CHAPTER 6

True/False Questions Difficulty: Easy Learning Objective: C1 T F 1. Goods in transit are automatically included in inventory.

Difficulty: Easy Learning Objective: C1 T F 2. Damaged and obsolete goods are not included in inventory if they cannot be sold.

Difficulty: Medium Learning Objective: C1 T F 3. Goods on consignment are goods shipped by their owner, called the consignee, to another party called the consignor.

Difficulty: Medium Learning Objective: C1 T F 4. If obsolete or damaged goods can be sold, they will be included in inventory at their net realizable value.

Difficulty: Hard Learning Objective: C1 T F 5. If the seller is responsible for paying freight charges, then ownership of inventory passes when goods arrive at their destination.

Difficulty: Hard Learning Objective: C1 T F 6. Net realizable value for damaged or obsolete goods is sales price plus the cost of making the sale. Difficulty: Easy Learning Objective: C2 7. 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.

Difficulty: Easy Learning Objective: C2 T F 8. When taking a physical count of inventory, the use of prenumbered inventory tickets assists in the control process.

100

Difficulty: Medium Learning Objective: C2 T F 9. Incidental costs often added to the costs of inventory include import duties, freight, storage, and insurance.

Difficulty: Medium Learning Objective: C2 T F 10. The Inventory account is a controlling account for the inventory subsidiary ledger that contains a separate record for each separate product. Difficulty: Medium Learning Objective: C2 T F 11. Few companies take a physical count of inventory each year, and rely on inventory records alone to determine the inventory value. Difficulty: Hard Learning Objective: C2 T F 12. All incidental costs of inventory acquisition and handling whether necessary or not, are assigned to inventory. Difficulty: Hard Learning Objective: C2 T F 13. The matching principle is used by some companies to avoid allocating incidental inventory costs to cost of goods sold. Difficulty: Easy Learning Objective: A1 T F 14. The consistency principle requires a company to use the same accounting methods period after period, so that financial statements are comparable across periods. Difficulty: Easy Learning Objective: A1 T F 15. A company can change its inventory costing method without mentioning this change in its financial statements because it is an internal management decision. Difficulty: Easy Learning Objective: A1 T F 16. Whether prices are rising or falling, FIFO always will yield the highest gross profit and net income.

101

Difficulty: Medium Learning Objective: A1 T F 17. An advantage of the weighted-average inventory method is that it tends to smooth out the effects of price changes. Difficulty: Medium Learning Objective: A1 T F 18. In a period of rising prices, FIFO usually gives a lower taxable income and therefore, yields a tax advantage. Difficulty: Medium Learning Objective: A1 T F 19. LIFO is preferred when costs are rising and managers have incentives to report higher income for reasons such as bonus plans, job security, and reputation. Difficulty: Medium Learning Objective: A1 T F 20. LIFO inventory value is often less than the inventory's replacement cost because LIFO inventory is valued using the oldest purchase cost. Difficulty: Hard Learning Objective: A1 T F 21. The full disclosure principle requires that the notes to the financial statements report a change in accounting method for inventory. Difficulty: Hard Learning Objective: A1 T F 22. 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. Difficulty: Hard Learning Objective: A1 T F 23. Companies are allowed to use FIFO for financial reporting and LIFO for tax reporting, according to IRS requirements. Difficulty: Easy Learning Objective: A2 T F 24. An error in the period-end inventory balance will cause an error in the calculation of cost of goods sold.

102

Difficulty: Easy Learning Objective: A2 T F 25. Errors in the period-end inventory balance only affect the current period's records and financial statements. Difficulty: Medium Learning Objective: A2 T F 26. An inventory error is sometimes said to be self-correcting because it causes an offsetting error in the next period. Difficulty: Medium Learning Objective: A2 T F 27. Managers are able to make important decisions correctly using erroneous inventory balances because inventory errors are self-correcting and so are less serious. Difficulty: Hard Learning Objective: A2 T F 28. An understatement of the ending inventory balance will understate cost of goods sold and overstate net income. Difficulty: Hard Learning Objective: A2 T F 29. An understatement of the beginning inventory balance will understate cost of goods sold and overstate net income. Difficulty: Hard Learning Objective: A2 T F 30. An understatement of ending inventory will cause an understatement of assets and equity on the balance sheet. Difficulty: Hard Learning Objective: A2 T F 31. An overstatement of ending inventory will cause an overstatement of assets and an understatement of equity on the balance sheet. Difficulty: Easy Learning Objective: A3 T F 32. A company's ability to pay its short-term obligations depends on many factors including how quickly it sells its merchandise inventory.

103

Difficulty: Medium Learning Objective: A3 T F 33. The inventory turnover ratio is computed by dividing average merchandise inventory by cost of goods sold. Difficulty: Medium Learning Objective: A3 T F 34. The days' sales in inventory is computed by dividing ending inventory by cost of goods sold and multiplying the result by 365. Difficulty: Medium Learning Objective: A3: T F 35. There is no simple rule for inventory turnover, except that a high ratio is preferable provided inventory is adequate to meet demand. Difficulty: Medium Learning Objective: A3 T F 36. It can be expected that companies that sell perishable goods to have higher inventory turnover than companies that sell nonperishable goods. Difficulty: Hard Learning Objective: A3 T F 37. A company's cost of goods sold was $15,500 and its average merchandise inventory was $4,500. Its inventory turnover equals 3.4. Difficulty: Hard Learning Objective: A3 T F 38. Toys "R" Us 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. Difficulty: Easy Learning Objective: P1 T F 39. One of the most important decisions in accounting for inventory is determining the per unit costs assigned to inventory items. Difficulty: Easy Learning Objective: P1 T F 40. The four methods of inventory valuation are SIFO, FIFO, LIFO, and average cost. Difficulty: Easy

104

Learning Objective: P1 T F 41. When units are purchased at different costs over time, determining the cost per unit assigned to inventory items is simple. Difficulty: Easy Learning Objective: P1 T F 42. LIFO assumes that inventory costs flow in the order incurred. Difficulty: Medium Learning Objective: P1 T F 43. 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 Difficulty: Medium Learning Objective: P1 T F 44. The FIFO inventory method assumes that costs for the earliest units purchased are the first to be charged to the cost of goods sold. Difficulty: Medium Learning Objective: P1 T F 45. Three key variables determine the dollar value of inventory: (1) inventory quantity, (2) costs of inventory, and (3) cost flow assumption. Difficulty: Medium Learning Objective: P1 T F 46. The assignment of costs to the goods sold and to inventory using specific identification is the same for both the perpetual and periodic systems. Difficulty: Medium Learning Objective: P1 T F 47. The dollar value assigned to goods purchased will differ under the different inventory methods of specific identification, FIFO, LIFO, and weighted average. Difficulty: Medium Learning Objective: P1 T F 48. 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. Difficulty: Medium Learning Objective: P1

105

F 49. Under LIFO, the most recent costs are assigned to ending inventory. Difficulty: Hard Learning Objective: P1

F 50. The matching principle requires that the inventory valuation method follow the physical flow of inventory. Difficulty: Hard Learning Objective: P1

F 51. The choice of an inventory valuation method can have a major impact on gross profit and cost of sales. Difficulty: Easy Learning Objective: P2

F 52. In applying the lower of cost or market method to inventory valuation, market is defined as the current replacement cost. Difficulty: Easy Learning Objective: P2

F 53. In applying the lower of cost or market method to inventory valuation, market is defined as the current selling price. Difficulty: Easy Learning Objective: P2

F 54. 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. Difficulty: Easy Learning Objective: P2

F 55. 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. Difficulty: Medium Learning Objective: P2

F 56. The conservatism principle 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. Difficulty: Medium

106

Learning Objective: P2 T F 57. 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. Difficulty: Hard Learning Objective: P2 T F 58. 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. Difficulty: Medium Learning Objective: P3 T F 59. 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. Difficulty: Easy Learning Objective: P4 T F 60. Monthly or quarterly statements are called interim statements because they are prepared between the traditional annual statements. Difficulty: Easy Learning Objective: P4 T F 61. The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to net sales. Difficulty: Easy Learning Objective: P4 T F 62. 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. Difficulty: Easy Learning Objective: P4 T F 63. The reliability of the gross profit method depends on a good estimate of the gross profit ratio. Difficulty: Medium Learning Objective: P4 T F 64. In the retail inventory method of inventory valuation, the retail amount of inventory refers to the dollar amount measured using selling prices of inventory items.

107

Difficulty: Medium Learning Objective: P4 T F 65. To avoid the time-consuming process of taking an inventory each year, most companies use the gross profit method to estimate ending inventory. Difficulty: Hard Learning Objective: P4 T F 66. 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. Multiple Choice Difficulty: Easy Learning Objective: C1 67. Damaged and obsolete goods: 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. Difficulty: Medium Learning Objective: C1 68. 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) All of the above. Difficulty: Medium Learning Objective: C1 69. 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. Difficulty: Hard Learning Objective: C1

108

70. 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. Difficulty: Medium Learning Objective: C1 71. 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. Difficulty: Hard Learning Objective: C1 72. 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 Hewetts 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. Hewetts ending inventory balance of $215,000 included $15,000 of goods being held on consignment from Rumsfeld Company. (Hewett Company is the consignee.) Hewetts 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 Difficulty: Hard Learning Objective: C1 73. Gotham Company reported a December 31 ending inventory balance of $412,000. The following

109

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 companys 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 Difficulty: Easy Learning Objective: C2 74. Costs included in the Merchandise Inventory account can include: A) Invoice price minus any discount. B) Transportation-in. C) Storage. D) Insurance. E) All of the above. Difficulty: Easy Learning Objective: C2 75. Internal controls that should be applied when a business takes a physical count of inventory should include A) Prenumbered inventory tickets. B) Counters of inventory should not be those who are responsible for the inventory. C) Counters must confirm the validity of inventory existence, amounts, and quality. D) Second counts by a different counter. E) All of the above. Difficulty: Medium Learning Objective: C2 76. Physical counts of inventory: A) Are not necessary under the perpetual system. B) Are necessary to measure and adjust for inventory shrinkage. C) Must be taken at least once a month. D) Requires the use of hand-held portable computers.
110

E) Are not necessary under the cost-to benefit constraint. Difficulty: Hard Learning Objective: C2 77. Incidental and necessary costs of inventory: A) Can be assigned to each inventory unit. B) May be immaterial. C) Can be allocated to cost of goods sold. D) Are subject to the cost-to-benefit constraint when deciding how to account for them. E) All of the above. Difficulty: Easy Learning Objective: A1 78. 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. Difficulty: Easy Learning Objective: A1 79. 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 Difficulty: Easy Learning Objective: A1 80. The inventory valuation method that has the advantages that it assigns a value to the inventory on the balance sheet that approximates 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 the above. Difficulty: Medium Learning Objective: A1 81. The inventory valuation method that results in the lowest taxable income in a period of inflation is:
111

A) LIFO method.
B) C) D) E) FIFO method. Weighted-average cost method. Specific identification method. Gross profit method.

Difficulty: Medium Learning Objective: A1 82. The consistency principle: A) Requires a company to consistently apply the same accounting method of inventory valuation unless another method becomes preferable. 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. Difficulty: Hard Learning Objective: A1 83. The full disclosure principle: A) Requires 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. Difficulty: Hard Learning Objective: A1, P3 84. 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 Difficulty: Easy Learning Objective: A2 85. If a period-end inventory amount is reported in error, it can cause a misstatement in: A) Cost of goods sold. B) Gross profit. C) Net income. D) Current assets.
112

E) All of the above. Difficulty: Medium Learning Objective: A2 86. 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. Difficulty: Hard Learning Objective: A2 87. 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. Difficulty: Hard Learning Objective: A2 88. 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. Difficulty: Hard Learning Objective: A2 89. Thelma Company reported cost of goods sold for Year 1 and Year 2 as follows: Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold Year 1 $ 120,000 250,000 370,000 130,000 $ 240,000 Year 2 $ 130,000 275,000 405,000 135,000 $ 270,000

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

113

D) $285,000 E) $249,000 Difficulty: Hard Learning Objective: A2 90. Louise Company reported the following income statement information for Year 1 and Year 2: Sales Cost of goods sold: Beginning inventory Cost of goods purchases Cost of goods available for sale Ending inventory Cost of goods sold Gross profit Year 1 $410,000 $132,000 273,000 405,000 144,000 261,000 $149,000 Year 2 $550,000 $144,000 302,000 446,000 152,000 294,000 $256,000

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. Difficulty: Hard Learning Objective: A2 91. 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. Difficulty: Easy Learning Objective: A3 92. The inventory turnover ratio: A) Is used to analyze profitability. B) Is used to measure solvency. C) Measures how quickly a company turns over its merchandise inventory. D) Validates the acid-test ratio. E) Calculation depends on the company's inventory valuation method. Difficulty: Easy

114

Learning Objective: A3 93. 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. Difficulty: Medium Learning Objective: A3 94. 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. Difficulty: Medium Learning Objective: A3 95. 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 divided by cost of goods sold. Difficulty: Hard Learning Objective: A3 96. Toys "R" Us 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. Difficulty: Hard Learning Objective: A3 97. Toys "R" Us 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.
115

Difficulty: Easy Learning Objective: P1 98. Acceptable inventory methods include: A) LIFO method. B) FIFO method. C) Specific identification method. D) Weighted-average method. E) All of the above. Difficulty: Easy Learning Objective: P1 99. Management must confront which of the following considerations when accounting for inventory: A) Costing (valuation) method. B) Inventory system (perpetual or periodic). C) Items to be included and their cost. D) Use of lower of cost or market or other estimate. E) All of the above. Difficulty: Medium Learning Objective: P1 100. The inventory valuation method that identifies the invoice cost of each item in ending inventory to determine the cost assigned to that inventory 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. Difficulty: Medium Learning Objective: P1 101. A company had the following purchases during the current year: J a n u a r1 y 0 : u n i t s a t $ 1 2 0 F e b r u a2 r 0 y : u n i t s a t $ 1 3 0 M a y : 1 5 u n i t s a t $ 1 4 0 S e p t e m 1 2b e u r n : i t s a t $ 1 5 0 N o v e m 1 0b e u r n: i t s a t $ 1 6 0 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.

116

E) $3,640. Difficulty: Medium Learning Objective: P1 102. 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 Difficulty: Medium Learning Objective: P1 103. Acme-Jones 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. Difficulty: Medium Learning Objective: P1 104. 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. Difficulty: Medium Learning Objective: P1 105. 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.

117

C) $210. D) $380. E) $590. Difficulty: Medium Learning Objective: P1 106. 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. Difficulty: Hard Learning Objective: P1 107. A company markets 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: J J J J J a a a a a n n n n n u u u u u a a a a a r By r Py r Sy r Py r Sy u o u o e 1g 1r 1l 2r 2l :i c2 d9 c0 d7 n n i n g h: a s e d :2 4 u n h: a s e d :2 7 u n b 3 i t 2 i t a l a n c 0 u n i s a t $ 4 u n i s a t $ e o f 1 t s a t $ 3 0 s e l t s a t $ 3 0 s e l 8 1 l 1 l u 4 i n 7 i n n i t e a c g p e a c g p s h r i c e h r i c e e a c h e a c h a t $ 1 3

e a c

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. Difficulty: Hard Learning Objective: P1 108. Acme-Jones Company 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.

118

E) $17.74. Difficulty: Hard Learning Objective: P1 109. Given the following information, determine the cost of the inventory at June 30 using the LIFO perpetual inventory method. J u n e B1 e g i n n i n g i n v e n t o r y , 1 5 u n i t s a t $ 2 J u n e S 1 a5 l e o f 6 u n i t s f o r $ 5 0 e a c h J u n e P 2 u9 r c h a s e o f 8 u n i t s a t $ 2 5 e a c h The cost of the ending inventory is A) $200. B) $220. C) $380. D) $275. E) $300. Difficulty: Easy Learning Objective: P2 110. 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. Difficulty: Easy Learning Objective: P2 111. 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. Difficulty: Medium Learning Objective: P2 112. The conservatism principle: A) Requires 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) Requires that a company use the same accounting methods period after period. C) Requires that revenues and expenses be reported in the period in which they are earned or incurred. D) Requires that all items of a material nature be included in financial statements. E) Requires that all inventory items be reported at full cost. Difficulty: Medium

e a c h

119

Learning Objective: P2 113. 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. Difficulty: Hard Learning Objective: P2 114. 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) $1,112.50 or $1075.00, depending upon whether LCM is applied to individual items or the inventory as a whole. D) $1,112.50. E) $1180.00 or $1075.00, depending upon whether LCM is applied to individual items or to the inventory as a whole. Difficulty: Medium Learning Objective: P3 115. 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. Difficulty: Medium Learning Objective: P3 116. 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.

120

B) C) D) E)

$160. $210. $380. $590.

Difficulty: Medium Learning Objective: P3 117. 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. Difficulty: Medium Learning Objective: P3 118. A company uses the periodic inventory system and had the following activity during the current monthly period. N N N N N o o o o o v v v v v e e e e e m m m m m Bb Pb Pb Sb Pb ee eu eu eo eu rg rr rr rl rr 1i c5 c8 d1 c1 n: h: h: 6 h9 n i n g a s e d a s e d : a: s e d 1i 1 5 2 5 n0 v0 e 0 0 0 u 0 0 0 u un u n u n nt o i tr s y @ o f n i t s @ i t s @ $ n i t s @ i t s @ $ $ $ 2 $ 2 2 2 3 4 5 0 2 5

Using the weighted-average inventory method, the company's ending inventory would be reported at: A) $2,000. B) $2,200. C) $2,250. D) $2,400. E) $4,400. Difficulty: Hard Learning Objective: P3 119. A company markets 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: J J J J J a a a a a n n n n n u u u u u a a a a a r r r r r By Py Sy Py Sy u o u o e1 1 1 2 2 r l r l g: 2c 9d 0c 7d i n n i n g :h a s e d : 2 4 u n :h a s e d : 2 7 u n b 3 i t 2 i t a l a n c e o 0 u n i t s a s a t a s e l 4 u n i t s a s a t a s e l f t 1 8 u n $ 1 4 e l i n g p r t $ 1 7 e l i n g p r a i a i i t s a t $ 1 3 c h c e o f $ 3 0 c h c e o f $ 3 0 e a e a e a

121

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. Difficulty: Medium Learning Objective: P4 120. A company's warehouse was destroyed by a tornado on March 15. The following information was the only information that was salvaged: 1. Inventory, beginning: $28,000 2. Purchases for the period: $17,000 3. Sales for the period: $55,000 4. Sales returns for the period: $700 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. Difficulty: Medium Learning Objective: P4 121. 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. Difficulty: Hard Learning Objective: P4 122. 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

122

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. Difficulty: Hard Learning Objective: P4 123. 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. Difficulty: Hard Learning Objective: P4 124. 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. Difficulty: Easy Learning Objective: P4 125. 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 in between the traditional, annual statements. D) Require the use of the perpetual method for inventories. E) Cannot be prepared if the company follows the conservatism principle.

123

Difficulty: Medium Learning Objective: P4 126. The Jackson Company has sales of $300,000 and cost of goods available for sale of $270,000. If the gross profit rate 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. Difficulty: Hard Learning Objective: P4 127. The 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 companys 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. Difficulty: Hard Learning Objective: P4 128. On July 24 of the current year, The Georgia Peach Company experienced a natural disaster that destroyed the companys entire inventory. At the beginning of July, the company reported beginning inventory of $226,750. Inventory purchased during July (until the date of the fire) was $197,800. Sales for the month of July through July 24 were $642,500. Assuming the companys typical gross profit rate 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

Matching Difficulty: Medium Learning Objective: C1, A1, P1, P2, P4 129. Match each of the following terms a through j with the appropriate definition. a. Specific identification method
124

b. Days' sales in inventory c. Conservatism principle d. Inventory turnover e. Retail inventory method f. Interim statements g. Net realizable value h. LIFO method i. Weighted average inventory method j. FIFO method 1. The accounting principle that aims to select the less optimistic estimate when two or more estimates are about equally likely. 2. The expected sales price of an item minus the cost of making the sale. 3. 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. 4. An estimate of days needed to convert the inventory at the end of the period into receivables or cash. 5. 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 6. Financial statements prepared for periods of less than one year. 7. An inventory valuation method that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold. 8. 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. 9. An inventory valuation method that assumes that inventory items are sold in the order acquired. 10. The number of times a company's average inventory is sold during a period. Difficulty: Medium Learning Objective: C1, A3, P1, P2, P4 130. Match the following terms a through j with the appropriate definition. a. Consignee b. Conservatism principle c. Lower of cost or market d. Gross profit method e. Inventory turnover f. Consistency principle g. Specific identification method h. Days' sales in inventory i. Consignor j. Retail inventory method 1. An owner of goods who ships them to another party who will then sell the goods for the owner. 2. 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. 3. 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.
125

4. An estimate of days needed to convert the inventory available at the end of the period into receivables or cash. 5. One who receives and holds goods owned by another for purposes of selling the goods for the owner. 6. 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. 7. The number of times a company's average inventory is sold during an accounting period. 8. The required method of reporting inventory at market when market is lower than cost. 9. 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. 10. The principle that aims to select the less optimistic estimate when two or more estimates are about equally likely. Difficulty: Medium Learning Objective: A1, P1 131. 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: FIFO LIFO WA SI First in, first out Last in, first out Weighted average Specific identification

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. Short Essay Difficulty: Easy Learning Objective: C1 132. 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.) Difficulty: Easy Learning Objective: C2 133. What costs are assigned to merchandise inventory? Difficulty: Hard Learning Objective: C2 134. Describe the internal controls that must be applied when taking a physical count of inventory.

126

Difficulty: Hard Learning Objective: A1 135. Explain the effects of inventory valuation methods on the cost of ending inventory, income, and income taxes. Difficulty: Hard Learning Objective: A1 136. How do the consistency principle and the full disclosure principle affect inventory valuation? Difficulty: Hard Learning Objective: A2 137. What is the effect of an error in the ending inventory balance on the income statement? Difficulty: Medium Learning Objective: A3 138. Explain how the inventory turnover ratio and the days' sales in inventory ratio are used to evaluate inventory management. Difficulty: Medium Learning Objective: P1 139. Identify and describe the four inventory valuation methods. Difficulty: Medium Learning Objective: P2 140. Explain why the lower of cost or market rule is used to value inventory. Difficulty: Hard Learning Objective: P3 141. Discuss the important accounting features of a periodic inventory system including accounts and procedures used. Difficulty: Medium Learning Objective: P4 142. Explain the difference between the retail inventory method and gross profit inventory method for valuing inventory. Difficulty: Medium

127

143. The opening story for Chapter 6 indicated that Izzy and Coco Tihanyi of Surf Divas initially struggled with inventory and sales when they first opened their business. They indicated that one ongoing challenge is maintaining appropriate levels of inventories while controlling costs. What do you think they meant by that statement? Problems Difficulty: Hard Learning Objective: A1 144. 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 Company Income Statement For the year ended December 31 Sales................................... $50,000 Cost of goods sold.............. 23,000 Gross profit........................ $27,000 Expenses............................. 13,000 Income before taxes............ $14,000 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? Difficulty: Hard Learning Objective: A2 145. Evaluate each inventory error separately and determine whether it overstates or understates cost of goods sold and net income. Inventory error: Cost of goods sold is: Understatement of beginning inventory........................ Understatement of ending inventory............................. Overstatement of beginning inventory.......................... Overstatement of ending inventory............................... Difficulty: Hard Learning Objective: A2 146. The City Store reported the following amounts on their financial statements for 2006, 2007, and 2008: Net income is:

128

Cost of goods sold.................................. Net income............................................. Total current assets................................. Equity.....................................................

For the year ended December 31 2006 2007 2008 $75,000 $87,000 $77,000 22,000 25,000 21,000 155,000 165,000 110,000 287,000 295,000 304,000

It was discovered early in 2009 that the ending inventory on December 31, 2006 was overstated by $6,000, and the ending inventory on December 31, 2007 was understated by $2,500. The ending inventory on December 31, 2008 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 2006, 2007, and 2008. Difficulty: Medium Learning Objective: A3 147. A company reported the following data:
C A Y e a r 1 Y e a r 2 Y e a r 3 o s t o f g o o $ d 3 s 4 s 7 o , 6l $ d 0 3 0 7 9 , 6 $ 5 4 0 4 3 , 9 0 v e r a g e i n v 8e n5 t, o0 r0 y 0 9 1 , 0 5 0 9 8 , 3 5 0 0

Required: 1. Calculate the company's merchandise inventory turnover for each year. 2. Comment on the company's efficiency in managing its inventory. Difficulty: Medium Learning Objective: A3 148. A company reported the following data:
C E o s t o f n d i n g Y e a r 1Y e a r 2Y e a r 3 g o $o 2d 3s 8 s ,o$ 0 l 3 0d 7 0 5 , $ 0 4 0 9 0 5 , 0 0 0 i n v 1e 2n 0t o , 0r 1y 0 5 0 0 , 0 1 0 8 0 0 , 0 0 0

Required: 1. Calculate the days' sales in inventory for each year. 2. Comment on the trend in inventory management. Difficulty: Medium Learning Objective: P1 149. A company made the following purchases during the year: J a n . M a r . A p r . J u l y O c t . 1 1 2 5 3 0 1 0 0 5 1 2 1 2 1 5 5 0 0 5 u u u u u n n n n n i i i i i t t t t t s$ s$ s$ s$ s$ 3a 3a 4a 4a 4a 6t 9t 2t 5t 8t 0 0 0 0 0 e e e e e a a a a a c c c c c h h h h h

129

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. Difficulty: Medium Learning Objective: P1 150. A company made the following merchandise purchases and sales during the month of May: M M M M M a a a a a y y y y y 1 5 1 2 2 p p 0 0 5 u u s p s 3 r 2 r 4o 3 u 4o 8 c 0h u a n s i 7 c 0h u a n s i 0 l d0 u n i 0 r 0 cu h n a i 0 l d0 u n i et et t ts t s d$ s d$ s$ s e$ s$ a1 a1 a5 da2 a5 t5 t7 t0 t2 t0 e e e e e a a a a a c c c c c h h h h h

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? Difficulty: Medium Learning Objective: P1 151. A company made the following merchandise purchases and sales during the month of July:
J J J J J J u u u u u u l l l l l l y y y y y y p1 p5 s9 p1 s2 p3 r c h r c h o l d 5 u4 r c h o 0 l d 2 u0 r c h u u a s ue a s ue 0 0u a s ue 5 0u a s ue nd nd n nd n nd i i i i i i t3 s t2 s t s t3 s t s t2 s 8$ 7$ $ 0$ $ 5$ a 01 a 02 a5 a 02 a5 a 03 t t t t t t 5 0 5 4 5 0 e e e e e e a a a a a a c c c c c c h h h h h h

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? Difficulty: Medium Learning Objective: P1 152. A company made the following merchandise purchases and sales during the current month:
J J J J J J u u u u u u l l l l l l y . p u1 r c y p u5 r c y s o 9 l d y p1 u4 r c y s2 o 0 l d y p3 u0 r c h h a s ue a s ue 5 0 0u h a s ue 2 5 0u h a s ue nd nd n nd n nd i i i i i i t3 s t2 s t s t3 s t s t2 s 8$ 7$ $ 0$ $ 5$ a 01 a 02 a5 a 02 a5 a 03 t t t t t t 5 0 5 4 5 0 e e e e e e a a a a a a c c c c c c h h h h h h

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? Difficulty: Medium Learning Objective: P1

130

153. What was the FIFO cost of the company's January 31 inventory? Difficulty: Medium Learning Objective: P1 154. What was the LIFO cost of the company's January 31 inventory? Difficulty: Medium Learning Objective: P1 155. What was the weighted average cost of the company's January 31 inventory? Difficulty: Medium Learning Objective: P1 156. Prepare general journal entries to record the March 16 sale assuming a FIFO method is used. Difficulty: Medium Learning Objective: P1 157. Prepare the general journal entry to record the March 16 sale assuming the LIFO method is used: Difficulty: Medium Learning Objective: P1 158. Prepare the general journal entry to record the March 16 sale, assuming the weighted average method is used. Calculation of cost of goods sold: [(100 x $10) + (60 x $12)/160 units = $10.75/unit Calculation of cost of goods sold: [(100 x $10) + (60 x $12)/160 units = $10.75/unit Difficulty: Medium Learning Objective: P2 159. A company reported the following data related to its ending inventory:
P 8 8 8 8 r 4 4 4 6 o 9 2 7 0 d U u 1 7 6 4 cn t i t s 0 0 5 0 0 A Cv a o $ 1 1 1 1 i s lM at 0 $ 6 4 6 b a l re k 1 1 1 4 1 3 2 0 e t

Calculate the lower-of-cost-or-market on the: (a) Inventory as a whole and (b) inventory applied separately to each product. Difficulty: Medium Learning Objective: P2 160. A company had the following ending inventory costs:

131

r o A B C

d U u

cn t i t s 1 0 5 0 3 5

nU $

H i at n C M d o a s r t k e t n 5 $ 6 8 7 1 0 1 1

a l u

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. Difficulty: Medium Learning Objective: P3 161. A company uses the periodic inventory system, and the following information is available. All purchases and sales are on credit. Units 30 70 45 50 195 100 60 160 35 Unit Cost $3 4 5 6 Total Cost $ 90 280 225 300 $895 Unit Price

10/01 10/06 10/11 10/16 10/12 10/20 10/31

Inventory Balance............................................. Purchase............................................................ Purchase............................................................ Purchase............................................................ Goods available................................................. Sale................................................................... Sale................................................................... Goods sold........................................................ Inventory Balance.............................................

$10 11

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. Difficulty: Medium Learning Objective: P3 162. A company made the following merchandise purchases and sales during the month of May: M M M M M a a a a a y y y y y p1 p5 s1 p2 s2 r c h r c h o 0l d u0 r c h o 5l d u u 3a 2a 4 3a 4 8s e 0 d u 7s e 0 d u 0 0 u 0s e 0 d u 0 0 u n n n n n $i $i $i $i $i t1 t1 t5 t2 t5 s s s s s 5 7 0 2 0 a a a a a et et et et et a a a a a c c c c c h h h h h

There was no beginning inventory. If the company uses the weighted average periodic method, what would be the cost of the ending inventory? Difficulty: Medium Learning Objective: P3

132

163. A company made the following merchandise purchases and sales during the month of May: M M M M M a a a a a y y y y y p1 p5 s1 p2 s2 r c h r c h o 0l d u0 r c h o 5l d u u 3a 2a 4 3a 4 8s e 0 d u 7s e 0 d u 0 0 u 0s e 0 d u 0 0 u n n n n n $i $i $i $i $i t1 t1 t5 t2 t5 s s s s s 5 7 0 2 0 a a a a a et et et et et a a a a a c c c c c h h h h h

There was no beginning inventory. If the company uses the LIFO periodic inventory method, what would be the cost of the ending inventory? Difficulty: Medium Learning Objective: P3 164. A company made the following merchandise purchases and sales during the month of May: M M M M M a a a a a y y y y y p1 p5 s1 p2 s2 r c h r c h o 0l d u0 r c h o 5l d u u 3a 2a 4 3a 4 s8 e 0 d u s7 e 0 d u 0 0 u s0 e 0 d u 0 0 u n n n n n $i $i $i $i $i t1 t1 t5 t2 t5 s s s s s 5 7 0 2 0 a a a a a et et et et et a a a a a c c c c c h h h h h

There was no beginning inventory. If the company uses the FIFO periodic inventory method, what would be the cost of the ending inventory? Difficulty: Medium Learning Objective: P4 165. 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: Purchases to date: $118,000 Sales to date: $140,000

$34,000

Historically, the company's gross profit ratio has been 30%. Estimate the value of the destroyed inventory using the gross profit method. Difficulty: Medium Learning Objective: P4 166. Apply the retail method to the following company information to calculate the cost of the ending inventory for the current period. Cost Retail Beginning inventory................................................................... $20,224 $31,600 Net purchases.............................................................................. 59,508 97,000 Sales........................................................................................... 89,000

133

Difficulty: Medium Learning Objective: P4 167. A company uses the retail inventory method and has the following information available concerning its most recent accounting period: A t C o A s tt R e t a i l B e g i n n i n g - o f - p e r i o d i n v e n t $ o 1 r y4 8 $, 6 0 20 4 5 , 2 0 0 N e t p u r c h a s e s 6 7 7 , 4 1 0 , 20 2 9 , 8 0 0 S a l e s 1 , 2 0 0 , 0 0 0 1. What is the cost-to-retail ratio using the retail method? 2. What is the estimated cost of the ending inventory? Completion Difficulty: Easy Learning Objective: C1 168. If the _______________ is responsible for paying the freight, ownership of merchandise inventory passes when goods are loaded on the transport vehicle. Difficulty: Easy Learning Objective: C1 169. If the _______________ is responsible for paying the freight, ownership of merchandise inventory passes when the goods arrive at their destination. Difficulty: Medium Learning Objective: C1 170.Goods on consignment are goods that are shipped by the owner, called the _______________, to another party called the ______________________. Difficulty: Medium Learning Objective: C1 171. If damaged goods can be sold at a reduced price, they are included in inventory at their ________________________. Difficulty: Medium Learning Objective: C1 172. _______________________ is the estimated sales price of damaged goods minus the cost of making the sale. Difficulty: Medium Learning Objective: C1

134

173. Some companies use the _________________ principle or the __________________ constraint to avoid assigning incidental costs of acquiring merchandise to inventory. Difficulty: Hard Learning Objective: C2 174. The cost of an inventory item includes the _____________, plus ______________costs necessary to put it in a place and condition for sale. Difficulty: Easy Learning Objective: A1 175. When purchase costs regularly rise, the ___________________ method of inventory valuation yields the highest gross profit and net income. Difficulty: Easy Learning Objective: A1 176. When purchase costs regularly rise, the ___________________ method of inventory valuation yields the lowest gross profit and net income, providing a tax advantage. Difficulty: Easy Learning Objective: A1 177. The ______________________ method of inventory valuation better matches current costs with revenues in computing gross profit. Difficulty: Medium Learning Objective: A1 178. An advantage of the _________________method of inventory valuation is that it tends to smooth out the effect of erratic changes in costs. Difficulty: Hard Learning Objective: A2 179. An overstated beginning inventory will ______________cost of goods sold and _____________net income. Difficulty: Easy Learning Objective: A3 180. The ____________________ratio reflects how much inventory is available in terms of days' sales. Difficulty: Easy Learning Objective: A3 181. The _____________________ is a measure of how quickly a merchandiser sells its merchandise

135

inventory. Difficulty: Easy Learning Objective: P1 182. The ______________________ method of assigning costs to inventory and cost of goods sold is usually only practical for companies with expensive, customer-made inventory. Difficulty: Easy Learning Objective: P1 183. The _____________________ method of assigning costs to inventory and cost of goods sold assumes that the inventory items are sold in the order acquired. Difficulty: Easy Learning Objective: P1 184. The ______________________ method of assigning costs to inventory and cost of goods sold assumes that the most recent purchases are sold first. Difficulty: Easy Learning Objective: P1 185. 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. Difficulty: Medium Learning Objective: P1 186. A major goal in accounting for inventory is ______________costs against sales.

Difficulty: Medium Learning Objective: P1 187. Regardless of what inventory method or system is used, cost of goods available for sale must be allocated between ___________________ and ___________________. Difficulty: Easy Learning Objective: P2 188. When applying the lower of cost or market method of inventory valuation, market is defined as the ______________________. Difficulty: Hard Learning Objective: P3 189. When the __________method is used with a periodic inventory system, cost of goods sold is

136

assigned costs from the most recent purchases for the period. Difficulty: Medium Learning Objective: P4 190. The _________________method is commonly used to estimate the value of inventory that has been destroyed, lost, or stolen.

137