Ch.5: SmartBook

One identical unit is purchased on each of the following three dates and at the respective costs: June 1 at $10 June 2 at $15 July 4 at $20 The company sells two units during the period. Conclude which inventory items are sold first and which unit remains in ending inventory if the company is using the FIFO cost flow assumption.

The June 1 at $10 and the June 2 at $15 are both sold; the July 4 unit remains in ending inventory.

Assume that three identical units are purchased separately on the following three dates and at the respective costs: June 1 at $10 June 2 at $15 July 4 at $20 The company sells two units during the period. Conclude which inventory items are sold first and which unit remains in ending inventory if the company is using the LIFO perpetual cost flow assumption

The June 2 at $15 and the July 4 at $20 are both sold; the June 1 at $10 remains in ending inventory.

Which of the following statements correctly explains what the inventory turnover ratio assesses.

The inventory turnover ratio assesses whether management is doing a good job controlling the amount of inventory.

Which of the following summarizes the weighted average cost flow assumption?

Weighted average assumes that costs flow at an average of the costs available.

An advantage of the LIFO method is that it best matches

current costs with revenues

An inventory error not only affects the current year's cost of goods sold, gross profit, net income, current assets and equity, but also the next period's statements because...

ending inventory of one period is the beginning inventory of the next period.

An advantage of the weighted average method under a periodic inventory system is that it:

smooths out erratic changes in costs

Storm Windows Company understated their ending inventory during their first year of operations by $2,000. What is the effect of this error at the end of the year?

-$2,000 understatement of net income. -$2,000 overstatement of cost of goods sold.

Assuming purchase costs are rising in a periodic inventory system, determine which of the statements below are correct regarding the cost of goods sold under FIFO, LIFO and weighted average cost flow methods. (Check all that apply.)

-Companies using FIFO will report the highest gross profit and net income. -Companies using FIFO will pay higher taxes than companies using LIFO, assuming all else being equal. -Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold. -Companies using FIFO will report the smallest cost of goods sold.

Which statement(s) below correctly describe(s) the relationship of cost of goods sold and ending inventory?

-Cost of goods available for sale must be allocated between cost of goods sold and ending inventory. -Cost of goods sold plus ending inventory will equal the total goods available for sale.

In year 1 ending inventory is overstated by $2,000. Explain the effect on cost of goods sold, gross profit and net income in year 1 and year 2 Select all answers that apply.

-Cost of goods sold in the current year, year 1, will be understated. -Gross profit in the current year, year 1, will be overstated. -Gross profit in the next year, year 2, will be understated. -Cost of goods sold in the following year, year 2, will be overstated.

Which of the costs below would be included in the recorded cost of merchandise inventory?

-Insurance costs -Storage costs -Invoice cost

Which of the statements below explain why LCM is used?

-LCM allows companies to recognize a loss in value of an asset in the period the loss occurs. -Assets are not shown at an inflated value on the balance sheet, but rather at lower of cost or replacement cost. -Companies cannot report inventory on a balance sheet that is higher than replacement cost.

Determine which of the following statements are correct regarding the difference between physical flow and the cost flow of inventory. (Check all that apply.)

-Physical flow refers to the actual movement of goods. -A business may adopt any cost flow assumption when accounting for perishable items. -Perishable items usually have an actual physical flow of FIFO. -Cost flow is an assumption about which goods/items are sold

Recount the methods used to assign costs to inventory and cost of goods sold under both a perpetual and a periodic system.

-Specific identification -First-in, first-out -Last-in, first-out -Weighted average

Q-mart failed to include inventory that was kept in a separate warehouse in its 12/31 end-of-the-period inventory count. Consequently, the ending inventory on 12/31 was understated on the balance sheet. Explain how this error affects the current year's income statement.

-The current year's cost of goods sold will be too high. -The current year's net income will be too low.

Which statement(s) below is(are) correct regarding the purpose of taking a physical inventory count?

-The physical count is used to adjust the Inventory account balance to the actual inventory available. -The physical count is used to determine if there has been any theft, loss, damage or errors in inventory.

Review the statements below and select the ones that are correct regarding the days' sales in inventory ratio.

-The ratio estimates how many days it will take to convert inventory into accounts receivable or cash. -The ratio is useful in evaluating how quickly inventory is being sold. -The ratio reveals how much inventory is available in terms of the number of days' sales. -The ratio is often viewed as a measure of the buffer against out-of-stock inventory

Sparky's incorrectly included inventory that was on consignment in its ending inventory count. Consequently, the ending inventory was overstated on the balance sheet. Explain how this error will affect this year's income statement. (Check all that apply.)

-This year's cost of goods sold will be too low. -This year's net income will be too high.

There are advantages to using each of the four inventory costing methods. Identify the statements below that are correct regarding these advantages. (Check all that apply.)

-Weighted average tends to smooth out erratic changes in costs. -FIFO assigns an amount to inventory on the balance sheet that approximates its current cost.

Explain the inventory and cost of goods sold relationship by selecting the correct formula below.

Beginning inventory + Net purchases - Ending inventory = Cost of goods sold

If ending inventory at the end of the year is understated, what is the effect on cost of goods sold and net income?

Cost of goods sold will be overstated and net income will be understated.

Which of the following statements is correct regarding goods in transit?

Goods shipped FOB shipping point will be included in the buyer's inventory.

Explain what lower of cost or market means in regards to reporting merchandise inventory on the balance sheet.

Inventory should be reported at the current market value of replacing it when lower than cost.