CHP 6 EXAM 2 REVIEW
Assets would be overstated
MegaCorp regularly includes purchased goods in its inventory even though they are shipped FOB destination. How would this affect financial statements?
$36.482 billion; Inventory assuming First In First Out (FIFO) is calculated by adding the inventory valued by Last In First Out (LIFO) to the LIFO reserve. Therefore, the inventory assuming FIFO is $36 billion + $482 million = $36.482 billion.
Northwest Refinery sells gasoline to gas stations. They use a LIFO inventory system. For 2022, their inventory was valued at $36 billion. On their financial statements, they stated that their LIFO reserve is $482 million. What is Northwest Refinery's 2022 inventory assuming FIFO?
$0; The formula to calculate net income is Gross Profit - Operating Expenses. Therefore, when gross profit equals operating expenses, net income will be zero.
When gross profit equals operating expenses, a merchandiser will earn an operating income of
when its value is less than its cost; US GAAP would allow companies to report their inventory at lower-of-cost-or-net realizable value instead of the historical cost when the current value is lower than the purchase price.
Under which conditions would the US GAAP allow inventory to be reported at lower-of-cost-or-net realizable value instead of historical cost?
basic goods that will be used in production but have not yet been placed into production
What are raw materials?
the average length of time inventory is held before it is sold
What does days in inventory measure?
625,000
What was the cost of goods sold for Lunar Company, if the days in inventory ratio was 73 days, and the average inventory was $125,000 for the most recent fiscal year?
inventory (current asset); an expense (cost of goods sold)
When a merchandising company purchases goods, it initially records them as ________, then as ________ after a sale is completed.
FOB Shipping Point; the carrier accepts goods from the seller.
When goods are shipped ________, title passes to the buyer when
as a current asset immediately below receivables; Inventory is classified on the balance sheet as a current asset and commonly reported after receivables.
Where is inventory classified on the balance sheet?
in the notes to the financial statement; The notes to the financial statements are used to make important disclosures that further explain the numbers in the financial statements. Common notes include inventory valuation methods, classifications, and basis.
Where will a stockholder find information regarding a company's major inventory classifications, basis, and cost method?
cost of goods and gross profit; Merchandising companies measure gross profit, calculated by subtracting the cost of goods sold by the sales revenue. Service companies do not have a cost of goods sold associated with their revenue and, therefore, also do not record gross profit.
Which additional income statement items do merchandizing businesses use beyond the measures service businesses use?
high-technology and fashion
Which types of industries are likely to use the lower-of-cost-or-net realizable value (LCNRV) basis most frequently?
White Incorporated employs a just-in-time (JIT) inventory system. Which inventory issues are mitigated by this inventory system?;
White Incorporated employs a just-in-time (JIT) inventory system. Which inventory issues are mitigated by this inventory system?
goods they have legal title to
A company should include ______ in inventory
will most likely indicate less than $2 million in merchandise on hand due to handling and related losses.
A department store uses a perpetual inventory system. At year-end, it shows a balance in the merchandise inventory account of $2 million. Assuming that the inventory records have been maintained properly, a year-end physical inventory
Periodic system
A physical count of inventory at the end of the accounting period is required under which inventory system(s)?
Assets would be overstated
Accurate Auditing is conducting an inventory count for Blake Industries. Blake intermingles empty boxes with full boxes in the storeroom. How would falsifying its inventory account have affected Blake's financial statements if the auditors had not discovered the fraud?
Goods in transit that Adrian sold to Allison Company, FOB destination
Adrian Company is taking physical inventory on October 31, the last day of its fiscal year. Which of the following is included in the inventory count?
customer theft and spoilage
Although the perpetual inventory system updates accounting records after each sale, a physical count is necessary at year-end to address issues such as ________ and
To determine the correct inventory amount, Railway Company would have to account for the goods worth $35,000 currently in consignment. These goods are being held by Rogers Consignment to be sold for a fee, but ultimately ownership resides with Railway Company. The $13,000 worth of goods shipped on December 27 FOB destination will not be accounted for since the transfer of ownership does not occur until the delivery date. Therefore, The correct amount of inventory that Railway should report is $180,000 + $35,000 = $215,000.
As a result of a thorough physical inventory, Railway Company determined that it had inventory worth $180,000 at December 31. This count did not take into consideration the following facts: Rogers Consignment store currently has goods worth $35,000 on its sales floor that belong to Railway but are being sold on consignment by Rogers. The selling price of these goods is $50,000. Railway purchased $13,000 of goods that were shipped on December 27, FOB destination, that will be received by Railway on January 3. Determine the correct amount of inventory that Railway should report.
448,000
At December 31, 2021, Takumi Corp's inventory records indicate an inventory balance of $520,000. This inventory balance includes the following: $52,000 in inventory purchases made by Takumi shipped from the seller on 12/27 terms FOB destination not due until 1/5.$31,000 in goods sold by Takumi with FOB destination terms . The goods are not expected to be received until 1/3.$20,000 of goods received on consignment into inventory from SH Incorporated. What is Takumi Corp's inventory balance at December 31?
perpetual; The company likely uses a perpetual inventory system because the merchandise inventory per the books at year-end ($2 million) differed from the physical inventory (slightly less than $2 million). Under the periodic inventory system, the inventory per the books is adjusted to exactly equal inventory on hand, and it is not possible to determine shrinkage.
At year-end, a department store shows a balance in the merchandise inventory account of $2 million and a physical inventory shows there is slightly less than $2 million in merchandise on hand. The beginning inventory was $1,000,000. The department store most likely uses a ________ inventory system.
upon selling the goods for Bunny
Bunny Company consigns a portion of its inventory to Rabbit Industries. At what point should Rabbit recognize income from this arrangement?
121.7
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. Carlos's days in inventory is ________ days.
Obsolete goods; Companies that carry large amounts of inventory bear the risk of not selling enough inventory and have a higher chance of carrying inventory whose value is significantly lower than their original cost or obsolete.
Carrying a large amount of inventory may increase
LIFO reserve
Companies that use LIFO rather than FIFO as an inventory system must report which value on their financial statements?
both merchandisers and manufacturers.
Cost of goods sold would be in the chart of accounts for
Greer's finished goods, work in process, and raw materials inventories are much smaller than Hanson's.; Just In Time (JIT) inventory aligns raw materials orders from suppliers directly with production since inventory is requested as orders come in. In contrast, traditional inventory management has items in stock in anticipation of a customer order. Therefore, Greer's finished goods, work in process, and raw materials are much smaller than Hanson's.
Greer Industries and Hanson Incorporated are both computer manufacturing companies. Greer uses the JIT inventory method, whereas Hanson uses the traditional inventory method. How do Greer's inventory levels differ from Hanson's?
4.25 billion years
Holloway Incorporated manufactures plane engines. At the end of 2022, they had $3.7 billion in finished goods, $400 million in work-in-process, and $150 million in raw materials. What is Holloway's inventory total?
consigned goods as inventory
Inexperienced workers might include _____ as _____
280,000,000
Price Company, a wholesaler, records annual sales revenue of $425,000, and reports cost of goods sold of $145,000. What would Price report as its gross profit for the year?
ending inventory
Pristine Products, a wholesaler, uses a periodic inventory system. At year-end, Pristine conducts a physical inventory count to determine
physical count
Regardless of which inventory method a company chooses to implement, what control is used periodically to maintain accurate records?
LIFO conformity rule; LIFO; The Last In First Out (LIFO) conformity rule requires that, if the LIFO inventory valuation method is used on the financial statements, it must also be used on the income tax return.
The ________ requires that if companies use ________ for tax purposes, they must also use it for financial reporting purposes.
is transferred to the buyer when the goods are accepted by a carrier.
FOB shipping point means that legal title of goods
consigned goods
Goods that are held for sale by one party although ownership of the goods is retained by another party are called
Greer's finished goods, work in process, and raw materials inventories are much smaller than Hanson's.;
Greer Industries and Hanson Incorporated are both computer manufacturing companies. Greer uses the JIT inventory method, whereas Hanson uses the traditional inventory method. How do Greer's inventory levels differ from Hanson's?
Jansen should assign a portion of the equipment's cost to expense each year of its useful life.
Jansen Corporation just purchased a piece of equipment with a 10-year useful life. How should it allocate the equipment's cost?
work in progress
Manufactured goods that are partially built but still in production are considered
should add $9600 to their inventory count
Rollins Technology is determining ending inventory. In the inventory process, Rollins inadvertently miscategorized a $9,600 shipment of FOB destination goods in transit to a customer as FOB shipping point. What should Rollins do to correct this error?
inventory costing method; Specific identification is a type of inventory costing method. This method requires companies to keep records of the original cost of each item in their inventory. This inventory costibasic goods that will be used in production but have not yet been placed into productionng method is most commonly used by jewelry stores and automobile dealerships.
Specific identification is a type of
LIFO; The Last In First Out (LIFO) inventory method assumes that the latest goods purchased are the first to be sold.
The first cost to be allocated to cost of goods sold is the cost of the latest goods purchased, according to the assumptions of the ________ inventory method.
The formula for Inventory Turnover Rate is: Cost of Goods Sold / Average Inventory. Therefore, Tye Company's inventory turnover rate is $1,200,000/(($80,000 + $120,000)/2) = 12 times.
The following information is available for Tye Company at December 31: Beginning inventory $80,000; Ending inventory $120,000; Cost of goods sold $1,200,000; and Sales revenue $1,600,000. Tye's inventory turnover is ________ times.
