Accounting 2036 Chapter 7

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Merle Industries had been selling its product for $36 per unit, but recently lowered the selling price to $23 per unit. The company's current inventory consists of 240 units purchased at $32 per unit. The market value of this inventory is currently $21 per unit. At what amount should the company's inventory be reported on the balance sheet?

Answer: $5,040 Why: Total lower of cost or market = Lower of cost or market per unit × Number of units in inventory = $21 × 240 units = $5,040

Goods available for sale equals:

Answer: Cost of Goods Sold plus ending inventory Why: Cost of Goods Sold and ending inventory are complementary. That is, of all the goods available for sale, they either have to be sold (Cost of Goods Sold) or unsold (ending inventory). Goods available for sale is also equal to beginning inventory plus Purchases.

Which inventory costing method uses the oldest cost for cost of goods sold on the income statement and the newest cost for inventory on the balance sheet?

Answer: FIFO Why: First-in, first-out (FIFO) assumes that the inventory costs flow out in the order the goods are received. Or, in other words, FIFO assumes that the costs of the first goods purchased (first in) are the costs of the first goods sold (first out).

AAA Co. uses a periodic inventory system and has the following information in regard to its inventory: Beginning inventory. 300 units @ 13 $3,900 Purchase on January 25 400 units @ 14 5,600 Purchase on March 15 300 units @ 15 4,500 Purchase on October 2 500 units @ 16 8,000 Goods available for sale $22,000 There are 750 units in ending inventory. What is the amount of the ending inventory using the FIFO method?

Answer: $11,750 Why: When the FIFO method is used, the latest costs are assigned to the ending inventory as follows: (500 units @ $16) + (250 units @ $15) = $11,750

The Xu Corporation uses a periodic inventory system. The company has a beginning inventory of 1,450 units at $17 each on January 1. Xu purchases 1,700 units at $16 each in February and 800 units at $18 each in March. There were no additional purchases or sales during the remainder of the year.Xu sells 750 units during the quarter. If Xu uses the weighted average method, what is its cost of goods sold for the quarter? (Do not round intermediate calculations. Round your final answer to the nearest dollar amount.)

Answer: $12,579 Why: Weighted Average − Periodic Beginning inventory 1,450 units × $17 24,650 + February purchase 1,700 units × $16 27,200 + March purchase 800 units × $18 14,400 = Goods available for sale 3,950 units 66,250 − Ending inventory 3,200 × $16.77215 53,671 = Cost of goods sold 750 units × $16.77215 $12,579 Weighted average cost = Cost of goods available for sale ÷ Number of units available for sale = $66,250 ÷ 3,950 units = $16.77215 per unit

The Xu Corporation uses a periodic inventory system. The company has a beginning inventory of 1,150 units at $14 each on January 1. Xu purchases 1,400 units at $13 each in February and 650 units at $15 each in March. There were no additional purchases or sales during the remainder of the year.Xu sells 1,200 units during the quarter. If Xu uses the LIFO method, what is its cost of goods sold?

Answer: $16,900 Why: LIFO − Periodic Beginning inventory 1,150 units × $14 $16,100 + February purchase 1,400 units × $13 18,200 + March purchase 650 units × $15 9,750 = Goods available for sale $44,050 − Ending inventory (1,150 units × $14) + (850 × $13) 27,150 = Cost of goods sold(650 units × $15 per unit) + (550 units × $13 per unit). $16,900

Delta Diamonds uses a periodic inventory system. The company had five one-carat diamonds available for sale this year: one was purchased on June 1 for $950, two were purchased on July 9 for $1,000 each, and two were purchased on September 23 for $1,050 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using the specific identification method, its ending inventory (after the December 24 sale) equals:

Answer: $4,050. Why: Ending inventory = Cost of one purchased June 1 + Cost of one purchased July 9 + Cost of two purchased September 23= ($950 × 1) + ($1,000 × 1) + ($1,050 × 2) = $4,050

Assume a periodic inventory system is used. Which inventory costing method generally results in the cost of the first goods purchased being assigned to ending inventory?

Answer: LIFO Why: Last-in, first-out (LIFO) assumes that the costs of the first goods purchased are the costs assigned to ending inventory. The most recent costs (last in) are the costs assigned to cost of goods sold (first out).

FIFO, LIFO, and weighted average inventory costing methods are based on:

Answer: assumptions that accountants make about the flow of inventory costs. Why: Four generally accepted inventory costing methods are available for determining the cost of goods sold and the cost of goods remaining in ending inventory, regardless of whether a company uses a perpetual or periodic inventory system. The method chosen does not have to correspond to the physical flow of goods, so any one of these four methods is acceptable under GAAP in the United States.

Goods placed in inventory are initially recorded at:

Answer: the amount paid to acquire the asset and prepare it for sale. Why: Goods placed in inventory are initially recorded at cost, which is the amount paid to acquire the asset and prepare it for sale.


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