6
INVENTORIES
SUMMARY CHAPTER OF QUESTIONS BY OBJECTIVES AND BLOOM'S TAXONOMY
Item 1. 2. 3. 4. 5. 6. 7. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 119. 120. 121. 122. 123. 140. 141. 155. 156.
a
SO 1 1 1 1 1 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 1 1 1 2
BT C C K K K K K K K K K K K C C C K C C K K K C C AP AP AN AP AP K K K A
Item 8. 9. 10. 11. 12. 13. 14. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 124. 125. 126. 127. 128. 142. 143. 157. 158.
SO 2 2 2 2 3 3 3 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 4 4 4 2 2 1 2
BT C C C K K K K AP K AP AP AP AP AP C K K AP C K K K K C AP E AN AP AP K K K A
Item 15. 16. 17. 18. 19. 20. 21. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 129. 130. 9. 131. 132. 133. 144. 145. 159. 160.
SO 3 3 4 4 5 5 6 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 5 5 5 5 6 2 3 2 2
BT K C K K C K C C K K K C C C C K K C K K C AP AN AN AP AN AN AN AP K K A A
Item
a a
SO 7 7 8 8 1 2 2 3 4 4 4 4 4 4 5 5 5 5 5 6 6 6 7 7 7 7 8 8 8 3 4 2 5
BT C K K K C K
Item 29. 30. 31. a 32. a 33.
SO 3 4 5 7 8
BT
True-False Statements
22. 23. a 24. a 25. 26. 27. 28. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. a 100. a 101.
a a
Multiple Choice Questions
K K K K K K AP C AN AN AN C K K AP C C AP AP AP AP AP K K A A
a a
102. 103. a 104. a 105. a 106. a 107. a 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. a 118.
a
7 8 8 8 8 8 8 1 1 2 2 3 3 4 5 6 8 8
AP C C C AP AP AP
Exercises
134. 135. a 136. a 137. a 138. 146. 147. 161. 162. 139. AP
Completion Statements
a
148. 149. 163. 164.
6 8 6 2 A K
Brief Exercises
This topic is dealt with in an Appendix to the chapter
6-2
Test Bank for Financial Accounting, Fifth Edition
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
Item 1. 2. 3. 4. 6. 7. 8. 9. 10. 11. Type TF TF TF TF TF TF TF TF TF TF Item 5. 26. 34. 35. 27. 28. 48. 49. 50. 51. Type TF TF MC MC TF TF MC MC MC MC Item 36. 37. 38. 39. 52. 53. 54. 55. 56. 57. Type Item Type Item Type MC MC MC MC MC MC MC MC MC MC Item 109. 110. 140. 141. 70. 111. 112. 119. 120. 121. 122. 123. 85. 113. 114. 124. 126. 127. 130. 131. 133. Type MC MC C C MC MC MC Ex Ex Ex Ex Ex MC MC MC Ex Ex Ex Ex Ex Ex Item 155. 157. Type BE BE Study Objective 1 MC 40. MC 44. MC 41. MC 45. MC 42. MC 46. MC 43. MC 47. Study Objective 2 MC 58. MC 64. MC 59. MC 65. MC 60. MC 66. MC 61. MC 67. MC 62. MC 68. MC 63. MC 69.
142. 143. 144. 156. 158. 159. 160. 164. 125. 145. 146.
C C C BE BE BE BE BE Ex C C
12. 13. 14. 15. 17. 18. 19. 20. 21.
TF TF TF TF TF TF TF TF TF
16. 29. 71. 72. 30. 86. 31. 92. 97.
TF TF MC MC TF MC TF MC MC
73. 74. 75. 76. 87. 88. 93. 94. 98.
Study Objective 3 MC 77. MC 81. MC 78. MC 82. MC 79. MC 83. MC 80. MC 84. Study Objective 4 MC 89. MC 91. MC 90. MC 115. Study Objective 5 MC 95. MC 116. MC 96. MC 129. Study Objective 6 MC 99. MC 117. Study Objective a7 a MC 134. Ex a MC 135. Ex Study Objective a8 MC MC MC
a a
MC MC MC MC MC MC MC Ex MC
128. 147. 132. 162. 148. 163.
Ex C Ex BE C BE
a a
22. 23.
TF TF TF TF TF
a
32. 100.
a
TF MC MC MC MC
a a
101. 102.
a a
24. 25. a 33.
a a
103. 104. a 105.
a a
106. 107. a 108.
118. 136. a 137.
MC Ex Ex
a a
138. 139. a 149.
Ex Ex C BE = Brief Exercise
Note: TF = True-False MC = Multiple Choice
C = Completion Ex = Exercise
The chapter also contains one set of ten Matching questions and four Short-Answer Essay questions.
Inventories
6-3
CHAPTER STUDY OBJECTIVES
1. Describe the steps in determining inventory quantities. The steps in determining inventory quantities are (1) taking a physical inventory of goods on hand and (2) determining the ownership of goods in transit. 2. Explain the basis of accounting for inventories, and describe the inventory cost flow methods. The primary basis of accounting for inventories is cost. Cost includes all expenditures necessary to acquire goods and to make them ready for sale. Inventoriable costs include (1) cost of beginning inventory and (2) the cost of goods purchased. The inventory cost flow methods are: specific identification, FIFO, LIFO, and average cost. 3. Explain the financial statement and tax effects of each of the inventory cost flow methods. The cost of goods available for sale may be allocated to cost of goods sold and ending inventory by specific identification or by a method based on an assumed cost flow. These methods have different effects on financial statements during periods of changing prices. When prices are rising, FIFO results in lower cost of goods sold and higher taxable income than the average cost and the LIFO methods. LIFO results in the lowest income taxes because of lower net income. In the balance sheet, FIFO results in an ending inventory that is closest to current value. The inventory under LIFO is the farthest from current value. 4. Explain the lower of cost or market basis of accounting for inventories. The lower of cost or market (LCM) basis is used when the current replacement cost (market) is less than cost. Under LCM, the loss is recognized in the period in which the price decline occurs. 5. Indicate the effects of inventory errors on the financial statements. In the income statement of the current year: (a) An error in beginning inventory will have a reverse effect on net income (overstatement of inventory results in understatement of net income); and (b) an error in ending inventory will have a similar effect on net income (overstatement of inventory results in overstatement of net income). If ending inventory errors are not corrected in the next period, their effect on net income for that period is reversed, and total net income for the two years will be correct. In the balance sheet, ending inventory errors will have the same effect on total assets and total stockholders' equity and no effect on liabilities. 6. Compute and interpret inventory turnover. Inventory turnover is calculated as cost of goods sold divided by average inventory. It can be converted to average days in inventory by dividing 365 days by the inventory turnover ratio. A higher turnover or lower average days in inventory suggests that management is trying to keep inventory levels low relative to sales.
a
7. Apply the inventory cost flow methods to perpetual inventory records. Under FIFO, the cost of the earliest goods on hand prior to each sale is charged to cost of goods sold. Under LIFO, the cost of the most recent purchase prior to sale is charged to cost of goods sold. Under the average cost method, a new average cost is computed after each purchase. 8. Describe the two methods of estimating inventories. The two methods of estimating inventories are the gross profit method and the retail inventory method. Under the gross profit method, a gross profit rate is applied to net sales to determine estimated cost of goods sold. Estimated cost of goods sold is then subtracted from cost of goods available for sale to determine the estimated cost of the ending inventory. Under the retail inventory method, a cost-to-retail ratio is computed by dividing the cost of goods available for sale by the retail value of the goods available for sale. This ratio is then applied to the ending inventory at retail to determine the estimated cost of the ending inventory.
a
6-4
Test Bank for Financial Accounting, Fifth Edition
TRUE-FALSE STATEMENTS
1. Transactions that affect inventories on hand have an effect on both the balance sheet and the income statement. The more inventory a company has in stock, the greater the company's profit. Raw materials inventories are the goods that a manufacturer has completed and are ready to be sold to customers. Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods. Consigned goods are goods held for sale by one party although ownership of the goods is retained by another party. The weighted average unit cost method of costing inventories tracks the actual physical flow of the goods available for sale. Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company. The First-in, First-out (FIFO) inventory method results in Cost of goods sold valued at the most recent cost. The matching principle requires that the cost of goods sold be matched against the ending merchandise inventory in order to determine income. The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items. If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions. If the unit price of inventory is increasing during a period, a company using the LIFO inventory method will show less gross profit for the period, than if it had used the FIFO inventory method. If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods. The average cost method uses the weighted average unit cost to allocate the costs of goods available for sale to beginning inventory and cost of goods sold. Use of the LIFO inventory valuation method enables a company to report paper or phantom profits. If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.
2. 3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
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16.
Inventories 17.
6-5
Under the lower of cost or market basis, market is defined as the price at which the inventory could be sold. GAAP requires that the write down from cost to market should be made in the period in which the price decline occurs. An error that overstates the ending inventory will also cause net income for the period to be overstated. If inventories are valued using the LIFO cost assumption, they should not be classified as a current asset on the balance sheet. Inventory turnover measures the number of times on average that the inventory sold during the period. If a company uses the FIFO cost assumption, the cost of goods sold for the period will be the same under a perpetual or periodic inventory system. In applying the LIFO assumption in a perpetual inventory system, the cost of the units most recently purchased prior to sale is allocated first to the units sold. Under generally accepted accounting principles, management has the choice of physically counting inventory on hand at the end of the year or using the gross profit method to estimate the ending inventory. The retail inventory method requires a company to value its inventory on the balance sheet at retail prices. Finished goods are a classification of inventory for a manufacturer that are completed and ready for sale. In a consignment arrangement, the party who retains ownership of the goods is the consignor. The cost of goods available for sale during the period is the total of beginning inventory and net purchases during the period. In a period of falling prices, the LIFO method results in a lower cost of goods sold than the FIFO method. The lower of cost or market basis is an example of the accounting concept of conservatism. Inventories are reported in the current assets section of the balance sheet immediately above receivables. In a perpetual inventory system, the cost of goods sold under the FIFO method is based on the cost of the latest goods on hand during the period. The gross profit method is based on the assumption that the rate of gross profit remains constant from one year to the next.
18.
19. 20.
21.
a
22.
a
23.
a
24.
a
25.
26.
27.
28.
29.
30.
31.
a
32.
a
33.
6-6
Test Bank for Financial Accounting, Fifth Edition
Answers to True-False Statements
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. 2. 3. 4. 5.
T F F T T
6. 7. 8. 9. 10.
F F F F F
11. 12. 13. 14. 15.
T T T F F
16. 17. 18. 19. 20.
T F T T F
21. 22. a 23. a 24. a 25.
a
T T T F F
26. 27. 28. 29. 30.
T T F T T
31. 32. a 33.
a
F F T
MULTIPLE CHOICE QUESTIONS
34. Inventories affect a. only the balance sheet. b. only the income statement. c. both the balance sheet and the income statement. d. neither the balance sheet nor the income statement. Merchandise inventory is a. reported under the classification of Property, Plant, and Equipment on the balance sheet. b. often reported as a miscellaneous expense on the income statement. c. reported as a current asset on the balance sheet. d. generally valued at the price for which the goods can be sold. Items waiting to be used in production are considered to be a. raw materials. b. work in progress. c. finished goods. d. merchandise inventory. In a manufacturing business, inventory that is ready for sale is called a. raw materials inventory. b. work in process inventory. c. finished goods inventory. d. store supplies inventory. The factor which determines whether or not goods should be included in a physical count of inventory is a. physical possession. b. legal title. c. management's judgment. d. whether or not the purchase price has been paid. If goods in transit are shipped FOB destination a. the seller has legal title to the goods until they are delivered. b. the buyer has legal title to the goods until they are delivered. c. the transportation company has legal title to the goods while the goods are in transit. d. no one has legal title to the goods until they are delivered. An auto manufacturer would classify vehicles in various stages of production as a. finished goods. b. merchandise inventory. c. raw materials. d. work in process.
35.
36.
37.
38.
39.
40.
Inventories
41.
6-7
Independent internal verification of the physical inventory process occurs when a. the employee is required to count all items twice for sake of verification. b. the items counted are compared to the inventory account balance. c. a second employee counts the inventory and compares the result to the count made by the first employee. d. all prenumbered inventory tags are accounted for. An employee assigned to counting computer monitors in boxes should a. estimate the number if there is a large quantity to be counted. b. read each box and rely on the box description for the contents. c. determine that the box contains a monitor. d. rely on the warehouse records of the number of computer monitors. After the physical inventory is completed, a. quantities are listed on inventory summary sheets. b. quantities are entered into various general ledger inventory accounts. c. the accuracy of the inventory summary sheets is checked by the person listing the quantities on the sheets. d. unit costs are determined by dividing the quantities on the summary sheets by the total inventory costs. A recommended internal control procedure for taking physical inventories is that the counting should be done by employees who do not have custodial responsibility for the inventory. This is an example of what type of internal control procedure? a. Establishment of responsibility b. Documentation procedure c. Independent internal verification d. Segregation of duties Westcoe Company's goods in transit at December 31 include: sales made (1) FOB destination (2) FOB shipping point purchases made (3) FOB destination (4) FOB shipping point
42.
43.
44.
45.
Which items should be included in Westcoe's inventory at December 31? a. (2) and (3) b. (1) and (4) c. (1) and (3) d. (2) and (4) 46. The term "FOB" denotes a. free on board. b. freight on board. c. free only (to) buyer. d. freight charge on buyer. Under a consignment arrangement, the a. consignor has ownership until goods are sold to a customer. b. consignor has ownership until goods are shipped to the consignee. c. consignee has ownership when the goods are in the consignee's possession. d. consigned goods are included in the inventory of the consignee.
47.
6-8
48.
Test Bank for Financial Accounting, Fifth Edition
Inventoriable costs include all of the following except the a. freight costs incurred when buying inventory. b. costs of the purchasing and warehousing departments. c. cost of the beginning inventory. d. cost of goods purchased. Fairway Enterprises had beginning inventory of $5,000 at May 1, 2006. During the month, the company made purchases of $20,000. The inventory at the end of the month is $7,500. What is cost of goods available for sale for the month of May? a. $5,000 b. $7,500 c. $25,000 d. $27,500 Farley Company had beginning inventory of $15,000 at March 1, 2006. During the month, the company made purchases of $40,000. The inventory at the end of the month is $17,300. What is cost of goods sold for the month of March? a. $37,700 b. $40,000 c. $55,000 d. $57,300 A company just starting in business purchased three merchandise inventory items at the following prices. First purchase $80; Second purchase $95; Third purchase $85. If the company sold two units for a total of $240 and used FIFO costing, the gross profit for the period would be a. $65. b. $75. c. $60. d. $50. The LIFO inventory method assumes that the cost of the latest units purchased are a. the last to be allocated to cost of goods sold. b. the first to be allocated to ending inventory. c. the first to be allocated to cost of goods sold. d. not allocated to cost of goods sold or ending inventory.
49.
50.
51.
52.
Use the following information for questions 5356. A company just starting business made the following four inventory purchases in June: June 1 150 units $ 780 June 10 200 units 1,170 June 15 200 units 1,260 June 28 150 units 990 $4,200 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. 53. Using the LIFO inventory method, the value of the ending inventory on June 30 (rounded to the nearest dollar) is a. $1,073. b. $1,305. c. $2,895. d. $3,128.
Inventories
54. Using the FIFO inventory method, the amount allocated to cost of goods sold for June is a. $1,305. b. $2,545. c. $2,895. d. $3,128. Using the average cost method, the amount allocated to the ending inventory on June 30 is a. $4,200. b. $3,000. c. $1,150. d. $1,200. The inventory method which results in the highest gross profit for June is a. the FIFO method. b. the LIFO method. c. the weighted average unit cost method. d. not determinable.
6-9
55.
56.
Use the following information to answer questions 57- 59. At May 1, 2006, Treeline Company had beginning inventory consisting of 100 units with a unit cost of $7. During May, the company purchased inventory as follows: 200 units at $7 300 units at $8 The company sold 500 units during the month for $12 per unit. Treeline uses the average cost method. 57. The average cost per unit for May is a. $7.00. b. $7.50. c. $7.60. d. $8.00. Treeline's gross profit for the month of May is a. $2,250 b. $3,750 c. $4,500 d. $6,000 The value of Treeline's inventory at May 31, 2006 is a. $700 b. $750 c. $800 d. $4,500 The cost of goods available for sale is allocated between a. beginning inventory and ending inventory. b. beginning inventory and cost of goods on hand. c. ending inventory and cost of goods sold. d. beginning inventory and cost of goods purchased.
58.
59.
60.
6 - 10
61.
Test Bank for Financial Accounting, Fifth Edition
Vic's Used Cars uses the specific identification method of costing inventory. During March, Vic purchased three cars for $4,000, $5,000, and $6,500, respectively. During March, two cars are sold for $6,000 each. Vic determines that at March 31, the $6,500 car is still on hand. What is Vic's gross profit for March? a. $3,500. b. $3,000. c. $500. d. $5,500. Of the following companies, which one would not likely employ the specific identification method for inventory costing? a. Music store specializing in organ sales b. Farm implement dealership c. Antique shop d. Hardware store A problem with the specific identification method is that a. inventories can be reported at actual costs. b. management can manipulate income. c. matching is not achieved. d. the lower of cost or market basis cannot be applied. The selection of an appropriate inventory cost flow assumption for an individual company is made by a. the external auditors. b. the SEC. c. the internal auditors. d. management. Which one of the following inventory methods is often impractical to use? a. Specific identification b. LIFO c. FIFO d. Average cost Which of the following is not a common cost flow assumption used in costing inventory? a. First-in, first-out b. Middle-in, first-out c. Last-in, first-out d. Average cost The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is a. called the matching principle. b. called the consistency principle. c. nonexistent; that is, there is no accounting requirement. d. called the physical flow assumption. Which of the following statements is true regarding inventory cost flow assumptions? a. A company may use more than one costing method concurrently. b. A company must comply with the method specified by industry standards. c. A company must use the same method for domestic and foreign operations. d. A company may never change its inventory costing method once it has chosen a method.
62.
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Inventories
69.
6 - 11
Which of the following statements is correct with respect to inventories? a. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold. b. It is generally good business management to sell the most recently acquired goods first. c. Under FIFO, the ending inventory is based on the latest units purchased. d. FIFO seldom coincides with the actual physical flow of inventory. The cost of goods available for sale is allocated to the cost of goods sold and the a. beginning inventory. b. ending inventory. c. cost of goods purchased. d. gross profit. Companies adopt different cost flow methods for each of the following reasons except a. balance sheet effects. b. cash flow effects. c. income statements effects. d. tax effects. In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the a. FIFO method. b. LIFO method. c. average cost method. d. tax method.
70.
71.
72.
Use the following information to answer questions 73-76. Tier II Company uses a periodic inventory system. Details for the inventory account for the month of January 2006 are as follows: Units 200 100 100 Per unit price $5.00 5.30 5.50 Total $1,000 530 550
Balance, 1/1/2006 Purchase, 1/15/2006 Purchase, 1/28/2006
An end of the month (1/30/2006) inventory showed that 120 units were on hand.
73.
How many units did the company sell during January 2006? a. 80 b. 120 c. 200 d. 280 a. b. c. d. If the company uses FIFO, what is the value of the ending inventory? $520 $600 $656 $1,424
74.
6 - 12
75.
Test Bank for Financial Accounting, Fifth Edition
If the company uses LIFO, what is the value of the ending inventory? a. $520 b. $600 c. $656 d. $1,480 If the company uses FIFO and sells the units for $10 each, what is the gross profit for the month? a. $1,376 b. $1,424 c. $2,800 d. $3,000 The specific identification method of inventory costing a. always maximizes a company's net income. b. always minimizes a company's net income. c. has no effect on a company's net income. d. may enable management to manipulate net income. The managers of Teng Company receive performance bonuses based on the net income of the firm. Which inventory costing method are they likely to favor in periods of declining prices? a. LIFO b. Average Cost c. FIFO d. Physical inventory method In periods of inflation, phantom or paper profits may be reported as a result of using the a. perpetual inventory method. b. FIFO costing assumption. c. LIFO costing assumption. d. periodic inventory method. Selection of an inventory costing method by management does not usually depend on a. the fiscal year end. b. income statement effects. c. balance sheet effects. d. tax effects. In a period of rising prices, the costs allocated to ending inventory may be understated in the a. average cost method. b. FIFO method. c. gross profit method. d. LIFO method. The accountant at Kline Company is figuring out the difference in income taxes the company will pay depending on the choice of either FIFO or LIFO as an inventory costing method. The tax rate is 30% and the FIFO method will result in income before taxes of $3,640. The LIFO method will result in income before taxes of $3,290. What is the difference in tax that would be paid between the two methods? a. $350. b. $150. c. $105. d. $36
76.
77.
78.
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81.
82.
Inventories
83.
6 - 13
The accountant at Carey Company has determined that income before income taxes amounted to $4,500 using the FIFO costing assumption. If the income tax rate is 30% and the amount of income taxes paid would be $150 greater if the LIFO assumption were used, what would be the amount of income before taxes under the LIFO assumption? a. $4,650. b. $5,000. c. $4,060. d. $4,350. The manager of Wyatt Company is given a bonus based on income before income taxes. Net income, after taxes, is $4,200 for FIFO and $3,780 for LIFO. The tax rate is 30%. The bonus rate is 20%. How much higher is the manager's bonus if FIFO is adopted instead of LIFO? a. $150. b. $200. c. $120. d. $420. The consistent application of an inventory costing method is essential for a. conservatism. b. accuracy. c. comparability. d. efficiency. Which costing method cannot be used to determine the cost of inventory items before lower of cost or market is applied? a. Specific identification b. FIFO c. LIFO d. All of these methods can be used. At December 31, 2006, Friendly Software Company has an inventory of software for which it paid $1,200. The current replacement cost for the inventory is $1,000. Friendly expects to sell the inventory for $1,500 in 2007. At what value should the inventory be reported on the 12/31/2006 balance sheet? a. $0 b. $1,000 c. $1,200 d. $1,500 The lower of cost or market basis of valuing inventories is an example of a. comparability. b. the cost principle. c. conservatism. d. consistency. Under the lower of cost or market basis in valuing inventory, market is defined as a. current replacement cost. b. selling price. c. historical cost plus 10%. d. selling price less markup. The lower of cost or market (LCM) basis may be used with all of the following methods except a. average cost. b. FIFO. c. LIFO. d. The LCM basis may be used with all of these.
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91.
Test Bank for Financial Accounting, Fifth Edition
Isaac Company developed the following information about its inventories in applying the lower of cost or market (LCM) basis in valuing inventories: Product A B C Cost $55,000 40,000 80,000 Market $60,000 38,000 81,000
If Isaac applies the LCM basis, the value of the inventory reported on the balance sheet would be a. $175,000. b. $171,000. c. $173,000. d. $181,000. 92. Understating beginning inventory will understate a. assets. b. cost of goods sold. c. net income. d. owner's equity. An error in the physical count of goods on hand at the end of a period resulted in a $10,000 overstatement of the ending inventory. The effect of this error in the current period is Cost of Goods Sold Net Income a. Understated Understated b. Overstated Overstated c. Understated Overstated d. Overstated Understated If beginning inventory is understated by $10,000, the effect of this error in the current period is Cost of Goods Sold Net Income a. Understated Understated b. Overstated Overstated c. Understated Overstated d. Overstated Understated A company uses the periodic inventory method and the beginning inventory is overstated by $4,000 because the ending inventory in the previous period was overstated by $4,000. The amounts reflected in the current end of the period balance sheet are a. b. c. d. 96. Assets Overstated Correct Understated Overstated Stockholders' Equity Overstated Correct Understated Correct
93.
94.
95.
Overstating ending inventory will overstate all of the following except a. assets. b. cost of goods sold. c. net income. d. owner's equity. Disclosures about inventory should include each of the following except the a. basis of accounting. b. costing method. c. quantity of inventory. d. major inventory classifications.
97.
Inventories
98. At 12/31/2006, the financial statements of Dollar Market included the following numbers: Beginning inventory Ending inventory Cost of goods sold Sales revenue $100,000 80,000 270,000 540,000
6 - 15
The company's inventory turnover ratio for the year is a. 2 b. 2.7 c. 3 d. 6 99. The following information is available for Tye Company at December 31, 2006: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $1,200,000; and sales $1,600,000. Tye's inventory turnover in 2006 is a. 16 times. b. 15 times. c. 12 times. d. 10 times. A new average cost is computed each time a purchase is made in the a. average cost method. b. moving-average cost method. c. weighted-average cost method. d. all of these methods. When valuing ending inventory under a perpetual inventory system, the a. valuation using the LIFO assumption is the same as the valuation using the LIFO assumption under the periodic inventory system. b. moving average requires that a new average be computed after every sale. c. valuation using the FIFO assumption is the same as under the periodic inventory system. d. earliest units purchased during the period using the LIFO assumption are allocated to the cost of goods sold when units are sold. The Jansen Company uses the perpetual inventory system and the moving average method to value inventories. On August 1, there were 10,000 units valued at $30,000 in the beginning inventory. On August 10, 20,000 units were purchased for $6 per unit. On August 15, 24,000 units were sold for $12 per unit. The amount charged to cost of goods sold on August 15 was a. $80,000. b. $120,000. c. $144,000. d. $108,000. Under the gross profit method, each of the following items are estimated except for the a. cost of ending inventory. b. cost of goods sold. c. cost of goods purchased. d. gross profit. Under the retail inventory method, the estimated cost of ending inventory is computed by multiplying the cost-to-retail ratio by a. net sales. b. goods available for sale at retail. c. goods purchased at retail. d. ending inventory at retail.
a
100.
a
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a
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a
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a
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a
Test Bank for Financial Accounting, Fifth Edition
Inventories are estimated a. more frequently under a periodic inventory system than a perpetual inventory system. b. using the wholesale inventory method. c. more frequently under a perpetual inventory system than the periodic inventory system. d. using the net method. Nolan Department Store estimates inventory by using the retail inventory method. The following information was developed: Beginning inventory Goods purchased Net sales At Cost $212,000 600,000 At Retail $500,000 900,000 800,000
105.
a
106.
The estimated cost of the ending inventory is a. $464,000. b. $348,000. c. $588,000. d. $600,000.
a
107.
Watson Department Store utilizes the retail inventory method to estimate its inventories. It calculated its cost to retail ratio during the period at 75%. Goods available for sale at retail amounted to $200,000 and goods were sold during the period for $125,000. The estimated cost of the ending inventory is a. $75,000. b. $150,000. c. $56,250. d. $100,000. Farr Company prepares monthly financial statements and uses the gross profit method to estimate ending inventories. Historically, the company has had a 40% gross profit rate. During June, net sales amounted to $40,000; the beginning inventory on June 1 was $12,000; and the cost of goods purchased during June amounted to $18,000. The estimated cost of Farr Company's inventory on June 30 is a. $6,000. b. $24,000. c. $10,000 d. $16,000. Goods in transit should be included in the inventory of the buyer when the a. public carrier accepts the goods from the seller. b. goods reach the buyer. c. terms of sale are FOB destination. d. terms of sale are FOB shipping point.
a
108.
109.
110. Inventory items on an assembly line in various stages of production are classified as a. Finished goods. b. Work in process. c. Raw materials. d. Merchandise inventory. 111. In a period of rising prices, a. LIFO inventory costing will result in lower taxes than FIFO. b. FIFO inventory costing will result in lower taxes than LIFO. c. LIFO inventory costing will result in higher taxes than FIFO. d. weighted average inventory costing will result in lower taxes than either LIFO or FIFO.
Inventories
Use the following information to answer question 112-117. W.B. Reindeer Company's inventory records show the following data: Inventory, January 1 Purchases: June 18 November 8 Units 5,000 4,500 3,000 Unit Cost $9.00 8.00 7.00
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A physical inventory on December 31 shows 2,000 units on hand. W.B. Reindeer sells the units for $12 each. The company has an effective tax rate of 20%. Reindeer uses the periodic inventory method. 112. Under the FIFO method, the December 31 inventory is valued at a. $14,000. b. $14,500. c. $15,000. d. $18,000. 113. What is the cost of goods available for sale? a. $21,000 b. $36,000 c. $45,000 d. $102,000 114. Under the LIFO method, Cost of Goods Sold is a. $10,500. b. $18,000. c. $84,000. d. $88,000. 115. The weighted average cost per unit is a. $7.50. b. $8.00. c. $8.16. d. $8.75. 116. If the company uses FIFO, what is the gross profit for the period? a. $2,000 b. $10,000 c. $21,000 d. $38,000 What is the difference in taxes if LIFO rather than FIFO is used? a. $800 additional taxes b. $3,200 tax savings c. $4,000 tax savings d. $4,000 additional taxes
117.
6 18
a
Test - Bank for Financial Accounting, Fifth Edition
Pearson Company's records indicate the following information for the year: Merchandise inventory, 1/1 Purchases Net sales $ 440,000 1,800,000 2,400,000
118.
On December 31, a physical inventory determined that ending inventory of $480,000 was in the warehouse. Pearson's gross profit rate has remained constant at 30%. Pearson suspects some of the inventory may have been taken by some new employees. At December 31, what is the estimated cost of missing inventory? a. $80,000. b. $160,000. c. $240,000. d. $560,000.
Inventories
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Answers to Multiple Choice Questions
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46.
c c a c b a d c c a d b a
47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59.
a b c a a c a c d a b a b
60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72.
c b d b d a b c a c b b a
73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85.
d c b a d a b a d c b c c
86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98.
d b c a d c b c c b b c c
99. 100. a 101. a 102. a 103. a 104. a 105. a 106. a 107. a 108. 109. 110. 111.
a
c b c b c d a b c a d b a
112. 113. 114. 115. 116. 117. a 118.
a d c c c a a
EXERCISES
Ex. 119 The following information is available for Franco Company for the month of March, 2006: Beginning inventory First purchase Second purchase Third purchase 60 units at $40 90 units at $50 50 units at $60 50 units at $55
Assume that Franco uses a periodic inventory system and that there are 65 units on hand at the end of the month. Instructions Compute (a) the cost of goods sold and (b) the value of the ending inventory under the FIFO method. Solution 119 (7 min.)
(a) FIFO Cost of Goods Sold: Calculate number of units sold: (60 + 90 + 50 + 50) 65 = 185 units Calculate cost of goods sold: 60 $40 = $2,400 90 x $50 = 400 35 $60 = 2,100 $9,000
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Test Bank for Financial Accounting, Fifth Edition
(b) FIFO Ending Inventory Cost (65 units): 50 $55 = $2,750 15 $60 = 900 $3,650 Ex. 120 Using the information in Ex. 119 above, compute each of the following under the average cost method: (a) Cost of the ending inventory. (b) Cost of goods sold. Solution 120 (7 min.) 250)
Average cost/unit = $50.60 ($12,650 60 90 50 50 250 $40 $50 $60 $55 = = = = $2,400 4,500 3,000 2,750 $12,650
(a) Cost of ending inventory = $3,289 (65 $50.60) (b) Cost of goods sold = $9,361 (185 $50.60) Ex. 121 Using the information in Ex. 119 above, compute each of the following under the LIFO method: (a) Cost of the ending inventory. (b) Cost of goods sold. Solution 121 (7 min.)
(a) LIFO Cost of Goods Sold: Calculate number of units sold: (60 + 90 + 50 + 50) 65 = 185 units Calculate cost of goods sold: 50 $55 = $2,750 50 x $60 = 3,000 85 $50 = 4,250 $10,000 (b) LIFO Ending Inventory Cost 60 $40 = $2,400 5 $50 = 250 $2,650
Inventories Ex. 122
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Dixen Company sells many products. Whamo is one of its popular items. Below is an analysis of the inventory purchases and sales of Whamo for the month of March. Dixen Company uses the periodic inventory system. Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 $40 3/3 Purchase 60 $50 3/4 Sales 70 $80 3/10 Purchase 200 $55 3/16 Sales 80 $90 3/19 Sales 80 $90 3/25 Sales 40 $90 3/30 Purchase 40 $60 Instructions (a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations) (b) Using the weighted-average method, calculate the amount assigned to the inventory on hand on March 31. (Show computations) (c) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)
Solution 122
(20 min.) Purchases Units Unit Cost 100 $40 60 $50 200 $55 80 80 40 40 400 $60 270 $90 $90 $90 Units Sales Selling Price/Unit
3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30 (a)
Beginning inventory Purchase Sales Purchase Sales Sales Sales Purchase
70
$80
Using FIFO - the earliest units purchased were the first sold. 3/1 100 @ $40 = $ 4,000 3/3 60 @ 50 = 3,000 3/10 110 @ 55 = 6,050 270 units $13,050 = the cost of goods sold Calculate the weighted-average unit cost: $20,400 400 = $51 $51 units in ending inventory (400 available less 270 sold = 130) $51 130 = $6,630 There are 130 units in ending inventory. They are comprised of the first units purchased when LIFO is assumed. 3/1 100 @ $40 = $4,000 3/3 30 @ $50 = 1,500 130 units $5,500 = ending inventory
(b)
(c)
6 - 22 Ex. 123
Test Bank for Financial Accounting, Fifth Edition
Wynn Company uses the periodic inventory system to account for inventories. Information related to Wynn Company's inventory at October 31 is given below: October 1 8 16 24 Beginning inventory Purchase Purchase Purchase Total units and cost 400 800 600 200 2,000 units @ $10.00 = units @ $10.40 = units @ $10.80 = units @ $11.60 = units $ 4,000 8,320 6,480 2,320 $21,120
Instructions 1. Show computations to value the ending inventory using the FIFO cost assumption if 600 units remain on hand at October 31. 2. Show computations to value the ending inventory using the weighted-average cost method if 600 units remain on hand at October 31. 3. Show computations to value the ending inventory using the LIFO cost assumption if 600 units remain on hand at October 31. Solution 123 (20 min.)
1. 600 units in ending inventory. Under FIFO, the units remaining in inventory are the ones purchased most recently. 10/24 200 units @ $11.60 = $2,320 10/16 400 units @ 10.80 = 4,320 600 units $6,640 2. 600 units in ending inventory. Under the weighted-average cost method, the weighted average cost per unit must be computed. $21,120 2,000 units = $10.56 600 units $10.56 = $6,336 3. 600 units in ending inventory. Under LIFO, the units remaining are the ones purchased earliest. 10/1 400 units @ $10.00 = $4,000 10/8 200 units @ 10.40 = 2,080 600 units $6,080 Ex. 124 Sims Company is in the electronics industry and the price it pays for inventory is decreasing. Instructions Indicate which inventory method will: a. provide the highest ending inventory. b. provide the highest cost of goods sold. c. result in the highest net income. d. result in the lowest income tax expense. e. produce the most stable earnings over several years.
Inventories Solution 124 a. b. c. d. e. (4 min.)
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LIFO FIFO LIFO FIFO Average cost
Ex. 125 Vance Company reported the following summarized annual data at the end of 2006: Sales revenue Cost of goods sold* Gross profit Operating expenses Income before income taxes *Based on an ending FIFO inventory of $200,000. The income tax rate is 30%. The controller of the company is considering a switch from FIFO to LIFO. He has determined that on a LIFO basis, the ending inventory would have been $160,000. Instructions (a) Restate the summary information on a LIFO basis. (b) (c) What effect, if any, would the proposed change have on Vance's income tax expense, net income, and cash flows? If you were a stockholder of this business, what would your reaction be to this proposed change? (25 min.) $1,000,000 640,000 360,000 250,000 $ 110,000 $1,000,000 600,000 400,000 250,000 $ 150,000
Solution 125 (a)
Restate to a LIFO basis: Sales revenue Cost of goods sold* Gross profit Operating expenses Income before income taxes
*Ending inventory would be $40,000 less ($200,000 $160,000 = $40,000) under LIFO, thereby increasing cost of goods by $40,000. (b) The taxes on the FIFO basis would be: $150,000 .30 = $45,000 Leaving Net Income of $105,000 ($150,000 $45,000 = $105,000). The taxes on the LIFO basis would be: $110,000 .30 = $33,000 Leaving Net Income of $77,000 ($110,000 $33,000 = $77,000).
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Test Bank for Financial Accounting, Fifth Edition
Switching to the LIFO basis will result in $12,000 less income tax expense and less net income of $28,000. The cash effect is $12,000 ($45,000 $33,000 = $12,000) saved in taxes if LIFO were used. (c) Owners of the business may favor the LIFO basis since more cash will be available for use in the business. LIFO results in more cash being retained in the business since less is paid out for income taxes.
Ex. 126 Compute the lower of cost or market valuation for Howe Company's total inventory based on the following: Inventory Categories Cost Data Market Data A $18,000 $17,700 B 14,000 14,600 C 21,000 19,500 Solution 126 (5 min.) Market Data $17,700 14,600 19,500 LCM $17,700 14,000 19,500 $51,200
Inventory Categories Cost Data A $18,000 B 14,000 C 21,000 Total Valuation Ex. 127
The controller of Lawn-Pro Company is applying the lower of cost or market basis of valuing its ending inventory. The following information is available: Cost Lawnmowers: Self-propelled Push type Total Snowblowers: Manual Self-start Total Total inventory $15,000 20,000 35,000 Market $17,000 16,000 33,000
30,000 19,000 49,000 $84,000
31,000 21,000 52,000 $85,000
Instructions Compute the value of the ending inventory by applying the lower of cost or market basis.
Inventories Solution 127 (15 min.) Lower of Cost or Market Lawnmowers: Self-propelled Push type Snowblowers: Manual Self-start Total inventory Ex. 128 $15,000 16,000
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30,000 19,000 $80,000
Wert Company is preparing the annual financial statements dated December 31, 2005. Information about inventory stocked for regular sale follows: Quantity on Hand 50 100 20 40 Unit Cost When Acquired $20 45 60 41 Replacement Cost (market) at year end $18 47 62 40
Item A B C D
Instructions Compute the valuation for the December 31, 2005, inventory using the lower of cost or market basis. Solution 128 Item A B C D (10 min.) Units 50 100 20 40 Lower of Cost or Market $18 45 60 40 Extension $ 900 4,500 1,200 1,600 $8,200
Ex. 129 Ellis Company reported net income of $60,000 in 2005 and $80,000 in 2006. However, ending inventory was overstated by $10,000 in 2005. Instructions Compute the correct net income for Ellis Company for 2005 and 2006.
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Test Bank for Financial Accounting, Fifth Edition (6 min.)
Solution 129
2005 correct net income = $50,000 ($60,000 $10,000) 2006 correct net income = $90,000 ($80,000 + $10,000) Ex. 130 For each of the independent events listed below, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item. Code: O = item is overstated U = item is understated NA = item is not affected Items Stockholders' Cost of Equity Goods Sold Net Income
Events 1. A physical count of goods on hand at the end of the current year resulted in some goods being counted twice. 2. The ending inventory in the previous period was overstated. 3. Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31. 4. Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31. 5. The internal auditors discovered that the ending inventory in the previous period was understated $15,000 and that the ending inventory in the current period was overstated $25,000. Solution 130 (20 min.) Stockholders' Equity O NA U U O
Assets
Events 1. 2. 3. 4. 5.
Assets O NA U NA O
Items Cost of Goods Sold U O O O U
Net Income O U U U O
Inventories
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Ex. 131 Mason's Hardware Store prepared the following analysis of cost of goods sold for the previous three years: 2004 2005 2006 Beginning inventory 1/1 $40,000 $18,000 $25,000 Cost of goods purchased 50,000 55,000 70,000 Cost of goods available for sale 90,000 73,000 95,000 Ending inventory 12/31 18,000 25,000 40,000 Cost of goods sold $72,000 $48,000 $55,000 Net income for the years 2004, 2005, and 2006 was $70,000, $60,000, and $55,000, respectively. Since net income was consistently declining, Mr. Mason hired a new accountant to investigate the cause(s) for the declines. The accountant determined the following: 1. Purchases of $35,000 were not recorded in 2004. 2. The 2004 December 31 inventory should have been $29,000. 3. The 2005 ending inventory included inventory costing $8,000 that was purchased FOB destination and in transit at year end. 4. The 2006 ending inventory did not include goods costing $4,000 that were shipped on December 29 to Sampson Plumbing Company, FOB shipping point. The goods were still in transit at the end of the year. Instructions Determine the correct net income for each year. (Show all computations.)
Solution 131
(5 min.) 2004 $ 40,000 (1) 85,000 125,000 (2) 29,000 $ 96,000 2004 $70,000 72,000 (96,000) $46,000 $35,000 $11,000 $8,000 2005 $29,000 55,000 84,000 (3) 17,000 $67,000 2005 $60,000 48,000 (67,000) $41,000 2006 $17,000 70,000 87,000 40,000 $47,000 2006 $55,000 55,000 (47,000) $63,000
Beginning inventory 1/1 Cost of goods purchased Cost of goods available for sale Ending inventory 12/31 Cost of goods sold
Net Income previously reported Add: Prior cost of goods sold Less: Revised cost of goods sold Corrected Net Income (1) (2) (3) Additional purchases Additional ending inventory Less ending inventory
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Test Bank for Financial Accounting, Fifth Edition
Ex. 132 Neal Pharmacy reported cost of goods sold as follows: 2004 $ 54,000 847,000 901,000 64,000 $837,000 2005 $ 64,000 891,000 955,000 55,000 $900,000
Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold
Neal made two errors: (1) 2004 ending inventory was overstated by $8,000. (2) 2005 ending inventory was understated by $20,000. Instructions Assuming the errors had not been corrected, indicate the dollar effect that the errors had on the items appearing on the financial statements listed below. Also indicate if the amounts are overstated (O) or understated (U). 2004 2005 Overstated/ Overstated/ Amount Understated Amount Understated Total assets Stockholders' equity Cost of goods sold Net income $_________ $_________ $_________ $_________ _______ _______ _______ _______ $_________ $_________ $_________ $_________ _______ _______ _______ _______
Solution 132
(20 min.) 2004 Overstated/ Amount Understated $8,000 O $8,000 O $8,000 U $8,000 O 2004 $ 54,000 847,000 901,000 56,000 $845,000 2005 Overstated/ Amount Understated $20,000 U $20,000 U $28,000 O $28,000 U 2005 $ 56,000 891,000 947,000 75,000 $872,000
Total assets Stockholders' equity Cost of goods sold Net income Correct cost of goods sold: Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold
Inventories Ex. 133 The following information is available for Manning Company: Beginning inventory Cost of goods sold Ending inventory Sales Instructions Compute each of the following: (a) Inventory turnover. (b) Days in inventory. Solution 133 (5 min.) $600,000 $600,000 ---------------------- = ---------- = 8 ($60,000 + $90,000) 2 $75,000 365 ---- = 45.6 days 8 $ 60,000 600,000 90,000 750,000
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(a) Inventory turnover: (b) Days in inventory:
a
Ex. 134
Vaughn Company uses the perpetual inventory system and the LIFO method. The following information is available for the month of May: May 1 10 15 18 21 30 Beginning inventory Purchase Sales Purchase Sales Purchase 20 units @ $5 20 units @ $8 15 units 10 units @ $9 23 units 10 units @ $10
Instructions Prepare a schedule to show cost of goods sold and the value of the ending inventory for the month of May.
a
Solution 134
(10 min.) 15 units $8 10 units $9 5 units $8 8 units $5 38 units = $120 = 90 = 40 = 40 $290 Cost of goods sold
Cost of goods sold: May 15 sale May 21 sale
Ending inventory: May 1 May 30
12 units $5 = $ 60 10 units $10 = 100 22 units $160 Ending inventory
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Test Bank for Financial Accounting, Fifth Edition
Ex. 135 7-M Company uses a periodic inventory system. At December 31, 2006, the company reported the following balances: Beginning inventory $200,000 Ending inventory 225,000 Freight-in 30,000 Purchases 800,000 Purchase returns and allowances 25,000 Purchase discounts 15,000 Calculate: (a) Net Purchases (b) Cost of goods purchased Solution 135 (a) (b)
a
(5 min.)
Net purchases $760,000 ($800,000 - $25,000 - $15,000) Cost of goods purchased $790,000 ($760,000 + 30,000)
Ex. 136
Adler Department Store prepares monthly financial statements but only takes a physical count of merchandise inventory at the end of the year. The following information has been developed for the month of July: At Cost At Retail Beginning inventory $ 45,000 $ 50,000 Merchandise purchases 115,000 150,000 The net sales for July amounted to $125,000. Instructions Use the retail inventory method to estimate the ending inventory at cost for July. Show all computations to support your answer.
a
Solution 136
(10 min.) At Cost $ 45,000 115,000 $160,000 At Retail $ 50,000 150,000 200,000 125,000 $ 75,000
Beginning inventory Merchandise purchases Goods available for sale Net sales (1) Ending inventory at retail (2) (3)
Cost to retail ratio = 80% ($160,000 $200,000). Ending inventory at cost = ($75,000 80%) = $60,000.
Inventories
a
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Ex. 137
Greer Company suffered a loss of its inventory on March 28 due to a fire in its warehouse. As a basis for filing a claim with its insurance company, Greer Company developed the following information: March net sales through March 28 Beginning Inventory, March 1 Merchandise purchases through March 28 $400,000 150,000 180,000
The company has experienced an average gross profit rate of 35% in the past and this rate appears to be appropriate in the current period. Instructions Using the gross profit method, prepare an estimate of the cost of the inventory destroyed by fire on March 28. Show all computations in good form.
a
Solution 137
(10 min.) $400,000 140,000 $260,000 $150,000 180,000 330,000 260,000 $ 70,000
Net sales Less: Estimated gross profit ($400,000 35%) Estimated cost of goods sold Beginning inventory Merchandise purchases Goods available for sale Less: Estimated cost of goods sold Estimated cost of ending inventory destroyed by fire
a
Ex. 138
The inventory of Snider Company was destroyed by fire on April 1. From an examination of the accounting records, the following data for the first three months of the year are obtained: Sales Sales Returns and Allowances Purchases Freight-In Purchase Returns and Allowances $225,000 5,000 90,000 3,500 4,000
Instructions Determine the merchandise lost by fire, assuming a beginning inventory of $60,000 and a gross profit rate of 40% on net sales.
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a
Test Bank for Financial Accounting, Fifth Edition (10 min.) $220,000 88,000 $132,000 $ 60,000 89,500 149,500 132,000 $ 17,500
Solution 138
Net Sales ($225,000 $5,000) Less: Estimated gross profit (40% $220,000) Estimated cost of goods sold Beginning inventory Cost of goods purchased ($90,000 $4,000 + $3,500) Cost of goods available for sale Less: Estimated cost of good sold Estimated cost of merchandise lost
a
Ex. 139
Hyland Company reports goods available for sale at cost, $90,000. Beginning inventory at retail is $40,000 and goods purchased during the period at retail were $80,000. Sales for the period amounted to $84,000. Instructions Determine the estimated cost of the ending inventory using the retail inventory method.
a
Solution 139
(10 min.) At Cost At Retail $ 40,000 80,000 120,000 84,000 $ 36,000
Beginning inventory Goods purchased Goods available for sale Net sales Ending inventory
$90,000
First calculate the cost to retail ratio. $90,000 $120,000 = 75% Apply this ratio to the ending inventory at retail. $36,000 .75 = $27,000 $27,000 is the estimated cost of the ending inventory.
Inventories
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COMPLETION STATEMENTS
140. _____________________________ includes manufactured items that are complete and ready for sale. 141. ________________________ is the part of manufactured inventory that has begun the production process but is not yet complete. 142. Cost of goods purchased is the sum of ___________________ and ________________. 143. Inventoriable costs are allocated to ______________ and cost of goods ____________. 144. Consigned goods are goods held for sale by one party (the ___________________) although ownership is retained by another party (the ______________________). 145. The ______________ method tracks the actual physical flow of each unit of inventory available for sale; however, management may be able to manipulate ______________ by using this method. 146. If the unit cost of inventory has continuously increased, the ______________, first-out inventory valuation method will result in a higher valued ending inventory than if the ______________, first-out method had been used. 147. The lower of cost or market basis of accounting for inventories should be applied when the ______________ cost of the goods is lower than its cost. 148. ________________ measures the number of times on average the inventory sold during the period.
a
149. Two widely used methods of estimating inventories are the ______________ method and the _____________ method.
ANSWERS TO COMPLETION STATEMENTS
140. 141. 142 143. 144. finished goods inventory work in process inventory net purchases, freight in ending inventory, sold consignee, consignor 145. 146. 147. 148. a 149. specific identification, net income first-in, last-in replacement Inventory turnover gross profit, retail inventory
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Test Bank for Financial Accounting, Fifth Edition
MATCHING
150. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. ___ ___ ___ Cost of goods available for sale Raw materials FOB shipping point FOB destination Net purchases F. G. H. I. J. First-in, first-out (FIFO) method Last-in, first-out (LIFO) method Average cost method Inventory turnover Current replacement cost
1. Measures the number of times the inventory sold during the period. 2. Purchases less purchases returns and allowances and purchases discounts. 3. Goods that will be used in the production process but which have not yet been placed into production.
___ ___ ___ ___ ___ ___
4. Cost of goods sold consists of the most recent inventory purchases. 5. Sum of beginning merchandise inventory and cost of goods purchased. 6. Title to the goods transfers when the public carrier accepts the goods from the seller. 7. Ending inventory valuation consists of the most recent inventory purchases. 8. The same unit cost is used to value ending inventory and cost of goods sold. 9. Title to goods transfers when the goods are delivered to the buyer.
___ 10. The amount that would be paid at the present time to acquire an identical item.
Answers to Matching
1. 2. 3. 4. 5. I E B G A 6. 7. 8. 9. 10. C F H D J
Inventories
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SHORT-ANSWER ESSAY QUESTIONS
S-A E 151 FIFO and LIFO are the two most common cost flow assumptions made in costing inventories. The amounts assigned to the same inventory items on hand may be different under each cost flow assumption. If a company has no beginning inventory, explain the difference in ending inventory values under the FIFO and LIFO cost bases when the price of inventory items purchased during the period have been (1) increasing, (2) decreasing, and (3) remained constant. Solution 151 The FIFO method determines the ending inventory by the cost of the most recent purchase. The LIFO method determines the ending inventory by the cost of the earliest purchase. Therefore, if the FIFO method is used and the prices during the period are increasing, the ending inventory under FIFO will be greater than under LIFO. Likewise, if the FIFO method is used and the prices during the period are decreasing, the ending inventory under FIFO will be less than under LIFO. If prices remain constant and the company has no beginning inventory, then there will be no difference in ending inventory.
S-A E 152 Errors occasionally occur when physically counting inventory items on hand. Identify the financial statement effects of an overstatement of the ending inventory in the current period. If the error is not corrected, how does it affect the financial statements for the following year? Solution 152 The overstatement of ending inventory will cause cost of goods sold to be understated. Consequently, net income for the period will be overstated. The effect on the balance sheet is that assets and stockholders' equity will be overstated. The subsequent period will have an overstatement of beginning inventory. This will cause cost of goods sold to be overstated and net income to be understated, counterbalancing the overstatement of income in the prior period.
S-A E 153 (Ethics) Lacy Cole and Tim Lane are department managers in the housewares and shoe departments, respectively, for Miltons, a large department store. Tim has observed Lacy taking inventory from her own department home, apparently without paying for it. He hesitates confronting Lacy because he is due to be promoted, and needs Lacy's recommendation. He also does not want to notify the company management directly, because he doesn't want an ethics investigation on his record, believing that it will give him a goody-goody image. This week, Lacy tried on several pairs of expensive running shoes in his department before finding a pair that suited her. She did not, however, buy them. That very pair was missing this morning.
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Test Bank for Financial Accounting, Fifth Edition
S-A E 153 (cont.) Miltons recently replaced its old periodic inventory system with a perpetual inventory system using scanners and bar codes. In addition, the annual inventory is to be replaced by a monthly inventory conducted by an independent firm. On hearing the news of the changes, Tim relaxes. "The system will catch Lacy now," he says to himself. Required: 1. Is Tim's attitude justified? Why or why not? 2. What, if any, action should Tim take now?
Solution 153 1. Tim's attitude is not justified. The system will only be able to detect that merchandise is missing, not to determine who took it. 2. Tim should notify his superiors at once. He has knowledge of what may be criminal acts, and by concealing them, he is very close to becoming a party to the acts. Tim's apparent fear of not being promotable because of a goody-goody image seems unjustified. It would seem more likely that Tim's refusal to accept unethical (and illegal) acts by others would make him a more valuable manager. He may even be jeopardizing his career with Miltons if someone else reports Lacy's actions. The resulting investigation may implicate Tim because of his failure to notify the proper authorities in a timely manner. S-A E 154 (Communication) Tom Young, a new employee of Oslow Company, recorded $1,000 in consigned goods received as part of the firm's inventory. The goods were received one day after the end of the fiscal period, but Tom reasoned that the goods should be included in inventory sooner because Oslow paid the freight. The mistake was brought to his attention by the purchasing department who said the goods should not have been recorded as Oslow's inventory at all. Tom told Lisa Lopez, the purchasing supervisor, that nobody needed to worry, because the mistake would cancel itself out the following month. In Tom's opinion, there was no reason to get everyone excited over nothing, especially since it was monthly, and not annual, financial statements that were affected. Lisa Lopez has reported the problem to the accounting department. Required: You are Tom's supervisor. Write a memo to Tom explaining why the error should have been corrected.
Inventories Solution 154 MEMO TO: Tom Young, Accounting Department
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FROM: Mary Farr, Supervisor DATE: March 12, 2005
It has come to my attention that $1,000 in consigned goods were included in the inventory reported in our January financial statements. You were informed that this amount should be removed from inventory, which you did not do, apparently believing that February's entries would correct the error. The error would have been corrected in February if it were only a matter of your recording inventory in the wrong month. January's inventory and expenses would have been overstated, and February's understated, but the net effect would have been zero. Since the $1,000 is a fairly large amount, however, that still would not have been appropriate. The error you made, however, was to enter into inventory goods that the company did not own, and will not own. Consigned goods are owned by the consignors until purchased by customers. We only provide our shops for the consignors to sell their goods, and we collect a fee for doing so. Please correct the error at once. We may need to notify some of the other departments of the error as well. Please arrange to meet with me in my office as soon as possible to discuss the matter. (signature)
Brief Exercises
BE 155 Match the following descriptions to the correct terms. (a) Consigned goods _________ (b) Physical inventory _________ (c) Inventory summary sheet _________ (d) Goods in transit 1. 2. 3. 4. Goods on board a truck, train, ship or plane that should be included in the inventory of the company that has legal title Goods that are held by one party for sale but ownership is retained by another party Involves counting, weighing and measuring each kind of inventory on hand Document listing the quantity of each kind of inventory
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Test Bank for Financial Accounting, Fifth Edition
Solution 155 (a) Consigned goods 2 (b) Physical inventory 3 (c) Inventory summary sheet 4 (d) Goods in transit 1 BE 156 Pembrook Company had beginning inventory on May 1 of $12,000. During the month, the company made purchases of $30,000 but returned $2,000 of goods because they were defective. At the end of the month, the inventory on hand was valued at $9,500. Calculate cost of goods available for sale and cost of goods sold for the month. Solution 156 Beginning inventory Net purchases ($30,000 $2,000) Goods available for sale Ending inventory Cost of goods sold
$12,000 +28,000 $40,000 - 9,500 $30,500
BE 157 Identify which of the following would be included in the physical inventory of Ingram Company: 1. Goods shipped to Kato Company on consignment. 2. Goods owned by Trotter Company held for consignment. 3. Goods purchased from Larkin Company that have not yet been received. The goods were shipped FOB shipping point. 4. Goods purchased from Taylor Company that have not yet been received. The goods were shipped FOB destination. Solution 157 1, 3 BE 158 Opti Company's inventory records show the following data for the month of September: Inventory, September 1 Purchases: September 8 September 18 Units 100 450 300 Unit Cost $3.00 3.50 3.70
A physical inventory on September 30 shows 200 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses FIFO inventory costing and a periodic inventory system.
Inventories Solution 158 Ending inventory of 200 units: 200 x $3.70 = $740 Cost of goods sold: Units available for sale (100 + 450 + 300) = 850 Units sold 850 200 = 650 100 x $3 = 450 x $3.50 = 100 x $3.70 = Cost of goods sold $ 300 1,575 370 $2,245
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BE 159 Use the information in BE 158 to calculate the value of ending inventory and cost of goods sold if the company uses LIFO inventory costing and a periodic inventory system. Solution 159 Ending inventory: Cost of goods sold:
(100 units x $3.00) + (100 units x $3.50) = $650 (300 units x $3.70) + (350 units x $3.50) = $2,335
BE 160 Use the information in BE 158 to calculate the value of the ending inventory and cost of goods sold if the company uses Weighted average inventory costing and a periodic inventory system. Round cost per unit to 2 decimal places and ending inventory and cost of goods sold to the nearest dollar. Solution 160 Weighted average cost per unit: Cost of goods available for sale = Units available for sale Ending inventory: Cost of goods sold:
$2,985 = $3.51 850
200 x $3.51 = $702 650 x $3.51 = $2,282
BE 161 Identify which of the following business would likely uses Specific Identification to track inventory costs. 1. Walopoly, a discount retail store which sells a high volume of general merchandise. 2. Graber's Grocery Mart, a small convenience store. 3. Murray Yacht Sales, a business which sells large sailboats and luxury yachts. 4. West Wind Sails, a small business that sells custom sails. 5. Chase Hardware, a chain of stores selling a variety of hardware items. Solution 161 3 and 4
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Test Bank for Financial Accounting, Fifth Edition
BE 162 Shelby Supply Company reports net income of $120,000 in 2006. The ending inventory did not include goods valued at $5,000 that Shelby had consigned to Felicia's Gift Shop. (1) (2) What is the correct net income for 2006? What impact will this error have on the balance sheet at 12/31/2006?
Solution 162 (1) If ending inventory is understated by $5,000, Cost of goods sold will be overstated and net income will be understated by $5,000. The correct net income is $125,000. (2) On the balance sheet, both Inventory and Retained earnings will be understated by $5,000. BE 163 The following information was available for Zoom Enterprises for the year ending 12/31/2006: Beginning inventory Ending inventory Cost of goods sold Sales revenue $25,000 $30,000 $110,000 $220,000
Compute the inventory turnover ratio and days in inventory for Zoom. Solution 163 Inventory ratio
=
$110,000 (25,000 + 30,000)/2 365 / 4 = 91.25 days
= 4 times
Days in inventory
=
BE 164 The following accounts are included in the ledger of Able Company: Advertising expense Freight-in Inventory Purchases Purchase returns and allowances Sales Sales returns and allowances Which of the accounts would be included in calculating cost of goods sold? Solution 164 Freight-in Inventory Purchases Purchase returns and allowances
Inventories
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