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ACG chapter 6

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Inventory costing methods place primary reliance on assumptions about the flow of resale prices. values. costs. margins. goods

costs The inventory costing methods, such as first-in first-out, place a primary reliance on assumptions about the costs of inventory to cost of goods sold and ending inventory.

measure of the average number of days inventory is held' calculated as 365 divided by inventory turnover ratio

days in inventory

inventory cost method where the oldest inventory is considered to be the sold first

first in, first out, (FIFO)

Jenkins Company developed the following information about its inventories in applying the lower-of-cost-or-market (LCM) basis in valuing inventories: Category Cost Market A $57,000 $60,000 B 40,000 38,000 C 80,000 81,000 If Jenkins applies the LCM basis, the value of the inventory reported on the balance sheet would be

57,000+ 38,000+80,000

Determine the cost of goods sold for June.

Average cost per unit= cost of good available for sale/ units available for sale Cost of goods sold = Number of units sold x Average cost per unit

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?

Days' sales in inventory is calculated as 365 days divided by inventory turnover. Inventory turnover = $1,200,000/$50,000 = 24 times Days' sales in inventory = 365/24 = 15.2 days

Pepper Company has the following inventory data: July 1 Beginning inventory 20 units at $20 $ 400 7 Purchases 70 units at $21 1,470 22 Purchases 10 units at $22 220 $2,090 A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the FIFO inventory method and a periodic inventory system, the amount allocated to ending inventory for July is

Goods available for sale is $2,090 (100 units) Ending inventory = 25 units Cost of goods sold = goods available for sale - ending inventory = 100 units - 25 units = 75 units Using FIFO & periodic, the cost of goods sold includes the oldest 68 units and ending inventory includes the 32 newest units. Ending inventory = 10 units at $22/unit + (25 units - 10 units) x $21/unit = $220 + 315 = $535

Spice Company has the following inventory data: Nov. 1 Inventory 30 units for $4.00 per unit 8 Purchase 120 units for $4.30 per unit 17 Purchase 60 units for $4.20 per unit 25 Purchase 90 units for $4.40 per unit A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under LIFO and a periodic inventory system is

Goods available for sale is 300 units (i.e., 30 + 120 + 60 + 90 = 300 units) Ending inventory = 100 units Cost of goods sold = goods available for sale - ending inventory = 300 units - 100 units = 200 units Using LIFO & periodic, the cost of goods sold includes the newest 200 units and ending inventory includes the 100 oldest units.Ending inventory = (30 x $4.00) + [(100 - 30) x $4.30] = $421

Spice Incorporated has the following inventory data: Nov. 1 Inventory 30 units for $5.20 per unit 8 Purchase 150 units for $5.00 per unit 17 Purchase 70 units for $5.40 per unit 25 Purchase 50 units for $5.10 per unit A physical count of merchandise inventory on November 30 reveals that there are 105 units on hand. Ending inventory under LIFO and a periodic inventory system is

Goods available for sale is 300 units (i.e., 30 + 150 + 70 + 50 = 300 units) Ending inventory = 105 units Cost of goods sold = goods available for sale - ending inventory = 300 units - 105 units = 195 units Using LIFO & periodic, the cost of goods sold includes the newest 195 units and ending inventory includes the 105 oldest units. Ending inventory = (30 x $5.20) + [75 x $5.00] = $531

Which of the following statements is true? - Consigned goods should not be included in the ending inventory of any company, including the consignee and the consignor. - Goods held on consignment are not owned by the company that holds them, and they should not be included in the ending inventory of the company that holds them. - Goods held on consignment are owned by the company that holds them, and they should not be included in the ending inventory of the company that holds them. - Goods held on consignment are owned by the company that holds them, but they should not be included in the ending inventory of the company that holds them. - Goods held on consignment are not owned by the company that holds them, but they should be included in the ending inventory of the company that holds them.

Goods held on consignment are not owned by the company that holds them, and they should not be included in the ending inventory of the company that holds them. Companies must arrive at an accurate count of inventory for financial reporting purposes. What determines whether goods should be included in the inventory it reports on its balance sheet is the company's ownership or title of the goods. Possession of goods does not meet the company owns the goods. For example, companies sometimes hold goods on consignment for others without owning them. Goods held on consignment for others should not be reported on the company's balance sheet; those goods should be reported on the balance sheet of the person or company that owns them.

In periods of deflation, what will LIFO produce?

Higher net income than FIFO LIFO (i.e., last-in, first-out) uses the cost of the most recently purchased inventory to determine cost of goods sold. Declining prices (i.e., 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 (i.e., low expenses). Low cost of goods sold produces high gross profit (i.e., gross margin), high net income, high retained earnings, and high total stockholders' equity. Low cost of goods sold (i.e., selling the less expensive inventory) also produces high ending inventory (i.e., keeping the expensive inventory) and high total assets.

Use the lower‐of‐cost‐or‐market method to determine the amount it should report as its ending inventory.

Lower‐of‐cost‐or‐market ending inventory equals the low of cost or market value for each category of inventory. Choose whichever is smaller (the cost or the market value) for each product. whichever is lower, add them all together

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

Net income will be overstated and the stockholders' equity will be overstated Cost of goods sold = Beginning inventory + Purchases - Ending inventory. If the ending inventory is overstated, cost of goods sold will be understated which causes net income to be overstated. Whenever net income is overstated, stockholders' equity will be overstated.

A 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 overstated Overstated and understated Understated and overstated Understated and understated None

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.

Which of the following is an inventory account? Raw materials Equipment Accounts receivable All of these are inventory accounts Cash

Raw materials Equipment is not an inventory account. Equipment consists of items used in the production of income that are not held for sale. Inventory can include raw materials, work in process, and finished goods. Raw materials is an inventory account that contains the cost of materials that have not yet been started into the production process. Work in process 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.

The company sold 550 units of inventory for $2.00 per unit during June. The company uses the period inventory system and the FIFO cost flow method. Determine the gross margin for the month of June.

Revenue (550 units x $2.00 per unit) 1,100 Cost of goods sold using FIFO: 200 units x $1.20/unit ( 240) 350 units x $1.30/unit ( 455)

At December 31, Moore Company's inventory records indicated a balance of $420,000. Upon further investigation it was determined that this amount included the following: (1) $54,000 in inventory purchases made by Moore shipped from the seller December 29 terms FOB shipping point, but not due to be received until January 2. (2) $25,000 in inventory purchases made by Moore shipped from the seller December 29 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 29. The goods are not expected to reach their destination until January 5. (4) $7,000 in goods sold by Moore with terms FOB shipping point on December 29. The goods are not expected to reach their destination until January 4. (5) $15,000 of goods owned by Moore Company held on consignment by Dollywood Company. What is Moore's correct ending inventory balance at December 31?

$388,000 Do not include the following in inventory: 1. FOB destination purchases not yet received (i.e., $25,000) 2. FOB shipping point goods sold and shipped (i.e., $7,000) 3. Goods held on consignment (i.e., None). Ending inventory = $420,000 - 25,000 - 7,000 = $388,000

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?

Beginning inventory + Purchases - Ending inventory = Cost of goods sold 20,000 + 500,000 - Ending inventory = 560,000 Ending inventory = 20,000 + 500,000 - 460,000 = 60,000

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. (4) $34,000 of inventory consigned to a third-party consignor that it continues to hold at the end of the year. What is Sunrise's correct ending inventory balance at December 31?

$552,000 The inventory balance of $654,000 should not include the $98,000 since ownership passes at destination on January 2. It should include the $68,000 because ownership does not pass at the shipping point on December 28. It should not include the $4,000 on consignment because these goods are not owned by Sunrise. It should include the inventory it consigned to a third-party, and it already does include it so no adjustment is necessary. The corrected inventory balance = $654,000 - $98,000 - $4,000 = $552,000.

Dole Industries had the following inventory transactions: Units Cost/unit Feb. 1 Purchase 72 $90 Mar. 14 Purchase 124 $94 May 1 Purchase 88 $98 The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company's gross profit using FIFO? (rounded to whole dollars)

(FIFO costs of good sold= start at top) Sales revenue = 204 units x $126/unit = $25,704 Cost of goods sold using FIFO = (72 units x $90/unit) + (124 units x $94/unit) + [(204 - 72 - 124) x $98] = $6,480 + 11,656 + 784 = $18,920 Gross profit = Sales revenue - Cost of goods sold = $25,704 - 18,920 = $6,784

(FIFO= start with bottom) Goods available for sale is $2,090 (100 units) Ending inventory = 25 units Cost of goods sold = goods available for sale - ending inventory = 100 units - 25 units = 75 units Using FIFO & periodic, the cost of goods sold includes the oldest 68 units and ending inventory includes the 32 newest units. Ending inventory = 10 units at $22/unit + (25 units - 10 units) x $21/unit = $220 + 315 = $535

A company uses the 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 ___________________.

(i) Overstated and (ii) Overstated In the periodic inventory system, cost of goods sold is computed at the end of the period using a formula that includes ending inventory which is determined by taking a physical inventory. Sometimes, the ending inventory is mis-counted (i.e., understated or overstated). An error in ending inventory results in an error in cost of goods sold in the opposite direction. For example, understating ending inventory overstates cost of goods sold. Moreover, an error in cost of goods sold causes an error in gross profit, net income, retained earnings, and stockholders' equity. For example, overstating cost of goods sold understates gross profit and retained earnings.

A company uses the periodic inventory method. An error in the physical count of goods on hand at the end of a period resulted in a $10,000understatement of the ending inventory. The effect of this error in the current period is that (i) cost of goods sold is _________________ and (ii)net income is __________________.

(i) Overstated and (ii) Understated In the periodic inventory system, cost of goods sold is computed at the end of the period using a formula that includes ending inventory which is determined by taking a physical inventory. Sometimes, the ending inventory is mis-counted (i.e., understated or overstated). An error in ending inventory results in an error in cost of goods sold in the opposite direction. For example, understating ending inventory overstates cost of goods sold. Moreover, an error in cost of goods sold causes an error in gross profit, net income, retained earnings, and stockholders' equity. For example, overstating cost of goods sold understates gross profit, net income, and retained earnings.

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 The LIFO reserve is the difference between inventory using LIFO and inventory using FIFO. If the company operates in an inflationary environment (i.e., rising prices), then the LIFO reserve is a positive number, add the LIFO reserve to LIFO inventory to determine the company's FIFO inventory. FIFO ending inventory = LIFO ending inventory + LIFO reserve = $300,000 + 25,000 = $325,000

Which one of the following statements is true? A merchandising company will normally have raw materials as an inventory account classification. None of these A manufacturing company will normally have raw materials, work in process, and finished goods as inventory account classifications. All of these A service company will normally have work in process as an inventory account classification.

A manufacturing company will normally have raw materials, work in process, and finished goods as inventory account classifications. A manufacturing operation utilizes raw materials, work in process, and finished goods as inventory account classifications. A merchandising company buys goods that are ready to sell and does not manufacture them.

West Jenkins Company developed the following information about its inventories in applying the lower-of-cost-or-market (LCM) basis in valuing inventories: Category Cost Market A $55,000 $52,000 B 48,000 58,000 C 77,000 65,000 If West Jenkins applies the LCM basis, the value of the inventory reported on the balance sheet would be

ADD the lowest in each category 52,000+48,000+65,000 + 165,000

Which of the following is a legitimate business reason for taking a physical inventory? - To determine if any inventory has been lost from waste, shoplifting, or employee theft - To check the accuracy of the perpetual inventory records - To determine cost of goods sold - None of these - All of these

All of these Taking a physical inventory involves counting, weighing, or measuring each kind of inventory on hand. Reasons to take a physical inventory include: (i) to check the accuracy of the perpetual inventory records, (ii) to determine cost of goods sold, and (iii) to determine if any inventory has been lost from waste, shoplifting, or employee theft.

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? Specific identification Average-cost Last-in, first-out First-in, first-out Allowance estimation

Allowance estimation A company's management decides which method of computing the cost of inventory. Choices of method include (1) specific identification, (2) first-in, first-out, (3) last-in, first-out, and (4) average cost methods.

the following information was available for Camaro Company: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $560,000; sales $800,000, and net income $50,000. The company's inventory turnover is

Average inventory = (80,000 + 120,000)/2 = 100,000 Inventory turnover = Cost of goods sold/average inventory Inventory turnover = 560,000/100,000 = 5.6

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?

Beginning inventory + Purchases - Ending inventory = Cost of goods sold 20,000 + 500,000 - Ending inventory = 560,000Ending inventory = 20,000 + 500,000 - 460,000 = 60,000

Cost of goods purchased is $500,000, ending inventory is $20,000, and cost of goods sold is $560,000. How much is beginning inventory?

Beginning inventory + Purchases - Ending inventory = Cost of goods sold Beginning inventory + 500,000 - 20,000 = 560,000 Beginning inventory = 560,000 - 500,000 + 20,000 = 80,000

At June 30, Johnson Incorporated's financial records report that it has $550,000 of inventory. It was also determined that this amount included the following: •$30,000 in goods sold by Johnson Inc. with terms FOB shipping point on June 29. The goods were delivered to the customer on July 1. • $10,000 of goods received from a Kennedy Company that Johnson Inc. holds on consignment. • $40,000 in inventory purchased by Johnson that were shipped from the seller on June 27 with terms FOB destination, but the inventory was not received by Johnson until July 2. What is company's correct amount of ending inventory as of the end of June?

Correct inventory = Reported inventory + Inventory it owns but did not include - Inventory it included but it does not own. Correct inventory= 550,000- 30,000- 10,000-40,000 =470,000

Ray's Sounds has accumulated the following cost and market data on March 31: Cost Data Market Data iPods $23,000 $21,600 Cell phones $16,000 $17,500 DVDs $21,000 $18,900 Using the lower-of-cost-or-market, how much is the value of the ending inventory?

Cost is compared to market for each inventory category as follows: iPods $21,600 + cell phones $16,000 + DVDs $18,900 = $56,500

Understating ending inventory will overstate the following: a. Assets b. Net income c. Stockholders' equity d. Cost of goods sold e. None of these

Cost of goods sold

The following information came from the income statement of the Wilkens Company: sales revenue $2,200,000; beginning inventory $220,000; ending inventory $280,000; and gross profit $1,200,000. What is Wilkens' inventory turnover ratio?

Cost of goods sold is the difference between sales revenue and gross profit: $2,200,000 - $1,200,000 = $1,000,000. Inventory turnover ratio = Cost of goods sold divided by average inventory: $1,000,000/[($220,000 + $280,000)/2] = 4.0.

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 destination, but not due to be received until January 2. (2) $23,000 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. (3) $6,000 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. (4) $8,000 in goods sold by Moore with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6. (5) $13,000 of goods owned by Moore Company held on consignment by Dollywood Company. What is Moore's correct ending inventory balance at December 31?

Do not include the following in a company's inventory: 1. FOB destination purchases not yet received (i.e., $56,000) 2. FOB shipping point goods sold and shipped (i.e., $6,000) 3. Goods held on consignment (i.e., None) Ending inventory = $400,000 - 56,000 - 6,000 = $338,000

At December 31, Moore Company's inventory records indicated a balance of $420,000. Upon further investigation it was determined that this amount included the following: (1) $54,000 in inventory purchases made by Moore shipped from the seller December 29 terms FOB shipping point, but not due to be received until January 2. (2) $25,000 in inventory purchases made by Moore shipped from the seller December 29 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 29. The goods are not expected to reach their destination until January 5. (4) $7,000 in goods sold by Moore with terms FOB shipping point on December 29. The goods are not expected to reach their destination until January 4. (5) $15,000 of goods received on consignment from Dollywood Company. What is Moore's correct ending inventory balance at December 31?

Do not include the following in inventory: --FOB destination purchases not yet received (i.e., $25,000) --FOB shipping point goods sold and shipped (i.e., $7,000)--Goods held on consignment (i.e., $15,000). Ending inventory = $420,000 - 25,000 - 7,000 - 15,000 = $373,000 Solution: Do not include the following in inventory: 1. FOB destination purchases not yet received (i.e., $25,000) 2. FOB shipping point goods sold and shipped (i.e., $7,000) 3. Goods held on consignment (i.e., $15,000). Ending inventory = $420,000 - 25,000 - 7,000 - 15,000 = $373,000

In a period of declining inventory costs, which inventory flow assumption will result in the lowest net income? Accelerated method Average cost method Net income is not affected by inventory method cost flow assumptions. FIFO LIFO

FIFO (FIFO= start at bottom) First-in, first-out (FIFO) considers the oldest inventory to be sold. In contrast, last-in, first-out (LIFO) considers the newest inventory to be sold. The lowest net income occurs when the most expensive inventory is considered to be sold. When prices are declining, the most expensive inventory is the oldest inventory. So, FIFO produces the lowest ending inventory when prices are declining

Which inventory method will result in the highest reported net income during periods with rising costs? LIFO Inventory method does not affect income. Average cost Accelerated method FIFO

FIFO First-in, first-out (FIFO) considers the oldest inventory to be sold. In contrast, last-in, first-out (LIFO) considers the newest inventory to be sold. The largest net income occurs when the least inventory is considered to be sold. When prices are rising, the least expensive inventory is the oldest inventory. So, FIFO produces the lowest ending inventory when prices are declining

Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods purchased as inventory has increased during the period, then the company using

FIFO will have the highest ending inventory. LIFO First-in, first-out (FIFO) considers the oldest inventory to be sold. In contrast, last-in, first-out (LIFO) considers the newest inventory to be sold. Increasing prices for inventory suggest that FIFO sells the oldest and cheapest inventory producing the lowest cost of goods sold, the highest net income and retained earnings, and the highest ending inventory. In contrast, increasing prices for inventory suggest that LIFO sells the newest and most expensive inventory producing the highest cost of goods sold, the lowest net income and retained earnings, and the lowest ending inventory.

FIFO will have the highest retained earnings. First-in, first-out (FIFO) considers the oldest inventory to be sold. In contrast, last-in, first-out (LIFO) considers the newest inventory to be sold. Increasing prices for inventory suggest that FIFO sells the oldest and cheapest inventory producing the lowest cost of goods sold, the highest net income and retained earnings, and the highest ending inventory. In contrast, increasing prices for inventory suggest that LIFO sells the newest and most expensive inventory producing the highest cost of goods sold, the lowest net income and retained earnings, and the lowest ending inventory.

freight terms indicating that the goods are placed free on board at the buyer's place of business, and the seller pays the freight cost; goods belong to the seller while in transit

FOB destination

freight terms indicating that the goods are placed free on board at the seller's place of business, and the buyer pays the freight cost; goods belong to the buyer while in trasit

FOB shipping point

The following information was available for Bowyer Company: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; sales $1,200,000, and net income of $40,000. The company's inventory turnover is

Inventory turnover = Cost of goods sold/average inventory Inventory turnover = $880,000/[($90,000 + $70,000)/2] = 11

Which of the following would most likely employ the specific identification method of inventory costing? Grocery store Hardware store Gasoline station All of these are equally likely to use specific identification Jewelry store

Jewelry store Jewelry stores use the specific identification method because of the high value and uniqueness of many of the inventory items. The average item in the grocery store is low in value and generic in nature. As such, the specific identification method would not be desirable. While numerous items within the store may warrant the specific identification method, the vast majority of items would not warrant the cost of implementing the specific identification method. A gasoline station would be unable to utilize the specific identification method for its fuel sales from a single holding tank. Its product is generic and of relatively low value.

Which of the following would most likely employ the specific identification method of inventory costing? Gasoline station All of these are equally likely to use specific identification Grocery store Hardware store Jewelry store

In a period of rising prices, which of the following inventory methods generally results in the lowest net income figure? FIFO method Specific identification method LIFO method Accelerated method Average cost method

LIFO (LIFO= start at the top) First-in, first-out (FIFO) considers the oldest inventory to be sold. In contrast, last-in, first-out (LIFO) considers the newest inventory to be sold. The lowest net income occurs when the most expensive inventory is considered to be sold. When prices are rising, the most expensive inventory is the newest inventory. So, LIFO produces the lowest net income when prices are rising.

Determine its LIFO reserve at the end of June.

LIFO Reserve: Companies using LIFO are required to report the difference between inventory based on LIFO and inventory based on FIFO. This amount is referred to as the LIFO reserve.

In a period of inflation, the cost flow method that results in the lowest income taxes is the a. FIFO method. b. LIFO method. c. average cost method. d. gross profit method. e. None of these Notes:

LIFO method Taxes are low when income before taxes is low, and taxes are low when expenses (e.g., cost of goods sold) are high. Cost of goods sold is high in periods of inflation when the company uses LIFO (i.e., the company assumes it sells the recently purchased, expensive inventory).

For a company using LIFO, the difference between inventory reported using LIFO and inventory using FIFO.

LIFO reserve

Sales revenue = 204 units x $126/unit = $25,704 Cost of goods sold using FIFO = (72 units x $90/unit) + (124 units x $94/unit) + [(204 - 72 - 124) x $98] = $6,480 + 11,656 + 784 = $18,920 Gross profit = Sales revenue - Cost of goods sold = $25,704 - 18,920 = $6,784

Which of the following statements is true? All of these None of these LIFO inventory valuation requires the physical flow of goods to be representative of the cost flow. FIFO inventory valuation requires the physical flow of goods to be representative of the cost flow. Specific identification method inventory valuation requires the physical flow of goods to be representative of the cost flow.

Specific identification method inventory valuation requires the physical flow of goods to be representative of the cost flow. The specific identification method has this constraint--the physical flow of goods must represent . There is no requirement for the physical flow of goods under the LIFO or FIFO inventory valuation concepts to match cost flow.

In a period of inflation, the costs allocated to ending inventory will approximate their current cost if a. the FIFO method is used. b. the LIFO method is used. c. the average method is used. d. all of these

The FIFO method is used Ending inventory approximates the current cost of inventory if ending inventory includes the most recently purchased inventory. Ending inventory includes the most recently purchased inventory is FIFO is used and the company assumes it sells the oldest inventory.

A company uses the 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

The LIFO reserve is the difference between inventory using LIFO and inventory using FIFO. If the company operates in an inflationary environment (i.e., rising prices), then the LIFO reserve is a positive number. FIFO ending inventory = LIFO ending inventory + ending LIFO reserve FIFO ending inventory = 1,300 + 100 = 1,400

All of the following statements are true regarding the LIFO reserve except: Current ratios and the inventory turnover can be significantly affected if a company has a large LIFO reserves. Companies using LIFO are required to report the LIFO reserve. To adjust LIFO inventory to FIFO inventory requires adding the LIFO reserve from LIFO inventory. None of these The LIFO reserve normally decreases the longer a company uses LIFO.

The LIFO reserve normally decreases the longer a company uses LIFO Compared to FIFO, LIFO can result in a significant difference in the results reported in the balance sheet (i.e., inventory) and income statement (i.e., cost of goods sold). With increasing prices, FIFO will result in higher reported inventory on the balance sheet and lower reported cost of goods sold on the income statement (moreover, the lower cost of goods sold results in higher reported net income). Comparing companies that do not use the same inventory cost flow assumption, such as one company uses FIFO and the other uses LIFO, is challenging and requires an adjustment for the effects of FIFO versus LIFO. Companies using LIFO are required to report the difference between inventory reported using LIFO and FIFO, and this amount is called the LIFO reserve. To adjust a company's inventory from LIFO to FIFO, add the LIFO reserve to inventory as determined by LIFO. The LIFO reserve generally increases the longer the company uses LIFO because the difference in the cost of inventory using LIFO instead of FIFO generally increases. When the LIFO reserve becomes large, it has material effects on the company's current ratio and inventory turnover ratio.

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. (4) $10,000 of inventory consigned to a third-party consignor that it continues to hold at the end of the year. What is Sunrise's correct ending inventory balance at December 31?

The inventory balance of $752,000 should not include the $112,000 since ownership passes at destination on January 2. It should include the $74,000 because ownership does not pass at the shipping point on December 27. It should not include the $6,000 on consignment because these goods are not owned by Sunrise. It should include the inventory it consigned to a third-party, and it already does include it so no adjustment is necessary.The corrected inventory balance = $752,000 - $112,000 - $6,000 = $634,000.

Irwin Industries had the following inventory transactions occur during the current year: Feb. 1 Purchase 40 at $42 Mar. 14 Purchase 60 at $43 May 1 Purchase 55 at $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 gross profit using LIFO? (rounded to whole dollars)

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

Freehan Company's accounting records has the following information about its inventory: Jan. 1 8,000 units at $8 Purchase, April 2 17,000 units at $10 Purchase, Aug. 28 15,000units at $12 If the company has 9,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?

[Average periodic ending inventory] 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 = [(8,000 x $8) + (17,000 x $10) + (15,000 x $12)] ÷ (8,000 + 17,000 + 15,000) = $414,000 ÷ 40,000 units = $10.35 per unit. Ending inventory = $10.35 x 9,000 units = $93,150.

A company just began business and made the following four inventory purchases in June: June 1 150 units $ 825 June 10 200 units 1,120 June 15 200 units 1,140 June 28 150 units 885 $3,970 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the average-cost method and a periodic inventory system, the amount allocated to the ending inventory on June 30 is

[Average periodic ending inventory] Ending inventory 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 divided by the number of inventory units. Average cost per unit = $3,970/700 units = $5.6714 per unit. Ending inventory = $5.6714/unit x 200 units = $1,134

A company just began business and made the following four inventory purchases in June: June 1 150 units at $ 825 June 10 200 units at 1,120 June 15 200 units at 1,140 June 28 150 units at 885 $3,970 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the average-cost method and a periodic inventory system, the amount allocated to the ending inventory on June 30 is

[Average periodic ending inventory] Ending inventory 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 divided by the number of inventory units.Average cost per unit = $3,970/700 units = $5.6714 per unit. Ending inventory = $5.6714/unit x 200 units = $1,134

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

[FIFO periodic ending inventory] Ending inventory under FIFO uses the most recent costs of inventory to compute ending inventory. Ending inventory = (4,000 x $13) + (4,000 x $12) = $100,000.

Lance Company has the following inventory units and costs: Beg. inventory, Jan. 1 7,000 at $11 Purchase, June 19 12,000 at $12 Purchase, Nov. 8 4,000 at $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?

[LIFO= start with top] 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

The situation that requires a departure from the cost basis of accounting to the lower of cost or market basis in valuing inventory is necessitated by an increase in selling price. a change from one cost flow assumption to another. an increase in the value of the inventory. a decline in the value of the inventory. a desire for more profit.

a decline in the value of the inventory. To comply with the concepts of conservatism (e.g., accounting rules should avoid overstating assets, profits, etc.), inventory should be valued at the lower-of-cost-or-market rather than at its cost. When there is a decline in the current replacement cost of inventory and a company had paid more for inventory than similar inventory's current replacement cost, the company's inventory account is considered to be overstated. The amount recorded as inventory should be reduced or lowered from cost to "market". Be careful because "market value" is not the company's sales price to its customers. Rather, "market value" is the current replacement cost or how much the company can buy inventory from its suppliers. For example, a company might purchase $100 of inventory and record it at cost of $100. The company might plan on selling the inventory for $150. Before selling that inventory, the current replacement cost might decline to $95 so the company records a $5 decline in inventory. However, the company might be able to still sell at $150 or perhaps approximately $145. Conservatism simply means that accounting rules are designed to report assets, income, etc. on a conservative basis—that is let's avoid overstating how much a company has as assets, profits, etc. Similarly, let's avoid overstating its inventory and the lower-of-cost-or-market helps us avoid overstating the value of inventory reported on a company's balance sheet.

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

an overstatement of net income of the next period. 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 ending inventory becomes an understatement of beginning inventory in the next period, and an understatement of beginning inventory in the next period adds too little when computing cost of goods sold, and cost of goods sold of next year is understated. The next effect is that too little cost of goods sold is subtracted from revenue to compute gross profit making gross profit of next year overstated (and making net income of next year overstated). However, Retained Earnings at the end of next year has the correct balance because it was understated in the current year due to understated ending inventory in the current year, and too much net income was closed to retained earnings in the next year. Recall that an error in ending inventory in one year will have a reverse effect on net income in the next accounting period.

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

an understatement of net income of the next period.

an inventory costing method that uses the weighted-average unit cost to allocate the cost of goods available for sale to ending inventory and cost of goods sold

average-cost method

The lower of cost or market basis of valuing inventories is an example of conservatism. consistency. the historical cost principle. materiality. comparability.

conservatism

The lower of cost or market basis of valuing inventories is an example of the historical cost principle. comparability. conservatism. consistency. materiality

conservatism To comply with the concepts of conservatism (e.g., accounting rules should avoid overstating assets, profits, etc.), inventory should be valued at the lower-of-cost-or-market rather than at its cost. When there is a decline in the current replacement cost of inventory and a company had paid more for inventory than similar inventory's current replacement cost, the company's inventory account is considered to be overstated. The amount recorded as inventory should be reduced or lowered from cost to "market". Be careful because "market value" is not the company's sales price to its customers. Rather, "market value" is the current replacement cost or how much the company can buy inventory from its suppliers. For example, a company might purchase $100 of inventory and record it at cost of $100. The company might plan on selling the inventory for $150. Before selling that inventory, the current replacement cost might decline to $95 so the company records a $5 decline in inventory. However, the company might be able to still sell at $150 or perhaps approximately $145. Conservatism simply means that accounting rules are designed to report assets, income, etc. on a conservative basis—that is let's avoid overstating how much a company has as assets, profits, etc. Similarly, let's avoid overstating its inventory and the lower-of-cost-or-market helps us avoid overstating the value of inventory reported on a company's balance sheet.

goods held for sale by one party although ownership of the goods is retained by another party

consigned goods

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

cost The inventory costing methods, such as first-in first-out, place a primary reliance on assumptions about the costs of inventory to cost of goods sold and ending inventory.

a measure of cost of goods sold divided by average inventory

inventory turnover

What is the company's days in inventory

inventory turnover = Cost of goods sold/Ave. inventory Days in inventory = 365/Inventory turnover

An inventory costing method that assumes that the costs of the latest goods purchased are the first to be allocated to cost of goods sold

last in, first out (LIFo) method

a basis whereby inventory is stated at the lower of either cost or market

lower of cost or market (LCM) basis

When terms are FOB shipping point ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. ownership of the goods remains with the seller until the goods are sold by the buyer. ownership of the goods transfer to the seller when the buyer pays for them. ownership of the goods remains with the seller until the goods reach the buyer. ownership of the goods transfer to the seller at the end of the year.

ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. In FOB shipping point, ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.

When terms are FOB shipping point ownership of the goods transfer to the seller at the end of the year. ownership of the goods remains with the seller until the goods reach the buyer. ownership of the goods transfer to the seller when the buyer pays for them. ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. ownership of the goods remains with the seller until the goods are sold by the buyer.

if goods in transit are shipped FOB shipping point

the buyer has title once the goods are given to the transporation company. In FOB shipping point, ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.

A low number of days in inventory may indicate

there is a relatively high chance that sales opportunities may be lost because of inventory shortages. Inventory turnover equals cost of goods sold divided by average inventory. Days in inventory equals 365 divided by the inventory turnover. A low number of days in inventory indicates that inventory is held by the company fewer days, on average. A low days in inventory suggests there is a (i) relatively high chance that sales opportunities may be lost because of inventory shortages, (ii) a relatively ow chance of inventory becoming obsolete before it can be sold, and (iii) the company has a relatively small amount of funds tied up in inventory.

A low number of days in inventory may indicate

there is a relatively low chance of inventory becoming obsolete before it can be sold. Inventory turnover equals cost of goods sold divided by average inventory. Days in inventory equals 365 divided by the inventory turnover. A low number of days in inventory indicates that inventory is held by the company fewer days, on average. A low days in inventory suggests there is a (i) relatively high chance that sales opportunities may be lost because of inventory shortages, (ii) a relatively ow chance of inventory becoming obsolete before it can be sold, and (iii) the company has a relatively small amount of funds tied up in inventory.

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