ACG2021 Chapter 6

Average inventory

(inventory year 1 + inventory year 2) / 2

Specific Identification

-Accounts for actual physical flow of costs -is best used for HIGH valued of physically LARGE items (i.e. cars)

Inventory costing

-Inventory is recorded at cost -includes all EXPENDITURES necessary to acquire goods and place them in a condition ready for use (i.e. specific identification)

Under LIFO to find the cost of goods sold:

-find the average cost: cost of goods available for sale / total units available for sale = weighted average unit cost -then: weighted average unit cost * units left in ending inventory = total cost of ending inventory -then: cost of goods available for sale - total cost of ending inventory = cost of goods sold

Current replacement cost:

-for a merchandising company, current replacement cost is the cost of purchasing the same goods at the present time from the usual suppliers in the usual quantities -used because a decline in the replacement cost of an item usually leads to a decline in the selling price of the item

Low cost of goods sold produces

-high gross profit (gross margin) -high net income -high retained earnings -high total stockholders equity -high ending inventory (keeps the expensive inventory) -high total assets

Lower-of-cost-or-market (LCM)

-is a basis whereby inventory is stated at the lower of either its cost or market value as determined by current replacement cost -is an example of the accounting convention of conservatism -conservatism=the approach adopted among accounting alternatives is the method that is least likely to overstate assets and net income -under LCM market is defined as current replacement cost, not selling price ***basically, you take the lower of either the cost, or the market price and identify that as the lower-of-cost-or-market "price" (self explanatory)

Perpetual Inventory System

-keeps a running count of inventory with inventory recorded for each purchase and sale as they occur. -Actual COGS is determined for each sale -uses the inventory account

Periodic Inventory System

-quantity of inventory is determined only by physical count -COGS determined after each physical inventory -uses the purchases account

Low cost of goods sold

-selling the less expensive inventory

What are legitimate business reasons for taking a physical inventory?

-to determine if any inventory have been lost from waste, shoplifting, or employee theft -to determine cost of goods sold -to check the accuracy of the perpetual inventory records ***Profitability of individual inventory items cannot be assessed from counting the items in the ending inventory of a company. A more in depth analysis must be performed to verify profitability

FIFO during inflation

-will have the most current costs in inventory -will have highest inventory value on the balance sheet

Methods for computing the cost of inventory:

1) specific identification 2) first-in, first-out 3) last-in, first-out 4) average cost methods

Days in inventory ratio

= 365 / inventory turnover ratio

FIFO ending inventory

= LIFO ending inventory + LIFO reserve *always use ending years LIFO reserve

Inventory turnover ratio

= cost of goods sold / average inventory ***average inventory= [(inventory year 1 + inventory year 2) / 2]

net income (in regards to taxes being present)

=net income before taxes multiplied by (100-tax rate)

Gross profit

=sales revenue - cost of goods

Net income before taxes

=sales revenue-cost of goods sold-operating expenses

Sales revenue

=units sold multiplied by per unit price

The physical inventory of a company should include:

All goods owned by a company regardless of whether the company holds physical possession of them or not. -consigned goods -goods in transit from another company shipped FOB shipping point (ownership still with the seller)

When is a physical inventory usually taken? a) when the company has its least amount of inventory b) at the end of the company's fiscal year c) in the middle of the fiscal year d) when a company has its greatest amount of inventory e) when goods are being sold or received

At the end of the company's fiscal year -used as a step in preparation of the company's financial statements -end of period inventory must be on every company's balance sheet

LIFO in periods of deflation

Declining prices (deflation) suggests the most recently purchased inventory is the least expensive inventory. -LIFO and deflation produces the lowest cost of goods sold (low expenses)

Consigned goods

These goods remain owned by the company that shipped them. "Title and Risk" remains with consignor, not consignee

understatement vs overstatement of ending inventory (summary)

UNDERSTATEMENT: -overstated cost of goods sold (which then results in) -understated gross profit -understated retained earnings -understated net income -understated assets -understated stockholders equity OVERSTATEMENT: -understated cost of goods sold (which then results in) -overstated gross profit -overstated retained earnings -overstated net income -overstated assets -overstated stockholders equity

Understatement of ending inventory results in

Understated gross profit, and understated retained earnings -understatement of ending inventory subtracts too little ending inventory when computing COGS, and COGS becomes overstated -the next effect is that too much COGS is subtracted from revenue to compute gross profit, making gross profit understated, aswell as net income and retained earnings

Bufford Company uses LIFO to measure ending inventory and cost of goods sold. It reported 1,000 of beginning inventory and 1,300 of ending inventory using LIFO. It also reports a LIFO reserve of 100 at the end of the year. The company operates in an inflationary environment. If the company used FIFO instead of LIFO, its ending inventory would be: a) 1,400 b) 1,300 c) 1,100 d) 1,500 e) 1,000

a) 1,400 FIFO ending inventory= LIFO ending inventory + LIFO reserve = 1,300 + 100 = 1,400

Irwin Industries had the following inventory transactions occur during the current year: Units Cost/Unit Purc. Feb 1 40 $42 Purc. Mar 14 60 $43 Purc. May 1 45 $44 The company sold 100 units at $80 each and has a tax rate of 25%. Assuming that a periodic inventory system is used and operating expenses are $1,000, what is the company's gross profit using LIFO? (rounded to whole dollars) a) 3,655 b) 4,355 c) 3,885 d) 3,145 e) 1,716

a) 3,655 -using periodic LIFO, cost of goods sold includes the last inventory purchased (the newest inventory) -sales revenue=units sold at cost per unit =100 units * $80 per unit =$8,000 -cost of goods sold= (45*$44) + [(100-45)*$43)] =$1,980 + 2,365 =$4,345 -gross profit=sales revenue - cost of goods sold =$8,000-$4345 =$3,655

Big Time Widgets has the following inventory data: December 1 - beginning inventory of 15 units at $6.00 per unit December 7 - Purchased 60 units at $6.60 per unit December 12 - Sold 40 units December 20 - Purchased 30 units at $7.20 per unit December 29 - Sold 20 units Assuming that a perpetual inventory system is used, what is the COGS on a LIFO basis for December? What if periodic inventory system has been used? a) 408 using perpetual and 414 using periodic b) 414 using perpetual and 408 using periodic c) 414 using perpetual and 414 using periodic d) 387 using perpetual and 387 using periodic e) 409.50 using perpetual and 423 using periodic

a) 408 using perpetual and 414 using periodic ***perpetual LIFO only includes inventory acquired that was on hand at date of sale, not inventory acquired after -Dec 12, company sold 40 units from the Dec 7 inventory -Dec 29, company sold 20 units from the Dec 20 inventory -Therefore, COGS= (40*$6.60) + (20*$7.20) = 264 + 144 = $408 ***periodic LIFO includes all inventory no matter the date of sale -Dec 12, company sold 40 units -Dec 29, company sold 20 units -Therefore, GOGS is based on the last 60 units of inventory acquired. =(30*$7.20) + (30*$6.60) = 216 + 198 = $414 *COST OF GOODS SOLD PROBLEM USING PERPETUAL AND PERIODIC LIFO*

Big Time Widgets has the following inventory data: December 1 - Beginning inventory of 15 units at $6.00 per unit December 7 - Purchased 60 units at $6.25 per unit December 12 - Sold 25 Units December 20 - Purchased 30 units at $7.75 per unit December 29 - Sold 10 units Assuming Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis for December? What if periodic inventory system has been used? a) 463 perpetual, 433.75 using periodic b) 463.75 using perpetual and 291 using periodic c) 409.5 using perpetual and 423 using periodic d) 291 using perpetual and 463.75 using periodic e) 433.75 using perpetual and 423 using periodic

a) 463.75 using perpetual and 433.75 using periodic ***perpetual LIFO only includes inventory acquired that was on hand at date of sale, not inventory acquired after -for each sale date, determine the inventory sold using LIFO for each sale of inventory; the inventory not sold during the period belongs to the ending inventory -Dec 12, sold 25 units acquired from Dec 7 -Dec 29, sold 10 units acquired from Dec 20 -ending inventory includes 70 units, including 15 units of beginning inventory, 35 units of inventory acquired on Dec 7 and 20 units of inventory acquired on Dec 29 -ending inventory = (15*$6.00) + (35*$6.25) + (20*$7.75) = 90 + 218.75 + 155 = $463.75 ***periodic LIFO includes all inventory no matter the date of sale -Dec 12, sold 25 units -Dec 29, sold 10 units -COGS is based on the last 35 units of inventory acquired; ending inventory includes the oldest 70 units of inventory -ending inventory = (15*$6.00) + (55*$6.25) = 90 +343.75 = $422.75 (55 units comes from the 70 units of inventory minus the beginning inventory)

At December 31, Sunrise Company's inventory records indicated a balance of $654,000. Upon further investigation it was determined that this amount included the following: (1) $68,000 of inventory sold and shipped by Sunrise on December 28 under the terms FOB destination, and this inventory was received by the buyer on January 6. (2) $98,000 of inventory purchased by Sunrise under the terms FOB destination, and this $98,000 of inventory did not arrive until January 2. (3) $4,000 of inventory held by Sunrise on consignment from another company. What is Sunrise's correct ending inventory balance at December 31? a) 552,000 b) 556,000 c) 586,000 d) 650,000 e) 728,000

a) 552,000 -inventory balance of 654,000 should not include the 98,000 since ownership passes at destination on Jan 2nd. -It should include the 68,000 because ownership does not pass at the shipping point on Dec 28. -It should not include the 4,000 on consignment because these goods are not owned by Sunrise Therefore, the correct inventory balance = 654,000 - 98,000 - 4,000 = $552,000

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? a) the company using FIFO will have the highest ending inventory b) none of these c) the company using LIFO will have the highest ending inventory d) the company using LIFO will have the lowest cost of goods sold e) the company using FIFO will have the highest cost of goods sold

a) The company using FIFO will have have the highest ending inventory -during inflation, LIFO assumes most expensive inventory was sold and this produces highest cost of goods sold, the lowest net income, and the lowest ending inventory -FIFO however, will have the most current costs in inventory, and will have the highest value on the balance sheet during inflation

Inventory is accounted for at cost. After a company has determined the quantity of units of inventory, it applies unit costs to the quantities to determine the total cost of inventory and the cost of goods sold. Which of the following statements is not a method for computing the cost of inventory? a) allowance estimation b) average-cost c) specific identification d) FIFO (first-in, first-out) e) LIFO (last-in, last-out)

a) allowance estimation

Which of these transactions would cause the inventory turnover ration to increase the most? a) decreasing the amount of inventory on hand and increasing sales b) increasing the amount of inventory on hand and decreasing sales c) keeping the amount of inventory on hand constant but increasing sales d) keeping the amount of inventory on hand constant but decreasing sales e) none of these

a) decreasing the amount of inventory on hand and increasing sales -inventory turnover ratio = cost of goods sold / average inventory -increasing sales will increase cost of goods sold which increases the numerator of the inventory turnover ratio -a corresponding decrease in inventory decreases the denominator of the inventory turnover ratio *** thus, both an increase of sales (and cost of goods sold) and a decrease in inventory will cause the inventory turnover to increase

Which of the following should be included in the physical inventory of a company? a) goods shipped on consignment to another company b) goods held on consignment from another company c) all of the answers d) none of the answers e) Goods in transit from another company shipped FOB destination

a) goods shipped on consignment to another company

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? a) it will have the reverse effect on the net income during the next accounting period b) it will have no effect on the net income of the next accounting period c) if net income was overstated in the current period, it will be overstated in the next period d) cannot be determined by the information given

a) it will have the reverse effect on the net income during the next accounting period -this is because this year's ending inventory becomes next year's beginning inventory

Harold Company overstated ending inventory by 15,000 at end of first year. Never noticed this error. As a result, what was the effect on Harold's stockholders equity at the end of the first year and at the end of the second year respectively? a) overstand and properly stated, respectively b) overstated and understated, respectively c) none of these d) understated and understated, respectively e) overstated and overstated, respectively

a) overstated and properly stated, respectively -if first year's ending inventory is overstated the same years cost of good sold will be understated -stockholders equity and net income will be overstated (i.e. reported higher than it should be) -if error is not corrected, the next years beginning inventory will have the error -second years net income will be understated by the same amount it was overstated in the first year -combined total net income for the two periods will be correct, but one will be too high and one will be too low. This will cause stockholders equity at the end of the two periods to be correct

A company uses periodic inventory method. 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 that (i) gross profit is _________ and (ii) retained earnings is ___________. a) (i) overstated and (ii) understated b) (i) overstated and (ii) overstated c) (i) understated and (ii) understated d) (i) understated and (ii) overstated e) none of these

b) (i) overstated and (ii) overstated -Periodic inventory system, cost of goods sold is computed at the end of the PERIOD rather than day-by-day (like perpetual). -Accuracy of cost of goods sold depends on the accuracy of the beginning and ending physical counts of inventory -sometimes, a portion of inventory is not counted and inventory is then understated -other times, inventory may be counted twice resulting in inventory to be overstated -therefore, any error in amount of inventory directly affects COGS -example: overstatement of ending inventory subtracts too much ending inventory when computing COGS, and COGS becomes understated. Next effect is that too little COGS is subtracted from revenue to compute gross profit making gross profit overstated aswell as net income and retained earnings overstated.

Carlos company 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 Carlo' days in inventory? a) 73 days b) 121.7 days c) 115.9 days d) 102.5 days e) 84.5 days

b) 121.7 days = 365 / inventory turnover = 365 / (cost of goods sold/ average inventory) = 365 / (cost of goods sold / [(beginning inventory+ending inventory/2)] = 365 / (285,000 / [(80,000+110,000) /2]) = 365 / (285,000/95,000) = 365 / 3 = 121.7

A company started business in August and it made the following purchases of inventory: -August 1, it purchased 100 units for $1,500; -August 12, it purchased 100 units for $1,550; and -August 24, it purchased 100 units for $1,575. A physical count of the inventory on August 31 reveals that there are 500 units on hand. What inventory method produces the lowest gross profit for August? a) periodic method b) LIFO method c) FIFO method d) perpetual method e) average cost method

b) LIFO method -Aug 1, it spent $15 per unit, Aug 12, it spent $15.50 per unit, Aug 24 it spent $15.75 per unit -This company is experience inflation -Low gross profit (low gross margin) occur with higher cost of goods sold -During inflation, most expensive inventory to be sold is from the LIFO method -LIFO method will produce the lowest gross profit because LIFO results in highest COGS **the choice of periodic vs perpetual inventory system does not change whether LIFO or FIFO produces the highest or lowest COGS or gross profit

In periods of inflation, what will LIFO produce? a) all of these b) lower total assets than FIFO c) lower cost of goods sold d) higher net income than FIFO e) higher retained earnings than FIFO

b) lower total assets than FIFO -Using LIFO, inflation suggests newest, and most expensive inventory is being sold -Therefore, LIFO and rising prices produces the highest cost of goods sold -FIFO produces the lowest cost of goods sold -LIFO produces low gross profit, low net income, low retained earnings, low stockholders equity compared to FIFO -LIFO also will produce low ending inventory and low total assets compared to FIFO

Lance Company has the following inventory units and costs: Units Unit Cost Inv. Jan 1 8k $11 Purc. June 19 13k 12 Purc. Nov 8 5k 13 If 9,000 units are on hand at Dec. 31, what is the cost of the ending inventory under LIFO using a periodic inventory system? a) 108,000 b) 113,000 c) 100,000 d) 91,000 e) 99,000

c) 100,000 -ending inventory under LIFO uses the oldest costs of inventory to compute ending inventory -ending inventory= (8000*$11) + (1000*$12) =$100,000

Ray's sounds has accumulated the following cost and market data on March 31: Cost Data Market Data iPods 23k 21.6k Phones 16k 17.5k DVDs 21k 18.9k Using the lower-of-cost-of-market, how much is the value of the ending inventory? a) 65,900 b) 58,600 c) 56,500 d) 60,000 e) 64,000

c) 56,500 -Cost is compared to market for each inventory category as follows: iPods 21,600 + phone 16,000 + dvds 18,900 = 56,500

The following info came from the income of the Watson Company: sales revenue 2,200,000; beginning inventory 220,000; ending inventory 280,000; and gross profit 1,200,000. Inventory turnover is 4 times per year. What is Watson's days in inventory? a) 52.1 days b) 121.7 days c) 91.25 days d) 60.8 days e) 113 days

c) 91.25 days - days in inventory = 365 / turnover ratio = 365/4 = 91.35 days in inventory

What is the underlying rationale for the lower-of-cost-or-market rule? a) the economic entity assumption b) the historical cost principle c) conservatism d) the materiality constraint e) going concern assumption

c) conservatism -conservatism dictates the lower-of-cost-or-market inventory valuation. -Inventory that has not yet sold has not reached revenue recognition ***conservatism means that accounting rules are designed to report assets, income, etc. on a conservative basis (i.e. that financial reports should not overstate a company assets, profits etc.) -the lower-of-cost-or-market principle avoids overstating ending inventory on a company's balance sheet

Which of the following is an inventory account? a) contributed capital b) equipment c) finished goods d) all of these e) accounts receivable

c) finished goods

Which one of the following is not a consideration that affects the selection of an inventory costing method? a) tax effects b) all of these are considerations affecting the choice of an inventory costing method c) perpetual versus periodic inventory system d) income statement effects e) balance sheet effects

c) perpetual versus periodic inventory system -Management chooses the company's inventory costing method (i.e FIFO, LIFO, average, specific identification). -management also chooses the company's inventory system (i.e. perpetual versus periodic). -perpetual and periodic are independent and once choice does not affect the other -on the other hand, the choice of inventory costing methods affects the amount reported as inventory, cost of goods sold, net income and other items (including taxable income)

Perpetual LIFO

cost of goods sold includes the last inventory acquired that was on hand at the date of sale; it does not include inventory acquired after the sale occurred

Periodical LIFO

cost of goods sold includes the last inventory acquires regardless of whether it was on hand at the date of sale; it can include inventory acquired after the sale occured

At December 31, Moore Company's inventory records indicated a balance of $400,000. Upon further investigation it was determined that this amount included the following: (1) $56,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB shipping point, but not due to be received until January 3. (2) $23,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB destination, but not due to be received until January 2. (3) $6,000 in goods sold by Moore with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6. (4) $8,000 in goods sold by Moore with terms FOB shipping point on December 27. The goods are not expected to reach their destination until January 4. (5) $13,000 of goods received on consignment from Dollywood Company. What is Moore's correct ending inventory balance at December 31? a) 364,000 b) 351,000 c) 323,000 d) 356,000 e) 369,000

d) 356,000 -23,000 not included (FOB destination) -8,000 not included (FOB shipping point) -13,000 not included (consignment) =400,000-23,000-8,000-13,000 =$356,000

In periods of deflation, LIFO will produce a) the same retained earnings as FIFO b) higher expenses than FIFO c) lower total assets than FIFO d) higher net income than FIFO e) lower revenue than FIFO

d) Higher net income than FIFO -deflation suggest the most recently purchased inventory is the least expensive, therefore deflation produces the lowest cost of goods sold (low expenses), high gross profit, or margin, high net income, high retained earnings, high stockholders equity, high ending inventory because the expensive inventory has been kept, and high total assets

In periods of falling prices, which of the following methods will give the largest net income? a) Average-cost b) All of these c) FIFO d) LIFO e) Specific identification

d) LIFO -the largest net income occurs with the smallest cost of goods sold -in periods of deflation, low cost of good sold occurs when the last units of inventory purchased are the ones assumed sold (i.e., last-in, first-out) -FIFO will not provide highest net income during FALLING prices -specific identification costing will vary depending on which units are sold -average costing will produce a net income between LIFO and FIFO

With the assumption of costs and prices generally rising, which of the following is correct? a) none of these b) FIFO provides the closest cost of goods sold to replacement cost c) LIFO provides the closest valuation of inventory on the balance sheet to replacement cost d) LIFO provides the closest valuation of cost of goods sold to replacement cost of inventory sold e) specific identification method provides the closest cost of goods sold to replacement cost on the income statement

d) LIFO provides the closest valuation of cost of goods sold to replacement cost of inventory sold. **LIFO assumes that the most recently purchased inventory is sold first -the cost to replace inventory that has been sold is likely closest to the cost of the most recently purchased inventory. -Therefore, LIFO provides the closest relationship of replacement cost to COGS on the income statement **In contrast, FIFO provides the closest valuation of inventory on the balance sheet to replacement cost. -the specific goods to be sold may come from early purchases or inventory just acquired, so it is not possible to know which cost will become an expense.

Average cost

determines the cost of goods available for sale on the basis of the weighted-average unit cost incurred equation: cost of goods available for sale / total units available for sale = weighted average unit cost

Cost Flow Assumption

does NOT need to be consistent with the physical movement of goods

Parish Company has the following inventory units and costs: Units Unit Cost Inv. Jan 1 8k $11 Purc. June 19 13k 12 Purc. Nov 8 5k 13 If 9,000 units are on hand at Dec. 31, what is the cost of the ending inventory under FIFO using a periodic inventory system? a) 117,000 b) 99,000 c) 100,000 d) 108,000 e) 113,000

e) 113,000 -ending inventory under FIFO uses the most recent costs of inventory to compute ending inventory -ending inventory= (5,000*$13) + (4,000*$12) = $113,000

Cost of goods purchased is $620,000, beginning inventory is $60,000, and cost of goods sold is $550,000. How much is ending inventory? a) 60,000 b) 10,000 c) 90,000 d) 0 e) 130,000

e) 130,000 -cost of goods sold= beginning inventory + purchases - ending inventory =60,000 + 620,000 - ending inventory = 550,000 -ending inventory= 60,000 + 620,000 - 550,000 =$130,000

Net sales are 2,200,000; cost of goods sold is 1,200,000; average inventory is 50,000. How many days' sales are in inventory? a) 11.4 b) 32 c) 12.5 d) 11.6 e) 15.2

e) 15.2 - days in inventory = 365/ turnover ratio - turnover ratio = cogs / average inventory - turnover ratio = 1,200,000/50,000=24 times - days in inventory = 365/24 = 15.2 days

Howe Industries had the following inventory transactions occur during the current year: Units Cost/Unit Purc. Feb 1 40 $41 Purc. Mar 14 60 $42 Purc. May 1 55 $44 The company sold 100 units at $85 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses are $500, what is the company's after tax net income using LIFO? (rounded to whole dollars) a) 3,690 b) 2,036 c) 4,190 d) 1,716 e) 2,583

e) 2,583 -using periodic LIFO, cost of goods sold includes the last inventory purchased (the newest inventory) -sales revenue=units sold at cost per unit =100*$85 =$8,500 -cost of goods sold=(55*$44)+[(100-55)*$42] =$2,420 + 1,890 =$4,310 -gross profit=sales revenue - cost of goods sold =$8,500-$4,310 =$4,190 -net income before taxes=sales revenue-cost of goods sold-operating expenses =$8,500-$4,310-$500 =$3,690 -net income= $3,690 * (100%-30%) =$2,583

The following information came from the income statement of Wilkens Company: sales revenue 1,800,000; beginning inventory 160,000; ending inventory 240,000; and gross profit 600,000. What is Wilkens' inventory turnover ratio? a) 2.5 times b) 3.75 times c) 3.0 times d) 7.0 times e) 6.0 times

e) 6.0 times -inventory turnover ratio = cost of goods sold divided by average inventory cogs = 1,800,000-600,000=1,200,000 =1,200,000/[(160,000+240,000)/2] =1,200,000/200,000 =6.0

Freehan Company's accounting records has the following information about its inventory: Units Unit Cost Inv. Jan 1 5k $8 Purc. Apr 2 15k 10 Purc. Aug 28 20k 12 If the company 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? a) 93,150 b) 70,000 c) 56,000 d) 84,000 e) 75,250

e) 75,250 -ending inventory cost equals the average cost per unit times the number of units of inventory in ending inventory -the average cost per unit equals the total cost of all inventory amounts divided by the number of inventory units -average cost per unit= [(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

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? a) Understated and overstated b) Overstated and overstated c) None of these d) Understated and understated e) Overstated and understated

e) 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

Average periodic ending inventory

ending inventory cost equals the average cost per unit times the number of units of inventory in ending inventory.

Cost of goods sold

equals beginning inventory + purchases - ending inventory

Average cost per unit

equals total cost of all inventory amounts divided by the number of inventory units

FIFO

first-in, first-out

Inventory accounts

include raw materials, work in process, and finished goods. -raw materials is an inventory account that contains the cost of goods started, but not completed. -finished goods is an inventory account that contains the cost of goods completed that are ready to sell

LIFO reserve

is the difference between inventory reported using LIFO and inventory using FIFO -if the company operates in inflation, then the LIFO reserve is a positive number. -The LIFO reserve added to the LIFO inventory determines the company's FIFO inventory.

Costs of good sold

is the difference between sales revenue and gross profit

LIFO

last-in, first-out

Specific identification method of inventory closing is used when

many of the inventory items are high in value and are unique -a jewelry story would use the specific identification method because of the many high value and unique pieces in the store. -a grocery store would not use this method because the average items are low in value and very generic

Overstatement of beginning or ending inventory in a periodic inventory system

overstatement of: -gross profit -net income -retained earnings

FOB shipping point (freight-in)

the buyer pays the shipping costs and the title of the good passes to the buyer when the seller delivers goods to the common carrier

Companies apply lower-of-cost-or-market (LCM) to:

the items in inventory after they have used one of the cost flow methods (specific identification, LIFO, FIFO, or average-cost) to determine cost.

LIFO during inflation

the most expensive inventory was sold -highest cost of goods sold -lowest net income -lowest ending inventory -lower total assets

FOB destination (freight-out)

the seller pays the shipping costs and ownership transfers only when the buyer receives the purchased good from the carrier

FIFO periodic ending inventory

uses the most recent costs of inventory to compute ending inventory

LIFO periodic ending inventory

uses the oldest (earliest) costs of inventory to compute ending inventory