Accounting - Chapter 6 HW/Quiz

Davidson Electronics has the following: Units Unit Cost Inventory, Jan. 1 5,000 $ 8 Purchase, April 2 15,000 10 Purchase, Aug. 28 20,000 12 If Davidson has 7,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?

$75,250 ----- Ending inventory cost equals average-cost per unit times 7,000 units.Average cost per unit equals the total cost of all inventory amounts divided by the number of inventory units. Average inventory = [(5,000 × $8) + (15,000 × $10) + (20,000 × $12)] ÷ (5,000 + 15,000 + 20,000) = $430,000 ÷ 40,000 units = $10.75 per unit. Ending inventory = $10.75 × 7,000 units = $75,250.

Serene Stereos has the following inventory data: Nov. 1 Inventory 30 units @ $4.00 each 8 Purchase 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each 25 Purchase 90 units @ $4.40 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under FIFO is

$846 ----- (30 × $4.00) + (120 × $4.30) + [(300 - 100 - 30 - 120) × $4.20] = $846

The following information was available for Bowyer Company at December 31, 2014: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; and sales $1,200,000. Bowyer's inventory turnover ratio in 2014 was

11.0 times. ----- $880,000 ÷ [($90,000 + $70,000) ÷ 2] = 11

Carlos Comany had beginning inventory of $80,000, ending inventory of $110,000, cost of goods sold of $285,000, and sales revenue of $475,000. What is Carlos' days in inventory?

121.7 days ----- Days in inventory equals 365 days ÷ inventory turnover (cost of goods sold ÷ average inventory).365 ÷ ($285,000 ÷ [($80,000 + $110,000) ÷ 2]) = 121.7 days

The following information was available for Bowyer Company at December 31, 2014: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; and sales $1,200,000. Bowyer's days in inventory in 2014 was

33.2 days. ----- 365 ÷ 11 = 33.2

The following information came from the income statement of the Wilkens Company at December 31, 2014: sales revenue $1,800,000; beginning inventory $160,000; ending inventory $240,000; and gross profit $600,000. What is Wilkens' inventory turnover ratio for 2014?

6.0 times ----- Cost of goods sold is the difference between sales revenue and gross profit: $1,800,000 - $600,000 = $1,200,000 Inventory turnover ratio = Cost of goods sold divided by average inventory: $1,200,000 / [($160,000 + $240,000) / 2] = 6.0

Which one of the following statements is true?

A manufacturing company will normally have raw materials, work in process, and finished goods as inventory account classifications. ----- A manufacturing operation utilizes raw materials, work in process, and finished goods as inventory account classifications.

When is a physical inventory usually taken?

At the end of the company's fiscal year ----- A physical inventory count is usually taken at the end of the company's fiscal year.

Cecil gives goods on consignment to Jerry who agrees to try to sell them for a 25% commission. At the end of the accounting period, which of the following parties includes in its inventory the consigned goods?

Cecil ----- Ownership remains with Cecil, so Cecil reports the goods as assets.

What accounting concept is employed when using the lower-of-cost-or-market valuation?

Conservatism ----- Conservatism dictates the lower-of-cost-or-market inventory valuation.

Which of the following is not an inventory account?

Equipment ----- Equipment is not an inventory account. It is consists of items used in the production of income that are not held for sale. supplie.

Which statement is true in a perpetual inventory system?

FIFO cost of goods sold will be the same as in a periodic inventory system.

Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using

FIFO will have the highest ending inventory.

Ownership passes to the buyer when purchased goods are received from a public carrier if the goods are shipped

FOB destination. ----- Under FOB destination, title transfers when the buyer receives the purchased goods from the public carrier, not when the public carrier accepts them from the seller.

In a period of inflation, LIFO produces a higher net income than FIFO.

False ----- Cost of goods sold under LIFO will be higher since LIFO utilizes the higher market price of the last units purchased which produces a lower net income.

Which of the following is true of the FIFO inventory method?

It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold. ----- FIFO assumes the cost of the earliest units purchased are the first to be allocated to cost of goods sold.

If there is an error in the ending inventory affecting the net income of the current period, what will happen to the net income of the next accounting period?

It will have the reverse effect on the net income during the next accounting period. ----- An error in the ending inventory of the current period will have a reverse effect on net income of the next accounting period.

Which one of the following methods is allowed under GAAP but not under IFRS?

LIFO ----- LIFO is allowed under GAAP, but prohibited under IFRS.

Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants the most realistic cost of goods sold. Which inventory costing method should Ace consider using?

LIFO because cost of goods sold represents the latest costs.

With the assumption of costs and prices generally rising, which of the following is correct?

LIFO provides the closest valuation of cost of goods sold to replacement cost of inventory sold. ----- LIFO provides the closest relationship of replacement cost to cost of goods sold on the income statement.

Which of the following is not an acceptable inventory costing method?

Last-in, last-out ----- Last in, last-out is not one of the inventory costing methods.

In periods of rising prices, what will LIFO produce?

Lower net income than FIFO ----- Because cost of good sold includes the most recent costs which are the highest costs, net income under LIFO will be the lowest.

Which is true if the ending inventory is overstated?

Net income will be overstated and the stockholders' equity will be overstated. ----- If the ending inventory is overstated, cost of goods sold will be understated which causes net income to be overstated. Whenever net income is overstated, stockholders' equity will be overstated.

Fran Company's ending inventory is understated by $4,000. What are the effects of this error on the current year's cost of goods sold and net income, respectively?

Overstated and understated ----- If ending inventory is understated by $4,000, the amount subtracted from goods available for sale is understated. This causes cost of goods sold to be overstated, which in turn causes net income to be understated.

Two companies report the same cost of goods available for sale, but each employs a different inventory costing method. If the price of goods has increased during the period, which statement is true? The company using

The company using FIFO will have the highest ending inventory. ----- Since the FIFO company will have the most current costs in inventory, the FIFO company will have the highest inventory value on the balance sheet during periods of rising prices.

Which of the following will most likely be the most difficult convergence issue to resolve between FASB and the IASB?

The use of LIFO ----- LIFO is currently allowed under GAAP, but prohibited under IFRS.

When a perpetual inventory system is used, which of the following is a purpose of taking a physical inventory?

To check the accuracy of the perpetual inventory records

In periods of falling prices, LIFO will result in a higher ending inventory valuation than FIFO.

True

The First-in, First-out (FIFO) inventory method results in an ending inventory valued at the most recent cost.

True

The lower-of-cost-or-market rule implies that it is unrealistic to carry inventory at a cost that is in excess of its market value.

True

When the terms of a sale are FOB destination, legal title to the goods passes to the buyer when the goods reach the buyer's place of business.

True ----- Sales terms of FOB destination indicate that the seller holds title until the goods reach the destination.

Under FIFO, cost of goods sold consists of the units with the oldest costs.

True ----- Under first-in, first-out, the cost of the oldest units on hand is used to determine the cost of the units sold.

Which of the following statements is correct with respect to inventories?

Under FIFO, the ending inventory is based on the latest units purchased.

Alpha First Company just began business and 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 210 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is

$1,131. ----- $780 + [($1,170 ÷ 200) × (210 - 150)] = $1,131

Charlene Cosmetics Company just began business and 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 210 units on hand. Using the average cost method, the amount allocated to the ending inventory on June 30 is

$1,260. ----- ($4,200 ÷ 700) × 210 = $1,260

Baker Bakery Company just began business and 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 210 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is

$1,368 ----- $990 + [($1,260 ÷ 200) × (210 - 150)] = $1,368

Hogan Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 36 $45 Mar. 14, 2014 Purchase 62 $47 May 1, 2014 Purchase 44 $49 The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company's gross profit using LIFO? (rounded to whole dollars)

$1,544 ----- (44 × $49) + [(102 - $44) × $47] = $4,882; [(102 × $63) - $4,882] = $1,544

Clear Clarinets has the following inventory data: July 1 Beginning inventory 30 units at $120 5 Purchases 180 units at $112 14 Sale 120 units 21 Purchases 90 units at $115 30 Sale 84 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis.

$11,022 ----- (30 + 180 - 120 + 90 - 84) = 96; (90 × $115) + (6 × $112) = $11,022

Kam Company has the following units and costs: Units Unit Cost Inventory, Jan. 1 8,000 $11 Purchase, June 19 13,000 12 Purchase, Nov. 8 5,000 13 If 9,000 units are on hand at December 31, what is the cost of the ending inventory under FIFO using a periodic inventory system?

$113,000 ----- Ending inventory under FIFO uses the most recent costs in computing ending inventory. Ending inventory = (5,000 × $13) + (4,000 × $12) = $113,000.

Jenks Company developed the following information about its inventories in applying the lower of cost or market (LCM) basis in valuing inventories: Product Cost Market A $57,000 $60,000 B 40,000 38,000 C 80,000 81,000 If Jenks applies the LCM basis, the value of the inventory reported on the balance sheet would be

$175,000 ----- $57,000 + $38,000 + $80,000 = $175,000

A company just starting business made the following inventory transactions in August: Purchase on August 1 300 units $1,560 Sale on August 8 200 units 3,400 Purchase on August 12 400 units 1,340 Sale on August 24 350 units 5,950 Using the LIFO inventory method, how much is cost of goods sold for August using a perpetual inventory system?

$2,212.50 ----- This represents cost of goods sold under LIFO: Sale on August 8: 200 × $5.20 = $1,040. Sale on August 24: 350 units ×$3.35 = $1,172.50 Total cost of goods sold = $2,212.50.

Dole Industries had the following inventory transactions occur during 2014: Units Cost/unit Feb. 1, 2014 Purchase 72 $90 Mar. 14, 2014 Purchase 124 $94 May 1, 2014 Purchase 88 $98 The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $2,000, what is the company's after-tax income using LIFO? (rounded to whole dollars)

$2,923 ----- (88 × $98) + [(204 - 88) ! $94] = $19,528; [(204 × $126) - $19,528] = $6,176; ($6,176 - $2,000) × .70 = $2,923

A company just starting business made the following inventory transactions in August: Purchase on August 1 300 units $1,560 Sale on August 8 200 units 3,400 Purchase on August 12 400 units 1,340 Sale on August 24 350 units 5,950 Using the average cost perpetual inventory method, how much is the average cost of the units sold on August 24?

$3.72 ----- The average cost per unit on August 12 must consider the 100 remaining units and the August 12 purchase of 400 units [(100 × $5.20) + (400 × $3.35)] / (100 + 400) = $3.72

Cost of goods purchased is $540,000, ending inventory is $20,000, and cost of goods sold is $560,000. How much is beginning inventory?

$40,000 ----- Ending inventory plus cost of goods sold minus purchases results in beginning inventory: $20,000 + $560,000 -$540,000 = $40,000.

Delightful Discs has the following inventory data: Nov. 1 Inventory 30 units @ $4.00 each 8 Purchase 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each 25 Purchase 90 units @ $4.40 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under LIFO is

$421 ----- (30 × $4.00) + [(100 - 30) × $4.30] = $421

Radical Radials Company has the following inventory data: July 1 Beginning inventory:20 units at $19 $380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $22 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is

$620 ----- $380 + [(32 - 20) × $20] = $620

Hagger Sounds has accumulated the following cost and market data on March 31: Cost Data Market Data iPods $24,000 $20,400 Cell phones 18,000 19,000 DVDs 28,000 25,600 Using the lower-of-cost-or-market, how much is the value of the ending inventory? (Apply LCM to each category)

$64,000 ----- Cost is compared to market for each inventory category as follows: iPods $20,400 + cell phones $18,000 + DVDs $25,600 = $64,000.

Inventory turnover ratio is calculated by dividing cost of goods sold by

average inventory ----- Since inventory turnover is a period ratio, average inventory for the period is used.

An assumption about cost flow is necessary

because prices usually change, and tracking which units have been sold is difficult.

The specific identification method of costing inventories is used when the

company sells a limited quantity of high-unit cost items.

Goods held on consignment are

never owned by the consignee.

The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is

nonexistent; that is, there is no such accounting requirement.

If goods in transit are shipped FOB destination

the seller has legal title to the goods until they are delivered.