ACG 2021 Patterson Exam 3

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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

$1,400.

Howe Industries had the following inventory transactions occur during the current year: Units Cost/unit Feb. 1 Purchase 40 $42 Mar. 14 Purchase 60 $43 May 1 Purchase 55 $44 The company sold 100 units at $75 each and has a tax rate of 20%. Assuming that a periodic inventory system is used and operating expenses are $1,000, what is the company's after tax net income using LIFO? (rounded to whole dollars)

$1,716 Using periodic LIFO, cost of goods sold includes the last inventory purchased (i.e., the newest inventory). Sales revenue = 100 x $75 = $7,500 Cost of goods sold = (55 x $44) + [(100 - 55) x $43] = $2,420 + 1,935 = $4,355 Gross profit = Sales revenue - cost of goods sold = $7,500 - 4,355 = $3,145 Net income before taxes = 7,500 - 4,355 - 1,000 = 2,145 Net income = 2,145 x (100% - 20%) = $1,716

Parrish Company has the following inventory 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 [FIFO periodic ending inventory] Ending inventory under FIFO uses the most recent costs of inventory to compute ending inventory. Ending inventory = (5,000 x $13) + (4,000 x $12) = $113,000.

Lance Company has the following inventory units and costs: Units Unit Cost Inventory, Jan. 1 7,000 $11 Purchase, June 19 12,000 12 Purchase, Nov. 8 4,000 13 If 10,000 units are on hand at December 31, what is the cost of the ending inventory under LIFO using a periodic inventory system?

$113,000 [LIFO periodic ending inventory] Ending inventory under LIFO uses the oldest (i.e., earliest) costs of inventory to compute ending inventory. Ending inventory = (7,000 x $11) + (3,000 x $12) = $113,000

Big Time Widgets has the following inventory data: December 1 Beginning inventory of 50 units at $6.00 per unit December 7 Purchased 10 units at $6.25 per unit December 12 Sold 30 units December 20 Purchased 30 units at $7.50 per unit December 29 Sold 20 units Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis for December? What if a periodic inventory system had been used instead of perpetual?

$255 using perpetual, and $240 using periodic Ending inventory = (30 x $6.00) + (10 x $7.50) = 180 + 75 = $255 Cost of goods sold is based on the last 50 units of inventory acquired; ending inventory includes the oldest 40 units of inventory = (40 x $6.00) = $240

Irwin Industries had the following inventory transactions occur during the current year: Units Cost/unit Feb. 1 Purchase 40 $42 Mar. 14 Purchase 60 $43 May 1 Purchase 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)

$3,655 Using periodic LIFO, cost of goods sold includes the last inventory purchased (i.e., the newest inventory). Sales revenue = 100 x $80 = $8,000 Cost of goods sold = (45 x $44) + [(100 - 45) x $43] = $1,980 + 2,365 = $4,345 Gross profit = Sales revenue - cost of goods sold = $8,000 - 4,345 = $3,655

At December 31, Sunrise Company's inventory records indicated a balance of $752,000. Upon further investigation it was determined that this amount included the following: (1) $112,000 of inventory purchased by Sunrise under the terms FOB destination, and this inventory did not arrive until January 2, (2) $74,000 of inventory sold and shipped by Sunrise on December 27 under the terms FOB destination, and this inventory was received by the buyer on January 6. (3) $6,000 of inventory held by Sunrise on consignment from another company. What is Sunrise's correct ending inventory balance at December 31?

$634,000 The corrected inventory balance = $752,000 - $112,000 - $6,000 = $634,000.

Freehan Company's accounting records has the following information about its inventory: Units Unit Cost Inventory, Jan. 1 6,000 $ 8 Purchase, April 2 18,000 10 Purchase, Aug. 28 16,000 12 If the company has 8,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?

$84,000 Average cost per unit = [(6,000 x $8) + (18,000 x $10) + (16,000 x $12)] ÷ (6,000 + 18,000 + 16,000) = $420,000 ÷ 40,000 units = $10.5 per unit Ending inventory = $10.5 x 8,000 units = $84,000.

Carlos Company had beginning inventory of $65,000, ending inventory of $135,000, cost of goods sold of $315,000, and sales revenue of $485,000. What is Carlos' days in inventory?

115.9 days Days in inventory equals 365 days ÷ inventory turnover (cost of goods sold ÷ average inventory) = 365 ÷ ($315,000 ÷ [($65,000 + $135,000) ÷ 2]) = 115.9 days

Net sales are $2,200,000, cost of goods sold is $1,200,000, and average inventory is $50,000. How many days' sales are in inventory?

15.2 Inventory turnover = $1,200,000/$50,000 = 24 times Days' sales in inventory = 365/24 = 15.2 days

The following information came from the income statement of the Watson Company: sales revenue $2,400,000; beginning inventory $150,000; ending inventory $250,000; and gross profit $1,000,000. Inventory turnover is 7 times per year. What is Watson's days in inventory?

52.1 days 365 days/7 times per year= 52.1

The following information came from the income statement of the 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?

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 merchandise inventory as inventory account classifications. -A manufacturing company will normally have raw materials, work in process, and finished goods as inventory account classifications. -A merchandising company will normally have raw materials, work in process, and finished goods as inventory account classifications. -A merchandising company will normally have raw materials and merchandise inventory as inventory account classifications. -none of these

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

Which is true if the ending inventory is overstated? -None of these -Net income will be overstated and the stockholders' equity will be overstated. -Net income will be understated and the stockholders' equity will be understated. -Net income will be overstated and the stockholders' equity will be understated. -Net income will be understated and the stockholders' equity will be overstated.

Net income will be overstated and the stockholders' equity will be overstated.

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

Conservatism

Inventory costing methods place primary reliance on assumptions about the flow of

Costs

Which of these transactions would cause the inventory turnover ratio to increase the most? -Decreasing the amount of inventory on hand and increasing sales -Increasing the amount of inventory on hand and decreasing sales -None of these -Keeping the amount of inventory on hand constant but increasing sales -Keeping the amount of inventory on hand constant but decreasing sales

Decreasing the amount of inventory on hand and increasing sales

LIFO inventory valuation requires the physical flow of goods to be representative of the cost flow. True or False

FALSE

In a period of rising prices which inventory method will result in the greatest amount of income tax expense?

FIFO

In periods of deflation, what will LIFO produce? The same retained earnings as FIFO Lower total assets than FIFO Lower revenue than FIFO Higher net income than FIFO Higher expenses than FIFO

Higher net income than FIFO LIFO uses the cost of the most recently purchased inventory to determine cost of goods sold. Declining prices (deflation) suggests the most recently purchased inventory is the least expensive inventory. As a result, LIFO and deflation produces the lowest cost of goods sold (low expenses). Low cost of goods sold produces high gross profit (gross margin), high net income, high retained earnings, and high total stockholders' equity. Low cost of goods sold (selling the less expensive inventory) also produces high ending inventory (keeping the expensive inventory) and high total assets.

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 because this year's ending inventory becomes next year's beginning inventory.

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 valuation of inventory on the balance sheet to replacement cost. -FIFO provides the closest cost of goods sold to replacement cost. -None of these -Specific identification method provides the closest cost of goods sold to replacement cost on the income statement.

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 in likely closest to the cost of the most recently purchased inventory. Thus, LIFO provides the closest relationship of replacement cost to cost of goods sold 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.

A company uses the periodic inventory method. An understatement of ending inventory in one period results in

an understatement of net income of the next period.

A company uses the periodic inventory method and the beginning inventory is understated by $4,000 because the ending inventory in the previous period was understated by $4,000; the ending inventory for this period is correct. The amounts reflected in the current end of the period balance sheet are

assets are correct and stockholders' equity is correct.

A company uses the periodic inventory method and the beginning inventory is understated by $4,000 because the ending inventory in the previous period was understated by $4,000; the ending inventory for this period is correct. The amounts reflected in the current end of the period balance sheet are

assets are correct and stockholders' equity is correct. In the periodic inventory system, cost of goods sold is computed at the end of the period (rather than tracked day-by-day as done in a perpetual inventory system). The periodic inventory system uses a formula to compute cost of goods sold: Beginning inventory plus purchased minus ending inventory = cost of goods sold The 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 understated. At other times, some inventory may be counted twice resulted in inventory being overstated. Regardless of over- versus under-stating inventory, errors in the amount of inventory results in errors in cost of goods sold. For example, an understatement of beginning inventory adds too little when computing cost of goods sold, and cost of goods sold becomes understated. The next effect is that too little cost of goods sold is subtracted from revenue to compute gross profit making gross profit overstated (and making net income overstated). However, Retained Earnings has the correct balance because it was understated in the prior year due to understated ending inventory in the prior year, and this year too much income was closed to retained earnings. Recall that an error in ending inventory in one year will have a reverse effect on net income in the next accounting period.

At December 31, Moore Company's inventory records indicated a balance of $360,000. 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 28 terms FOB shipping point, but not due to be received until January 2. (2) $24,000 in inventory purchases made by Moore shipped from the seller December 28 terms FOB destination, but not due to be received until January 3. (3) $8,000 in goods sold by Moore with terms FOB destination on December 28. The goods are not expected to reach their destination until January 4. (4) $9,000 in goods sold by Moore with terms FOB shipping point on December 28. The goods are not expected to reach their destination until January 5. (5) $13,000 of goods received on consignment from Dollywood Company. What is Moore's correct ending inventory balance at December 31?

$314,000 Ending inventory = $360,000 - 24,000 - 9,000 - 13,000 = $314,000

A company uses LIFO. At the beginning of the current year its inventory was $225,000, and at the end of the current year its inventory is $300,000. At the start of the year its LIFO reserve was $20,000 and at the end of the year its LIFO reserve is $25,000. The company operates in an inflationary environment. If the company used FIFO instead of LIFO, its ending inventory would be

$325,000.

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 cost of goods sold on a LIFO basis for December? What if a periodic inventory system had been used instead of perpetual?

$408 using perpetual, and $414 using periodic

Cost of goods purchased is $500,000, beginning inventory is $20,000, and cost of goods sold is $460,000. How much is ending inventory?

$60,000

Ray's Sounds has accumulated the following cost and market data on March 31: Cost Data Market Data iPods $22,000 $19,600 Cell phones $17,000 $18,500 DVDs $26,500 $28,600 Using the lower-of-cost-or-market, how much is the value of the ending inventory?

$63,100

When is a physical inventory usually taken?

At the end of the company's fiscal year

Which of the following would most likely employ the specific identification method of inventory costing?

Car Dealer

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, the goods have not been sold. Which of the following parties includes in its inventory the consigned goods?

Cecil Ownership remains with Cecil, so Cecil reports the goods as assets. Jerry is not the owner of the goods even though he has physical possession.

Harold Company overstated its ending inventory by $15,000 at the end of the first year. It never noticed the 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?

Overstated and properly stated, respectively If the first year's ending inventory is overstated, that same year's cost of goods sold will be understated and stockholders' equity and net income will be overstated (i.e., reported as being higher than it should be reported). If the error is not corrected, the next year's beginning inventory has the error. The second year's net income will be understated by the same amount it was overstated in the first year. The combined total net income for the two periods will be correct (but one is too high and the other is too low) which causes stockholders' equity at the end of the two periods to be correct.

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.

Specific identification method inventory valuation requires the physical flow of goods to be representative of the cost flow. True or False

TRUE

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 LIFO will have the highest ending inventory. -The company using FIFO will have the highest cost of goods sold. -None of these -The company using FIFO will have the highest ending inventory. -The company using LIFO will have the lowest cost of goods sold.

The company using FIFO will have the highest ending inventory. During periods with rising prices, LIFO assumes the most expensive inventory was sold and this produces the highest cost of goods sold, the lowest net income, and the lowest ending inventory. In contrast, the company using FIFO will have the most current costs in inventory, and it will have the highest inventory value on the balance sheet during periods of rising prices.

In periods of rising prices, what will LIFO produce?

lower net income than FIFO

When terms are FOB shipping point

ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.


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