lecture 7 _solutions - Errors in Measuring Inventory Ending...

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This exercise tests your understanding of the various inventory costing methods, specific identification (S), weighted average (W) , LIFO (L) and FIFO (F). In the space provided, write the name of the inventory method that best fits the description. Assume that the cost of inventory is rising and that the company is in a taxpaying position. 1. ___S____ Used to account for automobiles, jewelry and art objects. 2. ___F____ Reports the highest amount of gross profit/net income. 3. ___L____ Results in a good match of the most current estimate of cost of goods sold against revenue. 4. ___L____ Results in a measure of ending inventory that is not equal to current costs and is much lower than the cost of replacing the inventory. 5. ___L____ Results in the lowest amount of income taxes paid. 6. ____L___ Results in the lowest amount of gross profit/net income. 7.____W___ Reports a unit cost for ending inventory that is identical to the unit cost for cost of goods sold and is somewhere between the highest unit cost paid and the lowest unit cost paid. 8.__L_____ If used for tax purposes, must be used for financial reporting purposes. 9. ___L____ Can result in unusually low cost of goods sold if ending inventory levels dip below beginning inventory levels. 10.___F____ The cost of inventory using this method must be reported in the financial statements whether or not the method is used. Errors in Measuring Inventory Ending Inventory Beginning Inventory Overstated Understated Overstated Understated Ending Inventory + - N/A N/A Retained Earnings + - - + Goods Available for Sale N/A N/A + - Cost of Goods Sold - + + - Gross Profit + - - + Net Income + - - + Effect on Current Period's Balance Sheet Effect on n Current Period's Income Statement
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E7–12. Req. 1 Item Quantity Total Cost Total Market LCM Valuation (line-by- line) LCM Valuation (total value) A 20 x $10 = $ 200 x $15 = $300 $200 B 75 x 40 = 3,000 x 36 = 2,700 2,700 C 35 x 57 = 1,995 x 55 = 1,925 1,925 D 10 x 27 = 270 x 32 = 320 270 Total $5,465 $5,245 $5,095 Inventory valuation that should be used (LCM) $5,095 $5245 Req. 2 The write-down to lower of cost or market on a line-by-line basis will increase cost of goods sold expense by the amount of the write-down, $370 : Total Cost LCM Valuation = Write-down $5,465 $5,095 = $370 Write-down The write-down to lower of cost or market on a total inventory value basis will increase cost of goods sold expense by the amount of the write-down, $220 : Total Cost
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This note was uploaded on 05/10/2011 for the course ACCT 1002 taught by Professor Ng during the Spring '11 term at National University of Singapore.

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lecture 7 _solutions - Errors in Measuring Inventory Ending...

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