ACG2021 Exam 3

Ray's Sounds has accumulated the following cost and market data on March 31: Cost Data Market Data iPods $24,000 $20,400 Cell phones $18,000 $19,000 DVDs $28,000 $25,600 Using the lower-of-cost-or-market, how much is the value of the ending inventory?

64,000

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

costs

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 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.

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

$356,000 Do not include the following in inventory: --FOB destination purchases not yet received (i.e., $23,000) --FOB shipping point goods sold and shipped (i.e., $8,000) --Goods held on consignment (i.e., $13,000) Ending inventory = $400,000 - 23,000 - 8,000 - 13,000 = $356,000

Howe Industries had the following inventory transactions occur during the current year: Units Cost/unit Feb. 1 Purchase 40 $41 Mar. 14 Purchase 60 $42 May 1 Purchase 55 $43 The company sold 100 units at $80 each and has a tax rate of 20%. Assuming that a periodic inventory system is used and operating expenses are $1,200, what is the company's after tax net income using LIFO? (rounded to whole dollars)

2,036 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 = (55 x $43) + [(100 - 55) x $42] = $2,365 + 1,890 = $4,255 Gross profit = Sales revenue - cost of goods sold = $8,000- $4,255 = $3,745 Net income before taxes = 8,000 - 4,255 - 1,200 = 2,545 Net income = 2,545 x (100% - 20%) = 2,036

The following information came from the income statement of the Wilkens Company: sales revenue $2,400,000; beginning inventory $150,000; ending inventory $250,000; and gross profit $1,000,000. What is Wilkens' inventory turnover ratio?

7.0 times Cost of goods sold is the difference between sales revenue and gross profit: $2,400,000 - $1,000,000 = $1,400,000. Inventory turnover ratio = Cost of goods sold divided by average inventory: $1,400,000/[($150,000 + $250,000)/2] = 7.0.

Cost of goods purchased is $480,000, beginning inventory is $40,000, and cost of goods sold is $440,000. How much is ending inventory?

80,000 Beginning inventory + Purchases - Ending inventory = Cost of goods sold 40,000 + 480,000 - Ending inventory = 440,000 Ending inventory = 40,000 + 480,000 + 440,000 = 80,000

Carlos Company had beginning inventory of $75,000, ending inventory of $105,000, cost of goods sold of $405,000, and sales revenue of $515,000. What is Carlos' days in inventory?

81.1 days Days in inventory equals 365 days ÷ inventory turnover (cost of goods sold ÷ average inventory) = 365 ÷ ($405,000 ÷ [($75,000 + $105,000) ÷ 2]) = 81.1 days

Net sales are $2,400,000, cost of goods sold is $1,260,000, and average inventory is $40,000. How many days' sales are in inventory?

Days' sales in inventory is calculated as 365 days divided by inventory turnover. Inventory turnover = $1,260,000/$40,000 = 31.5 times Days' sales in inventory = 365/31.5 = 11.6 days

A company started business in August and it made the following purchases of inventory: (1) on August 1, it purchased 100 units for $1,500; (2) on August 12, it purchased 100 units for $1,550; and (3) on August 24, it purchased 100 units for $1,575. A physical count of the inventory on August 31 reveals that there are 500 units on hand. What inventory method produces the lowest gross profit for August?

LIFO why: On August 1, it spent $15 per unit; on Aug. 12, it spent $15.50 per unit; and on Aug. 24, it spent $15.750 per unit. This company is experiencing inflation. Low gross profit (i.e., low gross margin) occurs with higher cost of goods sold. During periods of inflation, the inventory costing method that considers the most expensive inventory to be sold is LIFO (i.e., last-in, first-out). The LIFO method will produce the lowest gross profit because LIFO results in the highest cost goods sold in periods of rising prices. The choice of a periodic versus perpetual inventory system does not change whether LIFO or FIFO produces the highest or lowest cost of goods sold or gross profit.

Which is true if the ending inventory is overstated? a) None of these b) Net income will be overstated and the stockholders' equity will be understated. c) Net income will be overstated and the stockholders' equity will be overstated. d) Net income will be understated and the stockholders' equity will be understated. e)Net income will be understated and the stockholders' equity will be overstated.

c) Net income will be overstated and the stockholders' equity will be overstated why: 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.

Which of the following should not be included in the physical inventory of a company? a) Goods in transit from another company shipped FOB shipping point b) Goods shipped on consignment to another company c) None of these choices is correct. d) Goods held on consignment from another company e)All of the answer choices are correct.

d) Goods shipped on consignment to another company why: Goods shipped on consignment to another company remain owned. Goods held on consignment are owned by company that shipped them. Inventory should include all goods owned by the company regardless of whether the company holds physical possession or not. Goods in transit from another company shipped FOB shipping point should be included in the physical inventory of the firm to whom the goods are being shipped because title (i.e., legal ownership) passes when the goods leave the seller's place of business.

Which one of the following is not a consideration that affects the selection of an inventory costing method? a) Tax effects b) Balance sheet effects c) Income statement effects d) Perpetual versus periodic inventory system e) All of these are considerations affecting the choice of an inventory costing method

d) Perpetual vs periodic inventory system why: Management chooses the company's inventory costing method (i.e., FIFO, LIFO, average, specific identification). Management also chooses the company's inventory system (i.e., perpetual versus periodic). These two choices are independent; one choice does not affect the other. On the other hand, the choice of inventory costing method affects the amount reported as inventory, cost of goods sold, net income and other items (including taxable income). Consideration of these affects should be taken into account when choosing an inventory costing method.