Chapter 7 LearnSmarts

How is the lower-of-cost-or-market rule applied when there are more than 2 types of inventory?

Only the items that have market values lower than the costs will be written down.

True or False: The inventory method selected by management does not have to correspond to the physical flow of goods to be in accordance with GAAP.

True

When costs to purchase inventory are rising, using LIFO leads to reporting ____ cost of goods sold and ____ net income than FIFO.

higher; lower

The assumption that a company makes about its inventory cost flow can affect cost of goods sold on its ____ and inventory on its _____.

income statement; balance sheet

Assuming rising inventory prices, rank which inventory method results in the higher ending inventory value. List from top to bottom, in order of highest ending inventory to lowest ending inventory value.

1. FIFO 2. Weighted Average 3. LIFO

At year end, CurlZ, Inc.'s inventory consists of 200 bottles of CleanZ at $1 per bottle and 100 boxes of DyeZ at $10 per box. Market values are $1.20 per bottle for CleanZ and $8 per box for DyeZ. CurlZ should report its inventory at

$1,000 The lower-of-cost-or-market rule requires the DyeZ boxes be recorded at the lower market value of $8 instead of the higher cost of $10. Thus, Inventory equals $1,000 (=(200 bottles x $1) + (100 boxes x $8)).

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10 each. It purchased 3 more units at $12 each. What is the weighted average cost per unit?

$11.20 (2 x $10) + (3 x $12) / 5

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10. It purchased 3 more at $12. It sold 4 units during the period. What is the Cost of Goods Sold using the weighted average cost method?

$44.80 (2 x $10) + (3 x $12) = 56/ 5 (total units) x 4 (units sold)

Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using periodic weighted average cost, its Cost of Goods Sold is

$560 (500 + 1,100 + 1,200)/ 5

Which of these would explain an increase in a company's inventory turnover ratio?

-An increase in the demand for the company's products -A decrease in total inventory

Which statement are true?

-Specific identification, weighted average cost, LIFO and FIFO are generally accepted costing methods. -The inventory methods apply to both perpetual and periodic inventory systems. -The inventory costing methods determine the amount of the debit to Cost of Goods Sold and credit to Inventory.

If Barry Bees, Inc.'s days to sell equals 73 days based on a 365-day year, then its inventory turnover ratio equals ____ times.

5 365/73

If Vito, Inc. has an inventory turnover ratio of 5 times, then its days to sell must be

73 days

Which inventory costing method assumes that inventory costs flow out in the opposite order from which the goods were purchased?

LIFO

Specific identification is

an inventory method that tracks which item is actually sold and debits Cost of Goods Sold for the actual cost of the item.

Days to sell measures the average number of

days from the time inventory is purchased to the time it is sold

An increase in a company's inventory balance from a prior year is

good if the inventory turnover ratio is higher

FIFO, an inventory costing method, actually describes how to calculate the cost of ____.

goods sold

Applying the lower of cost or market rule results in inventory being reported at the

market value if lower than cost

Applying the lower of cost or market rule results in inventory being reported at the

market value of lower than cost

On May 1, there were 4 inventory items that cost $30 each. On May 5, 2 items were purchased for $35 each. Given one item from the beginning inventory and one from the May 5 inventory were sold, under the ______ ______ inventory method, cost of goods sold would equal $65.

specific identification

_______ inventory consists of products acquired in a finished condition, ready for sale without further processing

Merchandise

Delta Diamonds had 5 diamonds available for sale this year: June 1 - purchased 1 for $500; July 9 - purchased 2 for $550 each; and on September 23 - purchased 2 for $600 each. On December 24, it sold 1 of the diamonds. Using LIFO periodic, its ending inventory is

$2,200 With LIFO, the 1 diamond sold is assumed to be the most recently purchased. Thus ending inventory (using LIFO) are the older remaining diamonds which equals $2,200 (=$500 + (2 x 550) + 600).

Delta Diamonds had 5 one-carat diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using a periodic specific identification, its Inventory after the December 24 sale is ______.

$2,250 (1 x 500 + 2 x 550 + 2 x 600 - 550)

Which of the following statements are true?

-An increased inventory balance is desirable if management is building up stock in anticipation of higher sales. -An increased inventory balance is undesirable if it is a result of an accumulation of unsaleable inventory.

The weighted average cost method uses the weighted average cost to calculate the value of

-Cost of Goods Sold -Inventory

Which of these might cause the value of inventory to fall below its original cost?

-Damage -Increased competition -Obsolescence from going out of style

Which financial statements are needs to calculate the inventory turnover ratio?

-Income statement -Balance sheet

The company has 1,000 of each of the following items in its inventory: Cost per item MV per item Jeans $20 $21 T-shirts $4 $3 What is the amount of the lower-of-cost-or-market write down, if any?

The write down would be $1,000 4-3 = 1 x 1,000 =

Chicken Little started the month with 5 eggs in its inventory that cost $2 each. During the month, Chicken Little bought 30 more eggs that cost $2.50 each. At the end of the month, Chicken Little counted its inventory and found that 8 eggs remained unsold. If Chicken Little uses FIFO periodic, its Cost of Goods Sold for the month is

$65 (5 eggs x $2) + (22 eggs x $2.50)

The goals of inventory managers include

-Making sure that inventory quality meets customer expectations -Keeping the costs of buying and storing inventory as low as possible -Having enough inventory on hand to meet customer demand

Barry, Inc.'s sales equal $30,000 and cost of goods sold equals $10,000. Its beginning inventory was $800 and its ending inventory is $1,200. Barry's inventory turnover ratio equals ______ times.

10 $10,000 / (($800 + $1,200)/2)

Mountain Made started the month with 3 quilts in its beginning inventory that cost $200 each. During the month, Mountain Made purchased 20 additional quilts for $210 each. At the end of the month, Mountain Made counted its inventory and found that 5 quilts remained unsold. If Mountain Made uses LIFO periodic, its Cost of Goods Sold for the month is

$3,780 18 quits x $210

Widget Company started the month with 10 gadgets in its Inventory that cost $5 each. During the month, Widget bought 50 more gadgets that cost $6 each. At the end of the month, Widget counted its inventory and found that 8 gadgets remained unsold. If Widget uses FIFO, its Cost of Goods Sold for the month is

$302 Of the 52 gadgets sold, the oldest gadgets are assumed to be sold first. Thus, Cost of Goods Sold equals (10 gadgets x $5) + (42 gadgets x $6).

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 item. Using the last-in, first-out, Cost of Goods Sold equals

$33 3 items x $11

Which of the following may occur with a higher inventory turnover ratio?

-Reduction in inventory storage costs -Reduction in obsolescence

Which statements are true?

-The inventory method is an assumed cost flow and does not have to correspond with the actual physical flow of goods. -A grocery store may or may not use the Last-in, First out inventory method.

Barrry Bees, Inc.'s Cost of Goods Sold equals $10,000. Its beginning inventory was $800, and its ending inventory was $1,200. Barry Bee's days to sell equals ____ days (assume 365 days per year).

36.5 $10,000/ ($800 + $1,200/ 2) = 10 365/ 10 =

Which statement is true? A. The inventory costing methods reflect the amount paid for the purchases of inventory. B. Specific identification, weighted average cost, LIFO and FIFO are acceptable GAAP costing methods. C. The inventory costing methods must mirror the physical flow of goods.

B. Specific identification, weighted average cost, LIFO and FIFO are acceptable GAAP costing methods.

In a perpetual inventory system, Inventory is initially recorded at

Cost

How does inventory costing methods affect the income statement when costs tend to rise over time?

Cost of Goods Sold on the income statement differs between the methods causing Income Tax Expense to differ

Of the 4 companies listed below, which company is more likely to use specific identification to value its inventory and cost of goods sold? A. Bulk candy merchandiser B. Dog biscuit manufacturer C. Fast food restaurant D. Custom home builder

D. Custom home builder

Which inventory costing method assumes that the inventory's cost flow out in the same order the goods are received?

FIFO

Risen, Inc. has beginning inventory of $16 which consists of 2 units at $8 each. It purchased 10 units at $10 each. It sold 5 units for $20 each. Which would result in the higher Gross Profit, FIFO or LIFO and why?

FIFO because the older, less expensive units are assumed to be sold first making Cost of Goods Sold lower and Gross Profit higher than LIFO.

Which of the following is merchandise inventory?

Goods held for sale in the normal course of business

Inventory costing methods allowed by US GAAP include: 1) specific ____; 2) ______ average; 3) last in, _____ out; and 4) first in, ____ out

Identification weighted first last

Inventory is reported on the ______. Later, when the inventory is sold, it becomes ______.

balance sheet as a current asset; Cost of Goods Sold on the income statement

When using specific identification inventory method, cost of goods sold equals the

cost of the actual item sold

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using first-in, first out, the 3 goods sold are assumed to be ____.

from the beginning inventory

A company had beginning inventory of 5 units that cost $10 each. During the month, 15 units were purchased for $11 each. The company sold 12 units during the month and had 8 remaining in ending inventory. If the company uses FIFO to calculate cost of goods sold, then its gross profit will be $5 _____ than if it had used LIFO.

higher

As inventory quality increases, its cost usually _______.

increases

A company had beginning inventory of 3 units that cost $5 each. During the month, 17 units were purchased for $6 each. The company sold 15 units during the month and had 5 remaining in ending inventory. If the company uses FIFO instead of LIFO to calculate cost of goods sold, then cost of goods sold will be

lower using FIFO, leading to higher gross profit and higher income taxes

LIFO uses the ____ unit costs for Cost of Goods Sold on the income statement and the ____ unit costs for Inventory on the balance sheet.

newest; oldest

To find the description of the inventory accounting method used by a company, you need to look at the

notes to the financial statements

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10 each. It purchases 3 more at $12 each. It sold 2 units. Using the ____ _____ cost inventory method, Cost of Goods Sold equals $22.40.

weighted average

What is the inventory costing method that adds together the total cost of all goods available for sale during the period, and then divides that by the number of units available for sale to get a value to assign to all go

weighted average cost