ch06
Student: ___________________________________________________________________________
1.
Goods in transit are automatically included in inventory.
True False
2.
Goods on consignment are goods shipped by their owner, called the consignee, to another party called the
consignor.
True False
3.
If obsolete or damaged goods can be sold, they will be included in inventory at their net realizable
value.
True False
4.
If the seller is responsible for paying freight charges, then ownership of inventory passes when goods
arrive at their destination.
True False
5.
Net realizable value for damaged or obsolete goods is sales price plus the cost of making the sale.
True False
6.
The cost of an inventory item includes its invoice cost minus any discount, and plus any added or
incidental costs necessary to put it in a place and condition for sale.
True False
7.
When taking a physical count of inventory, the use of prenumbered inventory tickets is an application of
internal control.
True False
8.
Incidental costs often added to the costs of inventory include import duties, freight, storage, and
insurance.
True False
9.
The Inventory account is a controlling account for the inventory subsidiary ledger that contains a separate
record for each separate product.
True False
10. Few companies take a physical count of inventory each year, and rely on inventory records alone to
determine the inventory value.
True False
11. The matching principle is used by some companies to avoid allocating incidental inventory costs to cost
of goods sold.
True False
12. The consistency concept prescribes that a company use the same accounting methods period after period,
so that financial statements are comparable across periods.
True False
13. A company can change its inventory costing method without mentioning this change in its financial
statements because it is an internal management decision.
True False
14. Whether purchase costs are rising or falling, FIFO always will yield the highest gross profit and net
income.
True False
15. An advantage of the weighted average inventory method is that it tends to smooth out erratic changes in
costs.
True False
16. In a period of rising purchase costs, FIFO usually gives a lower taxable income and therefore, yields a tax
advantage.
True False
17. LIFO is preferred when purchase costs are rising and managers have incentives to report higher income
for reasons such as bonus plans, job security, and reputation.
True False
18. The LIFO method of inventory valuation can result in a company's ending inventory being valued at less
than the inventory's replacement cost because LIFO inventory leaves the oldest costs in inventory.
True False
19. The full disclosure principle requires that the notes to the financial statements report a change in
accounting method for inventory.
True False
20. An advantage of LIFO is that it assigns the most recent costs to cost of goods sold, and does a better job
of matching current costs with revenues on the income statement.
True False
21. Companies are allowed to use FIFO for financial reporting and LIFO for tax reporting, according to IRS
requirements.
True False
22. An error in the period-end inventory balance will cause an error in the calculation of cost of goods
sold.
True False
23. Errors in the period-end inventory balance only affect the current period's records and financial
statements.
True False
24. An inventory error is sometimes said to be self-correcting because it causes an offsetting error in the next
period.
True False
25. An understatement of the ending inventory balance will understate cost of goods sold and overstate net
income.
True False
26. An understatement of the beginning inventory balance will understate cost of goods sold and overstate net
income.
True False
27. An understatement of ending inventory will cause an understatement of assets and equity on the balance
sheet.
True False
28. An overstatement of ending inventory will cause an overstatement of assets and an understatement of
equity on the balance sheet.
True False
29. A merchandiser's ability to pay its short-term obligations depends on many factors including how quickly
it sells its merchandise inventory.
True False
30. The inventory turnover ratio is computed by dividing average merchandise inventory by cost of goods
sold.
True False
31. The days' sales in inventory ratio is computed by dividing ending inventory by cost of goods sold and
multiplying the result by 365.
True False
32. There is no simple rule for inventory turnover, except that a high ratio is preferable provided inventory is
adequate to meet demand.
True False
33. It can be expected that companies selling perishable goods have a higher inventory turnover than
companies selling nonperishable goods.
True False
34. A company's cost of goods sold was $15,500 and its average merchandise inventory was $4,500. Its
inventory turnover equals 3.4.
True False
35. Tops had cost of goods sold of $8,321 million and its ending inventory was $2,027 million. Therefore its
days' sales in inventory equals 89 days.
True False
36. One of the most important decisions in accounting for inventory is determining the unit costs assigned to
inventory items.
True False
37. When units are purchased at different costs over time, determining the cost per unit assigned to inventory
items is simple.
True False
38. LIFO assumes that inventory costs flow in the order incurred.
True False
39. The assignment of costs to cost of goods sold and inventory using weighted average usually yields
different results depending on whether a perpetual or periodic system is used.
True False
40. The FIFO inventory method assumes that costs for the earliest units purchased are the first to be charged
to the cost of goods sold.
True False
41. The costs of goods purchased will vary under the different inventory methods of specific identification,
FIFO, LIFO, and weighted average.
True False
42. The assignment of costs to the cost of goods sold and to ending inventory using FIFO is the same for both
the perpetual and periodic inventory systems.
True False
43. Under LIFO, the most recent costs are assigned to ending inventory.
True False
44. The choice of an inventory valuation method can have a major impact on gross profit and cost of
sales.
True False
45. In applying the lower of cost or market method to inventory valuation, market is defined as the current
replacement cost.
True False
46. In applying the lower of cost or market method to inventory valuation, market is defined as the current
selling price.
True False
47. A company has inventory with a market value of $217,000 and a cost of $241,000. According to the
lower of cost or market, the inventory should be written down to $217,000.
True False
48. The lower of cost or market rule for inventory valuation must be applied to each individual unit
separately, and not to major categories of inventory or to the entire inventory.
True False
49. The conservatism constraint requires that when more than one estimate of the amounts to be received or
paid in the future exists and these estimates are about equally likely, then the less optimistic amount is
used.
True False
50. A company's total cost of inventory was $305,000 and its market value is $297,000. Under the lower cost
or market, the amount reported should be $305,000.
True False
51. A company's cost of inventory was $317,500. Due to phenomenal demand the market value of its
inventory increased to $323,000. This company should write up the value of its inventory according to
the consistency principle.
True False
52. When LIFO is used with the periodic inventory system, cost of goods sold is assigned costs from the
most recent purchases at the point of each sale, rather than from the most recent purchases for the
period.
True False
53. The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to
net sales.
True False
54. The reasoning behind the retail inventory method is that if we can get a good estimate of the cost-to-retail
ratio, we can multiply ending inventory at retail by this ratio to estimate ending inventory at cost.
True False
55. The reliability of the gross profit method depends on a good estimate of the gross profit ratio.
True False
56. In the retail inventory method of inventory valuation, the retail amount of inventory refers to its dollar
amount measured using selling prices of inventory items.
True False
57. To avoid the time-consuming process of taking an inventory each year, most companies use the gross
profit method to estimate ending inventory.
True False
58. Using the retail inventory method, if the cost to retail ratio is 60% and ending inventory at retail is
$45,000, then estimated ending inventory at cost is $27,000.
True False
59. Damaged and obsolete goods that can be sold:
A. Are never counted as inventory.
B. Are included in inventory at their full cost.
C. Are included in inventory at their net realizable value.
D. Should be disposed of immediately.
E. Are assigned a value of zero.
60. Merchandise inventory includes:
A. All goods owned by a company and held for sale.
B. All goods in transit.
C. All goods on consignment.
D. Only damaged goods.
E. Only non-damaged goods.
61. Goods in transit are included in a purchaser's inventory:
A. At any time during transit.
B. When the purchaser is responsible for paying freight charges.
C. When the supplier is responsible for freight charges.
D. If the goods are shipped FOB destination.
E. After the half-way point between the buyer and seller.
62. Goods on consignment:
A. Are goods shipped by the owner to the consignee who sells the goods for the owner.
B. Are reported in the consignee's books as inventory.
C. Are goods shipped to the consignor who sells the goods for the owner.
D. Are not reported in the consignor's inventory since they do not have possession of the inventory.
E. Are always paid for by the consignee when they take possession.
63. Regardless of the inventory costing system used, cost of goods available for sale must be allocated
between
A. beginning inventory and net purchases during the period.
B. ending inventory and beginning inventory.
C. net purchases during the period and ending inventory.
D. ending inventory and cost of goods sold.
E. beginning inventory and cost of goods sold.
64. On December 31 of the current year, Hewett Company reported an ending inventory balance of $215,000.
The following additional information is also available:
Hewett sold goods costing $38,000 to Trump Enterprises on December 28 and shipped the goods on that
date with shipping terms of FOB shipping point. The goods were not included in the ending inventory
amount of $215,000 because they were not in Hewett's warehouse.
Hewett purchased goods costing $44,000 on December 29. The goods were shipped FOB destination
and were received by Hewett on January 2 of the following year. The shipment was a rush order that
was supposed to arrive by December 31. These goods were included in the ending inventory balance of
$215,000.
Hewett's ending inventory balance of $215,000 included $15,000 of goods being held on consignment
from Rumsfeld Company. (Hewett Company is the consignee.)
Hewett's ending inventory balance of $215,000 did not include goods costing $95,000 that were shipped
to Hewett on December 27 with shipping terms of FOB destination and were still in transit at year-end.
Based on the above information, the correct balance for ending inventory on December 31 is:
A. $194,000
B. $209,000
C. $200,000
D. $171,000
E. $156,000
65. Gotham Company reported a December 31 ending inventory balance of $412,000. The following
additional information is also available:
The ending inventory balance of $412,000 included $72,000 of consigned inventory for which Gotham
was the consignor.
The ending inventory balance of $412,000 included $22,000 of office supplies that were stored in the
warehouse and were to be used by the company's supervisors and managers during the coming year.
The ending inventory balance of $412,000 did not include goods costing $48,000 that were purchased by
Gotham on December 28 and shipped FOB destination on that date. Gotham did not receive the goods
until January 2 of the following year.
The ending inventory balance of $412,000 included damaged goods at their original cost of $38,000. The
net realizable value of the damaged goods was $10,000.
The ending inventory balance of $412,000 included $43,000 of consigned inventory for which Gotham
was the consignee.
Based on this information, the correct balance for ending inventory on December 31 is:
A. $247,000
B. $341,000
C. $362,000
D. $309,000
E. $319,000
66. Costs included in the Merchandise Inventory account can include all of the following except:
A. Invoice price minus any discount.
B. Transportation-in.
C. Storage.
D. Insurance.
E. Damaged inventory that cannot be sold.
67. Internal controls that should be applied when a business takes a physical count of inventory should
include all of the following except:
A. Prenumbered inventory tickets.
B. A manager does not confirm that all inventories are ticketed once, and only once.
C. Counters must confirm the validity of inventory existence, amounts, and quality.
D. Second counts by a different counter.
E. Counters of inventory should not be those who are responsible for the inventory.
68. Physical counts of inventory:
A. Are not necessary under the perpetual system.
B. Are necessary to adjust the Inventory account to the actual inventory available.
C. Must be taken at least once a month.
D. Requires the use of hand-held portable computers.
E. Are not necessary under the cost-to benefit constraint.
69. During a period of steadily rising costs, the inventory valuation method that yields the lowest reported net
income is:
A. Specific identification method.
B. Average cost method.
C. Weighted-average method.
D. FIFO method.
E. LIFO method.
70. The inventory valuation method that tends to smooth out erratic changes in costs is:
A. FIFO.
B. Weighted average.
C. LIFO.
D. Specific identification.
E. WIFO.
71. The inventory valuation method that has the advantages of assigning an amount to inventory on the
balance sheet that approximates its current cost, and also mimics the actual flow of goods for most
businesses is:
A. FIFO.
B. Weighted average.
C. LIFO.
D. Specific identification.
E. All of these.
72. The inventory valuation method that results in the lowest taxable income in a period of inflation is:
A. LIFO method.
B. FIFO method.
C. Weighted-average cost method.
D. Specific identification method.
E. Gross profit method.
73. The consistency concept:
APrescribes a company to consistently apply the same accounting method of inventory valuation, an
. exception being when a change from one method to another will improve its financial reporting.
B. Requires a company to use one method of inventory valuation exclusively.
C. Requires that all companies in the same industry use the same accounting methods of inventory
valuation.
D. Is also called the full disclosure principle.
E. Is also called the matching principle.
74. The full disclosure principle:
A Prescribes that when a change in inventory valuation method is made, the notes to the statements report
. the type of change, its justification and its effect on net income.
B. Requires that companies use the same accounting method for inventory valuation period after period.
C. Is not subject to the materiality principle.
D. Is only applied to retailers.
E. Is also called the consistency principle.
75. Which of the following inventory costing methods will always result in the same values for ending
inventory and cost of goods sold regardless of whether a perpetual or periodic inventory system is used?
A. FIFO and LIFO
B. LIFO and weighted-average cost
C. Specific identification and FIFO
D. FIFO and weighted-average cost
E. LIFO and specific identification
76. If a period-end inventory amount is reported in error, it can cause a misstatement in all of the following
except:
A. Cost of goods sold.
B. Gross profit.
C. Net sales.
D. Current assets.
E. Net income.
77. An error in the period-end inventory causes an offsetting error in the next period and therefore:
A. Managers can ignore the error.
B. It is sometimes said to be self-correcting.
C. It affects only income statement accounts.
D. If affects only balance sheet accounts.
E. Is immaterial for managerial decision making.
78. The understatement of the ending inventory balance causes:
A. Cost of goods sold to be overstated and net income to be understated.
B. Cost of goods sold to be overstated and net income to be overstated.
C. Cost of goods sold to be understated and net income to be understated.
D. Cost of goods sold to be understated and net income to be overstated.
E. Cost of goods sold to be overstated and net income to be correct.
79. The understatement of the beginning inventory balance causes:
A. Cost of goods sold to be understated and net income to be understated.
B. Cost of goods sold to be understated and net income to be overstated.
C. Cost of goods sold to be overstated and net income to be overstated.
D. Cost of goods sold to be overstated and net income to be understated.
E. Cost of goods sold to be overstated and net income to be correct.
80. Thelma Company reported cost of goods sold for Year 1 and Year 2 as
follows:
Thelma Company made two errors: 1) ending inventory at the end of Year 1 was understated by $15,000
and 2) ending inventory at the end of Year 2 was overstated by $6,000. Given this information, the
correct cost of goods sold figure for Year 2 would be:
A. $291,000
B. $276,000
C. $264,000
D. $285,000
E. $249,000
81. Louise Company reported the following income statement information for Year 1 and Year
2:
The beginning inventory balance for Year 1 is correct. The ending inventory balance for Year 2 is
also correct. However, the ending inventory figure for Year 1 was overstated by $20,000. Given this
information, the correct gross profit figures for Year 1 and Year 2 would be:
A. $129,000 for Year 1 and $256,000 for Year 2.
B. $281,000 for Year 1 and $274,000 for Year 2.
C. $129,000 for Year 1 and $276,000 for Year 2.
D. $169,000 for Year 1 and $236,000 for Year 2.
E. $169,000 for Year 1 and $276,000 for Year 2.
82. An overstatement of ending inventory will cause
A. An overstatement of assets and equity on the balance sheet.
B. An understatement of assets and equity on the balance sheet.
C. An overstatement of assets and an understatement of equity on the balance sheet.
D. An understatement of assets and an overstatement of equity on the balance sheet.
E. No effect on the balance sheet.
83. The inventory turnover ratio:
A. Is used to analyze profitability.
B. Is used to measure solvency.
C. Reveals how many times a company turns over (sells) its merchandise inventory.
D. Validates the acid-test ratio.
E. Calculation depends on the company's inventory valuation method.
84. Days' sales in inventory:
A. Is also called days' stock on hand.
B. Focuses on average inventory rather than ending inventory.
C. Is used to measure solvency.
D. Is calculated by dividing cost of goods sold by ending inventory.
E. Is a substitute for the acid-test ratio.
85. The inventory turnover ratio is calculated as:
A. Cost of goods sold divided by average merchandise inventory.
B. Sales divided by cost of goods sold.
C. Ending inventory divided by cost of goods sold.
D. Cost of goods sold divided by ending inventory.
E. Cost of goods sold divided by ending inventory times 365.
86. Days' sales in inventory is calculated as:
A. Ending inventory divided by cost of goods sold.
B. Cost of goods sold divided by ending inventory.
C. Ending inventory divided by cost of goods sold times 365.
D. Cost of goods sold divided by ending inventory times 365.
E. Ending inventory times cost of goods sold.
87. Tops had cost of goods sold of $9,421 million, ending inventory of $2,089 million, and average inventory
of $1,965 million. Its inventory turnover equals:
A. 0.21.
B. 4.51.
C. 4.79.
D. 76.1 days.
E. 80.9 days.
88. Tops had cost of goods sold of $9,421 million, ending inventory of $2,089 million, and average inventory
turnover of $1,965 million. Its days' sales in inventory equals:
A. 0.21.
B. 4.51.
C. 4.79.
D. 76.1 days.
E. 80.9.days.
89. Acceptable methods of assigning specific costs to inventory and cost of goods sold include all of the
following except:
A. LIFO method.
B. FIFO method.
C. Specific identification method.
D. Weighted average method.
E. Retail method.
90. Management decisions in accounting for inventory cost include all of the following except:
A. Costing method.
B. Inventory system (perpetual or periodic).
C. Customer demand for inventory.
D. Use of market values or other estimates.
E. Items included in inventory and their costs.
91. The inventory valuation method that identifies each item in ending inventory with a specific purchase and
invoice is the:
A. Weighted average inventory method.
B. First-in, first-out method.
C. Last-in, first-out method.
D. Specific identification method.
E. Retail inventory method.
92.
A company had the following purchases during the current year:
On December 31, there were 26 units remaining in ending inventory. These 26 units consisted of 2 from
January, 4 from February, 6 from May, 4 from September, and 10 from November. Using the specific
identification method, what is the cost of the ending inventory?
A. $3,500.
B. $3,800.
C. $3,960.
D. $3,280.
E. $3,640.
93. A company had inventory on November 1 of 5 units at a cost of $20 each. On November 2, they
purchased 10 units at $22 each. On November 6 they purchased 6 units at $25 each. On November 8,
8 units were sold for $55 each. Using the LIFO perpetual inventory method, what was the value of the
inventory on November 8 after the sale?
A. $304
B. $296
C. $288
D. $280
E. $276
94. Axme Corporation uses a weighted-average perpetual inventory system.
August 2, 10 units were purchased at $12 per unit.
August 18, 15 units were purchased at $14 per unit.
August 29, 12 units were sold.
What was the amount of the cost of goods sold for this sale?
A. $148.00.
B. $150.50.
C. $158.40.
D. $210.00.
E. $330.00.
95. A company has inventory of 10 units at a cost of $10 each on June 1. On June 3, it purchased 20 units at
$12 each. 12 units are sold on June 5. Using the FIFO perpetual inventory method, what is the cost of the
12 units that were sold?
A. $120.
B. $124.
C. $128.
D. $130.
E. $140.
96. A company has inventory of 15 units at a cost of $12 each on August 1. On August 5, it purchased 10
units at $13 per unit. On August 12 it purchased 20 units at $14 per unit. On August 15, it sold 30 units.
Using the FIFO perpetual inventory method, what is the value of the inventory at August 12 after the
sale?
A. $140.
B. $160.
C. $210.
D. $380.
E. $590.
97. A company had inventory of 5 units at a cost of $20 each on November 1. On November 2, it purchased
10 units at $22 each. On November 6 it purchased 6 units at $25 each. On November 8, it sold 18 units
for $54 each. Using the LIFO perpetual inventory method, what was the cost of the 18 units sold?
A. $395.
B. $410.
C. $450.
D. $510.
E. $520.
98. A company sells a climbing kit and uses the perpetual inventory system to account for its
merchandise. The beginning balance of the inventory and its transactions during January were as
follows:
If the ending inventory is reported at $276, what inventory method was used?
A. LIFO method.
B. FIFO method.
C. Weighted average method.
D. Specific identification method.
E. Retail inventory method.
99. Axme uses a weighted average perpetual inventory system.
August 2, 10 units were purchased at $12 per unit.
August 18, 15 units were purchased at $15 per unit.
August 29, 20 units were sold.
August 31, 14 units were purchased at $16 per unit.
What is the per-unit value of ending inventory on August 31?
A. $12.00.
B. $13.80.
C. $15.42.
D. $16.00.
E. $17.74.
100.Given the following information, determine the cost of the inventory at June 30 using the LIFO perpetual
inventory method.
The cost of the ending inventory is
A. $200.
B. $220.
C. $380.
D. $275.
E. $300.
101.In applying the lower of cost or market method to inventory valuation, market is defined as:
A. Historical cost.
B. Current replacement cost.
C. Current sales price.
D. FIFO.
E. LIFO.
102.Generally accepted accounting principles require that the inventory of a company be reported at:
A. Market value.
B. Historical cost.
C. Lower of cost or market.
D. Replacement cost.
E. Retail value.
103.The conservatism constraint:
A Prescribes that when multiple estimates of amounts to be received or paid in the future are equally
. likely, then the least optimistic amount should be used.
B. Prescribes that a company use the same accounting methods period after period.
C. Prescribes that revenues and expenses be reported in the period in which they are earned or incurred.
D. Prescribes that all items of a material nature be included in financial statements.
E. Prescribes that all inventory items be reported at full cost.
104.A company normally sells its product for $20 per unit. However, the selling price has fallen to $15 per
unit. This company's current inventory consists of 200 units purchased at $16 per unit. Replacement cost
has now fallen to $13 per unit. Calculate the value of this company's inventory at the lower of cost or
market.
A. $2,550.
B. $2,600.
C. $2,700.
D. $3,000.
E. $3,200.
105.A company has the following per unit original costs and replacement costs for its inventory:
Part A: 50 units with a cost of $5, and replacement cost of $4.50
Part B: 75 units with a cost of $6, and replacement cost of $6.50
Part C: 160 units with a cost of $3, and replacement cost of $2.50
Under the lower of cost or market method, the total value of this company's ending inventory is:
A. $1,180.00.
B. $1,075.00.
C. $1,075.00 or $1,112.50, depending upon whether LCM is applied to individual items or the inventory
as a whole.
D. $1,112.50.
E. $1,180.00 or $1,075.00, depending upon whether LCM is applied to individual items or to the
inventory as a whole.
106.A company has inventory of 10 units at a cost of $10 each on June 1. On June 3, it purchased 20 units at
$12 each. 12 units are sold on June 5. Using the FIFO periodic inventory method, what is the cost of the
12 units that were sold?
A. $120.
B. $124.
C. $128.
D. $130.
E. $140.
107.A company has inventory of 15 units at a cost of $12 each on August 1. On August 5, it purchased 10
units at $13 per unit. On August 12 it purchased 20 units at $14 per unit. On August 15, it sold 30 units.
Using the FIFO periodic inventory method, what is the value of the inventory at August 15 after the sale?
A. $140.
B. $160.
C. $210.
D. $380.
E. $590.
108.A company had inventory of 10 units at a cost of $20 each on November 1. On November 2, it purchased
10 units at $22 each. On November 6 it purchased 6 units at $25 each. On November 8, it sold 22 units
for $54 each. Using the FIFO perpetual inventory method, what was the cost of the 22 units sold?
A. $470.
B. $490.
C. $450.
D. $570.
E. $520.
109.A company uses the periodic inventory system and had the following activity during the current monthly
period.
In a periodic inventory system, using the weighted-average inventory method, the company's ending
inventory would be:
A. $2,000.
B. $2,200.
C. $2,250.
D. $2,400.
E. $4,400.
110.A company sells a climbing kit and uses the periodic inventory system to account for its
merchandise. The beginning balance of the inventory and its transactions during January were as
follows:
If the ending inventory is reported at $357, what inventory method was used?
A. LIFO.
B. FIFO.
C. Weighted average.
D. Specific identification.
E. Retail inventory method.
111.A company's warehouse was destroyed by a tornado on March 15. The following information was the
only information that was salvaged:
The company's average gross profit ratio is 35%. What is the estimated cost of the lost inventory?
A. $9,705.
B. $25,995.
C. $29,250.
D. $44,000.
E. $45,000.
112.A company reported the following information regarding its inventory.
Beginning inventory: cost is $70,000; retail is $130,000
Net purchases: cost is $65,000; retail is $120,000
Sales at retail: $145,000
The year-end inventory showed $105,000 worth of merchandise available at retail prices. What is the cost
of the ending inventory?
A. $48,300.
B. $56,700.
C. $56,441.
D. $78,300.
E. $105,000.
113.On September 30 a company needed to estimate its ending inventory to prepare its third quarter financial
statements. The following information is available:
Beginning inventory, July 1: $4,000
Net sales: $40,000
Net purchases: $41,000
The company's gross margin ratio is 15%. Using the gross profit method, the cost of goods sold would
be:
A. $4,000.
B. $5,000.
C. $21,000.
D. $25,000.
E. $34,000.
114.A company that has operated with a 30% average gross profit ratio for a number of years had $100,000
in sales during the first quarter of this year. If it began the quarter with $18,000 of inventory at cost and
purchased $72,000 of inventory during the quarter, its estimated ending inventory by the gross profit
method is:
A. $30,000.
B. $21,000.
C. $20,000.
D. $18,000.
E. $27,000.
115.On December 31, a company needed to estimate its ending inventory to prepare its fourth quarter
financial statements. The following information is currently available:
Inventory as of October 1: $12,500
Net sales for fourth quarter: $40,000
Net purchases for fourth quarter: $27,500
This company typically achieves a gross profit ratio of 15%. Ending Inventory under the gross profit
method would be:
A. $4,000.
B. $6,000.
C. $10,000.
D. $16,000.
E. $34,000.
116.Interim statements:
A. Are required by the Congress.
B. Are necessary to achieve full disclosure about a business's operations.
C. Are usually monthly or quarterly statements prepared for periods of less than one year.
D. Require the use of the perpetual method for inventories.
E. Cannot be prepared if the company follows the conservatism principle.
117.Jackson Company has sales of $300,000 and cost of goods available for sale of $270,000. If the gross
profit ratio is typically 30%, the estimated cost of the ending inventory under the gross profit method
would be:
A. $60,000
B. $180,000
C. $30,000
D. $90,000
E. Impossible to determine from the information provided.
118.Georgia Peach Company reported net sales in June of the current year of $1,000,000. At the beginning
of June, the company reported beginning inventory of $368,000. Cost of goods purchased during June
amounted to $217,500. The company reported ending inventory at the end of June of $226,750.
The company's gross profit rate for June of the current year was:
A. 35.9%
B. 18.8%
C. 81.2%
D. 64.1%
E. Impossible to determine from the information provided.
119.On July 24 of the current year, The Georgia Peach Company experienced a natural disaster that destroyed
the company's entire inventory. At the beginning of July, the company reported beginning inventory of
$226,750. Inventory purchased during July (until the date of the disaster) was $197,800. Sales for the
month of July through July 24 were $642,500. Assuming the company's typical gross profit ratio is 50%,
estimate the amount of inventory destroyed in the natural disaster.
A. $212,275
B. $103,300
C. $217,950
D. $321,250
E. $157,788
120.Flaxco purchases inventory from overseas and incurs the following costs: the cost of the merchandise is
$50,000, credit terms are 2/10, n/30 that apply only to the $50,000; FOB shipping point freight charges
are $1,500; insurance during transit is $500; and import duties are $1,000. Flaxco paid within the discount
period and incurred additional costs of $1,200 for advertising and $5,000 for sales commissions. Compute
the cost that should be assigned to the inventory.
A. $50,000
B. $53,000
C. $52,000
D. $51,500
E. $53,200
121.Some companies choose to avoid assigning incidental costs of acquiring merchandise to inventory by
recording them as expenses when incurred. The argument that supports this is called:
A. The matching principle.
B. The materiality constraint.
C. The cost principle.
D. The conservation constraint principle.
E. The lower of cost or market principle.
122.All of the following statements related to goods on consignment are true except:
A. Goods on consignment are goods provided by the owner, call the consignor.
B. A consignee sells goods for the owner.
C. The consignor continues to own the consigned goods.
D. The consignee reports the goods in its inventory until sold.
E. The consignor reports the goods in its inventory until sold.
123.When purchase costs of inventory regularly decline, which method of inventory costing will yield the
lowest gross profit and income?
A. FIFO.
B. LIFO.
C. Weighted average.
D. Specific identification.
E. Gross margin.
124.When purchase costs of inventory regularly decline, which method of inventory costing will yield the
lowest cost of goods sold?
A. FIFO.
B. LIFO.
C. Weighted average.
D. Specific identification.
E. Gross margin.
125.IFRS reporting currently does not allow which method of inventory costing?
A. Specific identification.
B. FIFO.
C. LIFO.
D. Weighted average.
E. Lower of cost or market.
126.All of the following statements regarding U.S. GAAP and IFRS are true except?
A. Both U.S. GAAP and IFRS include broad and similar guidance for the items and costs making up
merchandise inventory.
B. For both U.S. GAAP and IFRS, merchandise inventory includes all items that a company owns and
holds for sale.
C. Both U.S. GAAP and IFRS require companies to write down inventory when its value falls below the
cost presently recorded.
D. Both U.S. GAAP and IFRS allow reversals of write downs up to the original acquisition cost.
E. With limited exceptions, neither U.S. GAAP nor IFRS allow inventory to be adjusted upward beyond
the original cost.
127.Pettis needs to determine its year-end inventory. The warehouse contains 20,000 units, of which 3,000
were damaged by flood and cannot be sold. Another 2,000 units, shipped FOB shipping point, are in
transit. The company also consigns goods and has 4,000 units at a consignee's location. How many units
should Pettis include in its year-end inventory?
A. 29,000
B. 21,000
C. 23,000
D. 19,000
E. 26,000
128.Perch Company reported the following purchases and sales for its only product. Perch uses
a perpetual inventory system. Determine the cost assigned to the ending inventory using
FIFO.
A. $2,260
B. $3,180
C. $1,860
D. $3,580
E. $2,100
129.Perch Company reported the following purchases and sales for its only product. Perch
uses a perpetual inventory system. Determine the cost assigned to cost of goods sold using
FIFO.
A. $2,260
B. $3,180
C. $1,860
D. $3,580
E. $2,100
130.Perch Company reported the following purchases and sales for its only product. Perch
uses a perpetual inventory system. Determine the cost assigned to ending inventory using
LIFO.
A. $2,260
B. $3,180
C. $1,860
D. $3,580
E. $2,100
131.Perch Company reported the following purchases and sales for its only product. Perch
uses a perpetual inventory system. Determine the cost assigned to cost of goods sold using
LIFO.
A. $2,260
B. $3,180
C. $1,860
D. $3,580
E. $2,100
132.On May 1 of the current year, Peck Company experienced a 500 year flood which destroyed the
company's entire inventory. The company had not completed its month end reporting for April and
must estimate the amount of inventory lost. At the beginning of April, the company reported beginning
inventory of $215,450. Inventory purchased during April (until the date of the disaster) was $192,530.
Sales for the month of April were $542,500. Assuming the company's typical gross profit ratio is 40%,
estimate the amount of inventory destroyed in the flood.
A. $87,480
B. $134,520
C. $109,980
D. $82,480
E. $81,480
133.Use the following information for Razor Company to compute inventory turnover for
2011.
A. 8.33
B. 5.00
C. 4.95
D. 4.54
E. 7.33
134.Use the following information for Razor Company to compute days' sales in inventory for
2011.
A. 73.0
B. 80.3
C. 43.8
D. 70.0
E. 49.8
135.Match each of the following terms a through j with the appropriate definition.
1. Inventory
The accounting constraint that aims to select the less
turnover
optimistic estimate when two or more estimates are about_
equally likely. _
_
_
2. FIFO
The expected sales price of an item minus the cost of making
method
the sale. _
_
_
_
3. Retail
A method for estimating an ending inventory based on the
inventory
ratio of the amount of goods for sale at cost to the amount of_
method
goods for sale at retail price. _
_
_
4. Interim
An estimate of days needed to convert the inventory at the
statements
end of the period into receivables or cash. _
_
_
_
5. Specific
An inventory pricing method that assumes the unit prices of
identificatio the beginning inventory and of each purchase are weighted by_
n method
the number of units of each in inventory; the calculation occurs_
at the time of each sale. _
_
6. Cons
Financial statements prepared for periods of less than one
ervatism
year. _
constraint
_
_
_
7. Days'
An inventory valuation method that assumes costs for the
sales in
most recent items purchased are sold first and charged to cost of_
inventory
goods sold. _
_
_
8. LIFO
An inventory valuation method where the purchase cost of
method
each item in ending inventory is identified and used to determine_
the cost assigned to inventory. _
_
_
9. Net
An inventory valuation method that assumes that inventory
realizable
items are sold in the order acquired. _
value
_
_
_
10. Weight
The number of times a company's average inventory is sold
ed average
during a period. _
inventory
_
method
_
_
136.Match the following terms a through j with the appropriate definition.
1. Lower
An owner of goods who ships them to another party who will
of cost or
then sell the goods for the owner. _
market
_
_
_
2. Consig
A procedure for estimating inventory where the past gross
nor
profit rate is used to estimate the cost of goods sold, which is then_
subtracted from the cost of goods available for sale to determine_
the estimated ending inventory. _
_
3. Days'
The accounting principle that a company use the same
sales in
accounting methods period after period so that the financial_
inventory
statements of succeeding periods will be comparable. _
_
_
4. Cons
An estimate of days needed to convert the inventory available at
ervatism
the end of the period into receivables or cash. _
principle
_
_
_
5. Inv
One who receives and holds goods owned by another for
entory
purposes of selling the goods for the owner. _
turnover
_
_
_
6. Sp
The method of assigning costs to inventory where the purchase
ecific
cost of each item in inventory is identified and used to determine_
identif
the cost of inventory. _
ication
_
method
_
7. Consig
The number of times a company's average inventory is sold
nee
during an accounting period. _
_
_
_
8. Cons
The required method of reporting inventory at market when
istency
market is lower than cost. _
principle
_
_
_
9. Gross
A method for estimating inventory based on the ratio of the
profit
amount of goods for sale at cost to the amount of goods for sale at_
method
retail prices. _
_
_
10. Retail
The principle that aims to select the less optimistic estimate
inventory
when two or more estimates are about equally likely. _
method
_
_
_
137.Identify the inventory valuation method that is being described for each situation below. In all
cases, assume a period of rising prices. Use the following to identify the inventory valuation
method:
a. The method that can only be used if each inventory item can be matched with a specific purchase and
its invoice.
b. The method that will cause the company to have the lowest income taxes.
c. The method that will cause the company to have the lowest cost of goods sold.
d. The method that will assign a value to inventory that approximates its current cost.
e. The method that will tend to smooth out erratic changes in costs.
138.Identify the items that are included in merchandise inventory. (In your answer address the special
situations of goods in transit, consigned goods, and damaged goods.)
139.What costs are assigned to merchandise inventory? Identify all costs including the incidental costs.
140.Describe the internal controls that must be applied when taking a physical count of inventory.
141.Explain the effects of inventory valuation methods on the cost of ending inventory, income, and income
taxes.
142.How do the consistency concept and the full disclosure principle affect inventory valuation?
143.What is the effect of an error in the ending inventory balance on the income statement?
144.Explain how the inventory turnover ratio and the days' sales in inventory ratio are used to evaluate
inventory management.
145.Identify and describe the four inventory valuation methods.
146.Explain why the lower of cost or market rule is used to value inventory.
147.Discuss the important accounting features of a periodic inventory system including accounts and
procedures used.
148.Explain the difference between the retail inventory method and gross profit inventory method for valuing
inventory.
149.Sarbanes Oxley (SOX) demands that companies safeguard inventory and properly report it. List methods
that companies should use to safeguard inventory and accounting procedures that should be used to
properly report inventory.
150.The inventory manager's compensation includes a bonus plan based on gross profit. You discover that the
inventory manager has knowingly overstated ending inventory by $2 million. What effect does this error
have on the financial statements of the company and specifically gross profit? Why would the manager
knowingly overstate ending inventory? Would this be considered an ethics violation?
151.Fast Auto Parts is an auto parts wholesaler that stocks several major brand names for Complete Auto
Parts stores across the country. Complete Auto Parts does not assume responsibility for parts until they
are sold to the customer. Identify the consignor and the consignee. Which company should include any
unsold goods as part of its inventory?
152.Advances in technology have greatly reduced the cost of a perpetual inventory system. What advantages
does a perpetual inventory system have over periodic?
153.For Randy Hetrick of Fitness Anywhere, the major challenge was maintaining appropriate levels of
inventories while controlling costs. What is meant by this statement?
154.Monitor Company uses the LIFO method for valuing its ending inventory. The following financial
statement information is available for its first year of operation:
Monitor's ending inventory using the LIFO method was $8,200. Monitor's accountant determined that had
the company used FIFO, the ending inventory would have been $8,500.
a. Determine what the income before taxes would have been, had Monitor used the FIFO method of
inventory valuation instead of LIFO.
b. What would be the difference in income taxes between LIFO and FIFO, assuming a 30% tax rate?
c. If Monitor wanted to lower the amount of income taxes to be paid, which method would it choose?
155.Evaluate each inventory error separately and determine whether it overstates or understates cost of goods
sold and net income.
156.The City Store reported the following amounts on their financial statements for Year 1, Year 2, and Year
3:
It was discovered early in Year 4 that the ending inventory on December 31, Year 1 was overstated
by $6,000, and the ending inventory on December 31, Year 2 was understated by $2,500. The ending
inventory on December 31, Year 3 was correct. Ignoring income taxes determine the correct amounts of
cost of goods sold, net income, total current assets, and equity for each of the years Year 1, Year 2, and
Year 3.
157.
A company reported the following data:
Required:
1. Calculate the company's merchandise inventory turnover for each year.
2. Comment on the company's efficiency in managing its inventory.
158.A company reported the following data:
Required:
1. Calculate the days' sales in inventory for each year.
2. Comment on the trend in inventory management.
159.
A company made the following purchases during the year:
On December 31, there were 28 units in ending inventory. These 28 units consisted of 1 from the January
10 purchase, 2 from the March 15 purchase, 5 from the April 25 purchase, 15 from the July 30 purchase,
and 5 from the October 10 purchase. Using specific identification, calculate the cost of the ending
inventory.
160.A company made the following merchandise purchases and sales during the month of
May:
There was no beginning inventory. If the company uses the weighted average inventory valuation method
and the perpetual inventory system, what would be the cost of its ending inventory?
161.A company made the following merchandise purchases and sales during the month of July:
There was no beginning inventory. If the company uses the first-in, first-out method and the perpetual
system, what would be the cost of the ending inventory?
162.A company made the following merchandise purchases and sales during the current
month:
There was no beginning inventory. If the company uses the last-in, first-out perpetual inventory system,
what would be the cost of the ending inventory?
163.Using the information given below for a company that uses a perpetual inventory system, calculate the
ending inventory using FIFO.
164.Using the information given below for a company that uses a perpetual inventory system, calculate the
ending inventory using LIFO.
165.Using the information given below for a company that uses a perpetual inventory system, calculate the
ending inventory using weighted average.
166.Using the information given below, prepare general journal entries to record the March 16 sale assuming
a cash sale and the FIFO method is used.
167.Using the information given below, prepare the general journal entry to record the March 16 sale
assuming a cash sale and the LIFO method is used:
168.Using the information given below, prepare the general journal entry to record the March 16 sale
assuming a cash sale and the weighted average method is used.
169.A company reported the following data related to its ending inventory:
Calculate the lower-of-cost-or-market on the: (a) Inventory as a whole and (b) inventory applied
separately to each product.
170.A company had the following ending inventory costs:
Instructions;
1. Calculate the lower of cost or market (LCM) value for the inventory as a whole.
2. Calculate the lower of cost or market (LCM) value for each individual item.
171.A company uses the periodic inventory system, and the following information is available. All purchases
and sales are on credit.
1. Prepare the general journal entries to record:
The October 6 purchase.
The October 12 sale.
2. Assuming the periodic inventory system is used, determine both the cost of the ending inventory and
the cost of goods sold using the LIFO method for October.
172.A company made the following merchandise purchases and sales during the month of May:
There was no beginning inventory. If the company uses the weighted average periodic method, what
would be the cost of the ending inventory?
173.A company made the following merchandise purchases and sales during the month of May:
There was no beginning inventory. If the company uses the LIFO periodic inventory method, what would
be the cost of the ending inventory?
174.A company made the following merchandise purchases and sales during the month of May:
There was no beginning inventory. If the company uses the FIFO periodic inventory method, what would
be the cost of the ending inventory?
175.A company's store was destroyed by a fire on February 10 of the current year. The only information for
the current period that could be salvaged included the following:
Beginning inventory, January 1: $34,000
Purchases to date: $118,000
Sales to date: $140,000
Historically, the company's gross profit ratio has been 30%. Estimate the value of the destroyed inventory
using the gross profit method.
176.Apply the retail method to the following company information to calculate the cost of the ending
inventory for the current period.
177.A company uses the retail inventory method and has the following information available concerning its
most recent accounting period:
1. What is the cost-to-retail ratio using the retail method?
2. What is the estimated cost of the ending inventory?
178.Fun Land Toy Stores has taken a physical count of its inventory at January 31, its fiscal year-end. After
reviewing the accounting records and documentation, the following items have been discovered: (a) An
invoice from Fleck Co. indicates that $30,000 of toys were shipped to Fun Land on January 27, terms
FOB shipping point. The toys and invoice did not arrive at Fun Land until February 2 and were not
included in the physical count. (b) An invoice from Grande indicates that $8,000 of toys were shipped
to Fun Land on January 29, terms FOB destination. The toys and invoice did not arrive at Fun Land
until February 2 and were not included in the physical count. The physical count and cost assignment on
January 31 prior to these two items is $440,000. The cost of goods sold for Fun Land is $2,100,000.
1. Calculate the amount that should be reported as ending inventory for Fun Land.
2. Calculate the days' sales in inventory before and after the appropriate adjustments for inventory.
179.A company reported the current month purchase and sales data for its only product and uses the perpetual
inventory system. Determine the cost assigned to ending inventory and cost of goods sold using
FIFO.
180.A company reported the current month purchase and sales data for its only product and uses the perpetual
inventory system. Determine the cost assigned to ending inventory and cost of goods sold using LIFO.
181.A company uses the retail inventory method and has the following information available concerning its
most recent accounting period:
1. Use the retail inventory method to estimate the company's year-end inventory at cost.
2. A year-end physical count at retail prices yields a total inventory of $404,800. Prepare a calculation
showing the company's loss from shrinkage at cost and at retail.
182.If the _______________ is responsible for paying the freight, ownership of merchandise inventory passes
when goods are loaded on the transport vehicle.
________________________________________
183.If the _______________ is responsible for paying the freight, ownership of merchandise inventory passes
when the goods arrive at their destination.
________________________________________
184.Goods on consignment are goods that are shipped by the owner, called the ______________, to another
party called the _____________________.
________________________________________
185._______________________ is the estimated sales price of damaged goods minus the cost of making the
sale.
________________________________________
186.Some companies use the _________________ principle or the __________________ constraint to avoid
assigning incidental costs of acquiring merchandise to inventory.
________________________________________
187.The cost of an inventory item includes the ____________, plus ______________ costs necessary to put it
in a place and condition for sale.
________________________________________
188.When purchase costs regularly rise, the ___________________ method of inventory valuation yields the
highest gross profit and net income.
________________________________________
189.When purchase costs regularly rise, the ___________________ method of inventory valuation yields the
lowest gross profit and net income, providing a tax advantage.
________________________________________
190.An advantage of the _________________ method of inventory valuation is that it tends to smooth out the
effect of erratic changes in costs.
________________________________________
191.An overstated beginning inventory will ______________ cost of goods sold and _____________ net
income.
________________________________________
192.The ____________________ ratio reflects how much inventory is available in terms of days' sales.
________________________________________
193.The _____________________ is a measure of how quickly a merchandiser sells its merchandise
inventory.
________________________________________
194.The ______________________ method of assigning costs to inventory and cost of goods sold exactly
matches the costs of items with the revenues they generate and would be used when items can be easily
traced to the purchase invoice cost.
________________________________________
195.The _____________________ method of assigning costs to inventory and cost of goods sold assumes
that the inventory items are sold in the order acquired.
________________________________________
196.The ______________________ method of assigning costs to inventory and cost of goods sold assumes
that the most recent purchases are sold first.
________________________________________
197.The ______________________ method of assigning costs to inventory and cost of goods sold required
that we divide the cost of goods available for sale by the units of inventory available at the time of each
sale.
________________________________________
198.Regardless of what inventory method or system is used, cost of goods available for sale must be allocated
between ___________________ and __________________.
________________________________________
199.When applying the lower of cost or market method of inventory valuation, market is defined as the
_____________________.
________________________________________
200.The _________________ method is commonly used to estimate the value of inventory that has been
destroyed, lost, or stolen.
________________________________________
ch06 Key
1. FALSE
2. FALSE
3. TRUE
4. TRUE
5. FALSE
6. TRUE
7. TRUE
8. TRUE
9. TRUE
10. FALSE
11. FALSE
12. TRUE
13. FALSE
14. FALSE
15. TRUE
16. FALSE
17. FALSE
18. TRUE
19. TRUE
20. TRUE
21. FALSE
22. TRUE
23. FALSE
24. TRUE
25. FALSE
26. TRUE
27. TRUE
28. FALSE
29. TRUE
30. FALSE
31. TRUE
32. TRUE
33. TRUE
34. TRUE
35. TRUE
36. TRUE
37. FALSE
38. FALSE
39. TRUE
40. TRUE
41. FALSE
42. TRUE
43. FALSE
44. TRUE
45. TRUE
46. FALSE
47. TRUE
48. FALSE
49. TRUE
50. FALSE
51. FALSE
52. FALSE
53. FALSE
54. TRUE
55. TRUE
56. TRUE
57. FALSE
58. TRUE
59. C
60. A
61. B
62. A
63. D
64. E
65. E
66. E
67. B
68. B
69. E
70. B
71. A
72. A
73. A
74. A
75. C
76. C
77. B
78. A
79. B
80. A
81. C
82. A
83. C
84. A
85. A
86. C
87. C
88. E
89. E
90. C
91. D
92. B
93. E
94. C
95. B
96. C
97. B
98. A
99. C
100. C
101. B
102. C
103. A
104. B
105. C
106. B
107. C
108. A
109. B
110. B
111. A
112. B
113. E
114. C
115. B
116. C
117. A
118. D
119. B
120. C
121. C
122. D
123. A
124. B
125. C
126. D
127. B
128. A
129. B
130. C
131. D
132. D
133. C
134. A
135. Conservatism constraint :: The accounting constraint that aims to select the less optimistic estimate when two or more estimates are
about equally likely. and Net realizable value :: The expected sales price of an item minus the cost of making the sale. and Retail inventory
method :: A method for estimating an ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for
sale at retail price. and Days' sales in inventory :: An estimate of days needed to convert the inventory at the end of the period into receivables
or cash. and Weighted average inventory method :: An inventory pricing method that assumes the unit prices of the beginning inventory
and of each purchase are weighted by the number of units of each in inventory; the calculation occurs at the time of each sale. and Interim
statements :: Financial statements prepared for periods of less than one year. and LIFO method :: An inventory valuation method that
assumes costs for the most recent items purchased are sold first and charged to cost of goods sold. and Specific identification method :: An
inventory valuation method where the purchase cost of each item in ending inventory is identified and used to determine the cost assigned to
inventory. and FIFO method :: An inventory valuation method that assumes that inventory items are sold in the order acquired. and Inventory
turnover :: The number of times a company's average inventory is sold during a period.
136. Consignor :: An owner of goods who ships them to another party who will then sell the goods for the owner. and Gross profit
method :: A procedure for estimating inventory where the past gross profit rate is used to estimate the cost of goods sold, which is then
subtracted from the cost of goods available for sale to determine the estimated ending inventory. and Consistency principle :: The accounting
principle that a company use the same accounting methods period after period so that the financial statements of succeeding periods will be
comparable. and Days' sales in inventory :: An estimate of days needed to convert the inventory available at the end of the period into receivables
or cash. and Consignee :: One who receives and holds goods owned by another for purposes of selling the goods for the owner. and Specific
identification method :: The method of assigning costs to inventory where the purchase cost of each item in inventory is identified and used to
determine the cost of inventory. and Inventory turnover :: The number of times a company's average inventory is sold during an accounting
period. and Lower of cost or market :: The required method of reporting inventory at market when market is lower than cost. and Retail
inventory method :: A method for estimating inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale
at retail prices. and Conservatism principle :: The principle that aims to select the less optimistic estimate when two or more estimates are about
equally likely.
e. WA
d. FIFO
c. FIFO
b. LIFO
137. a. SI
138. Merchandise inventory consists of goods owned by a company and held for resale. Three special cases involving ownership decisions
are goods in transit, consigned goods, and damaged goods. Goods in transit are included in the inventory of the company that owns the goods.
Consigned goods are included in the inventory of the consignor. Damaged goods are valued at net realizable value.
139. The costs of merchandise inventory include the invoice price minus any discounts, plus any added or incidental costs necessary to put the
inventory in a place and condition for sale. Incidental costs include import duties, freight costs, storage, insurance, and costs of aging.
140. The internal controls should include (1) prenumbered tickets that are all accounted for; (2) counters who are not responsible for the inventory;
(3) counters who must confirm the validity of inventory's existence, amounts, and quality; (4) a second count by a different counter; and (5)
confirmation that all inventories are ticketed once and only once by a manager.
141. The specific identification method exactly identifies the costs of the inventory items sold. The weighted average method smooths out changes
in costs by "averaging" inventory costs. However, LIFO and FIFO provide different amounts in periods of rising or falling costs. For example, in
periods of rising costs, LIFO provides a lower income and thus lower taxes. In periods of falling costs, LIFO provides a higher income and thus
higher taxes. FIFO calculations provide both higher income and taxes in periods of rising costs and lower income and taxes in periods of declining
costs.
If a company does change its inventory valuation method, the full disclosure principle requires that the notes to the financial statements report the
type of change, its justification, and its effect on net income.
142. The consistency concept requires that companies use the same accounting method for inventory valuation from period to period so that the
financial statements are comparable across periods. The only exception is when a change from one method to another will improve its financial
reporting. The consistency principle does not require a company to use one inventory valuation method for all categories of inventory.
143. An inventory error causes misstatements in cost of good sold, gross profit, net income, current assets, and equity. It also causes misstatements
in the next period's cost of goods sold and net income. However, the inventory error is said to be self-correcting because the error in the first period
is offset by the error in the second period.
The days' sales in inventory ratio helps to better interpret inventory turnover. It can be interpreted as the number of days one can sell from
inventory if no new items are purchased, and can be viewed as a measure of the buffer against out-of-stock inventory.
144. A merchandiser's ability to pay its short term obligations depends, among other factors, on how quickly it sells its merchandise inventory. The
inventory turnover ratio reveals how many times a company turns over (sells) its inventory during a period. A low ratio compared to competitors
suggests the company may be holding more inventory than necessary to support its sales volume. On the other hand, a ratio that is too high
compared to competitors may suggest that the inventory level is too low and customers may have to back order merchandise.
145. The specific identification method assigns costs to each inventory item based on specific invoice costs. The weighted average method assigns
costs by using the total balance in inventory and dividing it by the number of units to arrive at a cost per unit at each sale. This cost per unit is
then multiplied by the number of units in ending inventory. The first-in-first-out method assigns cost to items sold assuming that the first units
purchased are the first to be sold. The last-in-first out method assumes that the last units purchased are the first to be sold.
146. Answer: The concept of conservatism requires that if there is more than one estimate of the value of an asset, then the lower of the two should
be used. The lower of cost or market rule compares the acquisition cost of inventory with the current replacement cost. The lower of these two
values is then selected as the amount to be reported.
147. Each purchase of merchandise is debited to the Purchases account. Cost of goods sold is not recorded at the time of sale. Instead, a physical
count of inventory at the end of the accounting period is used to determine the amount of inventory sold. Certain costs of inventory such as
transportation-in, purchases discounts, and purchases returns and allowances are recorded in separate accounts. These separate accounts are then
used to help compute inventory at the end of the period.
148. The retail method is generally used to prepare interim statements. It uses the cost to retail ratio to give an estimated ending inventory at cost.
The gross profit method is typically used to reconstruct the value of lost, stolen, or destroyed inventory. It uses the (historical) gross profit ratio to
estimate cost of goods sold and the value of ending inventory.
149. Safeguards include restricted access, use of authorized requisitions, security measures, and controlled environments to prevent damage.
Proper accounting includes matching inventory received with purchase order terms and quality requirements, preventing misstatements, and
controlling access to inventory records.
150. By overstating ending inventory, the cost of goods sold is understated, causing the gross profit to be overstated and net income to be
overstated. By overstating the gross profit, this would increase the manager's bonus. The assets and equity would also be overstated. Since the
manager's bonus is based on gross profit, the error would result in a larger bonus since gross profit would be overstated. Yes, this would be
considered an ethics violation since the manager intentionally overstated ending inventory and the financial statements would contain errors that
could affect decisions made by the users of the financial statements.
151. Fast Auto Parts is the consignor; Complete Auto Parts is the consignee. Fast Auto Parts should include any unsold goods as part of its
inventory.
152. The perpetual inventory system updates the inventory balance as transactions affecting inventory occur, the balance is increased for purchases
and decreased for sales. The subsidiary ledger also enables companies to get detailed records for each inventory item without a lot of extra
effort. Knowing the exact amount of inventory may avoid the risk of lost sales and also help management reduce the level of inventory, thereby
increasing the inventory turnover and decreasing the required number of days' sales in inventory. The reduced level of inventory also reduces
costs. Many companies are now asking whether they can afford not to have a perpetual inventory system because timely access to inventory
information is a competitive advantage.
153. Any entrepreneur who sells inventory must constantly balance the need to have adequate inventory available to meet customers' demands
while also minimizing the amount of investment in inventory. Maintaining too little inventory can result in stock-outs (lost sales due to a lack of
available inventory) but maintaining too much inventory wastes the company's resources (by requiring funds be invested in inventory and not
in other more productive assets). Randy knew that to meet his customers' needs, he would need sound inventory accounting. By implementing
inventory management tools, he learned how to fill orders, collect money, and maintain the right inventory.
c. Monitor would choose the LIFO method because it results in lower income taxes.
Income taxes would be $90 higher using FIFO than LIFO.
b.
Feedback: a. If ending inventory is $300 higher using FIFO ($8,500 - $8,200), then the cost of goods sold would be $300 lower, gross profit $300
higher, and income before taxes would be $300 higher. Therefore, income before taxes would be $14,000 + $300 = $14,300.
154. Answers will vary
Feedback:
155. Answers will vary
Feedback:
156. Answers will vary
2. The company's efficiency in managing its inventory is increasing as its sales increase. This is a positive reflection on inventory management.
1.
Feedback:
157. Answers will vary
2. The company has a trend of decreasing the number of days it takes to sell its inventory. This is a positive reflection on inventory management
provided there is sufficient inventory available to meet the sales demand.
1.
Feedback:
158. Answers will vary
Feedback:
159. Answers will vary
Feedback:
160. Answers will vary
Feedback:
161. Answers will vary
Feedback:
162. Answers will vary
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163. Answers will vary
Feedback:
164. Answers will vary
**$1,756/150 units = $11.71/unit
*$1,480/140 units = $10.57/unit
Feedback:
165. Answers will vary
Feedback:
166. Answers will vary
Feedback:
167. Answers will vary
Feedback:
168. Answers will vary
b. LCM, applied separately to each product = $3,470
a. LCM, applied to inventory as a whole = $3,680
Feedback:
169. Answers will vary
Feedback:
170. Answers will vary
2. Ending Inventory:
1. Journal entries:
Feedback:
171. Answers will vary
Cost of ending inventory = 150 units x $17.78 each = $2,667
Average cost = $16,890/950 units = $17.78 per unit
Feedback:
172. Answers will vary
Cost of ending inventory = 150 x $15 each = $2,250
Feedback:
173. Answers will vary
Cost of ending inventory = 150 x $22 each = $3,300
Feedback:
174. Answers will vary
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175. Answers will vary
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176. Answers will vary
Feedback:
177. Answers will vary
After adjustment: 470,000/2,100,000 * 365 = 81.7 days
2. Before adjustment: 440,000/2,100,000 * 365 = 76.5 days
1. The ending inventory should be adjusted to $470,000. Only the $30,000 invoice needs to be added since it was shipped FOB shipping point, the
owner (Fun Land) should include the inventory in the ending balance. ($440,000 + $30,000 = $470,000)
Feedback:
178. Answers will vary
Feedback:
179. Answers will vary
Feedback:
180. Answers will vary
$20,800 x .55 = $11,440 inventory shrinkage at cost
2. $425,600 - $404,800 = $20,800 inventory shrinkage at retail
$425,600 x .55 = $234,080
$1,325,800 - $900,200 = $425,600
1. $729,190/1,325,800 = .55
Feedback:
181. Answers will vary
182. Purchaser, or buyer
183. Seller
184. Consignor; consignee
185. Net realizable value
186. Matching; cost-to-benefit (or materiality)
187. Invoice price minus any discount; any added or incidental
188. First in, first out (FIFO)
189. Last in, first out (LIFO)
190. Weighted average
191. Overstate; understate
192. Days' sales in inventory
193. Inventory turnover
194. Specific identification
195. First in, first out (FIFO)
196. Last in, first out (LIFO)
197. Weighted average (or average cost)
198. Cost of goods sold; ending inventory
199. Replacement cost
200. Gross profit
ch06 Summary
Category
# of Questions
AACSB: Analytic
116
AACSB: Communications
81
AACSB: Ethics
1
AACSB: Technology
2
AICPA BB: Critical Thinking
3
AICPA BB: Global
2
AICPA BB: Industry
194
AICPA BB: Industry, Legal
1
AICPA FN: Decision Making
11
AICPA FN: Decision Making, Measurement
1
AICPA FN: Leveraging Technology
2
AICPA FN: Measurement
160
AICPA FN: Measurement, Risk Analysis
1
AICPA FN: Reporting
4
AICPA FN: Risk Analysis
21
Blooms: Analyze
4
Blooms: Apply
70
Blooms: Remember
55
Blooms: Understand
72
Difficulty: Easy
55
Difficulty: Hard
72
Difficulty: Medium
73
Fundamental - Chapter 06
200
Learning Objective: A1 Analyze the effects of inventory methods for both financial and tax reporting.
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Learning Objective: A2 Analyze the effects of inventory errors on current and future financial statements.
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Learning Objective: A3 Assess inventory management using both inventory turnover and days sales in inventory.
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Learning Objective: C1 Identify the items making up merchandise inventory.
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Learning Objective: C2 Identify the costs of merchandise inventory.
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Learning Objective: P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and we
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ighted average.
Learning Objective: P2 Compute the lower of cost or market amount of inventory.
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Learning Objective: P3 Appendix 6A—
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Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Learning Objective: P4 Appendix 6B—Apply both the retail inventory and gross profit methods to estimate inventory.
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