Chapter 8 Intermediate Financial 1

Gerhard Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased at least 1,200 units, COGS would have been

$2,000 higher.

Joachim Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased 1,200 units, pretax income would have been

$2,000 lower.

Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that Pernell's pretax income for the 2016 fiscal year would have been

$50,000 higher if it had used FIFO.

Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that Pernell's cost of goods sold for the 2016 fiscal year would have been

$50,000 lower if it had used FIFO.

Smith Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $690,000. Its inventory as of December 31, 2016, was $758,100 at year-end costs and the cost index was 1.05. What was DVL inventory on December 31, 2016?

$723,600

Western Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $715,000. Its inventory as of December 31, 2016, was $815,400 at year-end costs and the cost index was 1.08. What was DVL inventory on December 31, 2016?

$758,200

What type of expenditures should be included in the cost of inventory of a manufacturing company? (Select all that apply.)

- Expenditures necessary to bring inventory to sales location. - Expenditures necessary to acquire inventory.

What is included in the cost of merchandise inventory? (Select all that apply.)

- Necessary costs incurred to get the goods in location for sale. - The purchase price of the goods.

A periodic inventory system (Select all that apply.)

- does not continuously track the quantity of merchandise. - does not continuously track the cost of merchandise sold.

Ownership of inventory at the end of the accounting period is determined for (Select all that apply.)

- goods shipped to customers. - goods shipped by suppliers.

Which of the following accounts are typically reported on the balance sheet of a manufacturing company? (Select all that apply.)

- raw materials - finished goods - work in process

The cost of inventory includes (Select all that apply.)

- the cost to bring inventory to its desired location - expenditures to acquire the inventory

Doris recently started her position at Monro Company. The company uses the dollar-value LIFO inventory method. On her first day at work, Doris was asked to calculate the cost index for a new inventory layer. The company's records reveal that the cost in terms of the base year was $50,000 and the cost in terms of the layer year was $100,000. What is the cost index for the new layer?

2

Parker Company reports gross sales revenue of $7.5 million, net sales revenue of $7 million, and cost of goods sold of $3.5 million. Its inventory balance was $150,000 at the beginning of the accounting period and $200,000 at the end of the accounting period. The company's inventory turnover ratio is closest to

20

Rudy Company reports gross sales revenue of $5.2 million, net sales revenue of $5 million, and cost of goods sold of $3 million. Rounding to the nearest percent, the company's gross profit ratio would be

40%.

Which inventory costing method assumes that cost of goods sold and ending inventory consist of a mixture of all the goods available for sale?

Average cost

Use of LIFO inventory pools reduces the chance of unintentional LIFO layer . (Enter only one word.)

Blank 1: liquidations or liquidation

Inventory for a company consists of raw materials, work in process, and finished goods. (Enter only one word.)

Blank 1: manufacturing

A(n) inventory system adjusts inventory at the end of each reporting period. (Enter only one word.)

Blank 1: periodic

A(n) inventory system adjusts for each change caused by a purchase, a sale, or a return of merchandise. (Enter only one word.)

Blank 1: perpetual

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold?

FIFO

Which inventory costing method assumes that items in ending inventory are the most recently acquired?

FIFO

The LIFO reserve shows how ending inventory would have differed if the company had utilized _______ or ______, instead of LIFO. (Select all that apply.)

FIFO weighted-average

True or false: A periodic inventory system allows management to determine the amount of goods on hand without having to take a physical count.

False

Dollar amounts are assigned to goods sold and goods remaining in ending inventory by making an assumption regarding what?

How units of goods and their associated costs flow through the system.

Items a company intends to sell in the normal course of business, has in production for future sale, or uses currently in production, are all examples of what?

Inventory

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory?

LIFO

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income?

LIFO

If a company uses _____ to measure taxable income, they must use the same method for external financial reporting.

LIFO

In which type of inventory costing system are inventory costs on the balance sheet generally out of date?

LIFO

When prices increase, the ______ inventory method provides the best matching of revenue and expenses.

LIFO

Which inventory costing method assumes that the units sold are the most recent units purchased?

LIFO

Another name for the LIFO reserve account is

LIFO allowance.

If a company uses LIFO to measure its taxable income, the IRS requires that LIFO also be used to measure income reported to investors and creditors.This is know as the

LIFO conformity rule.

Turn Company utilizes the LIFO inventory method to calculate taxable income. Which method is available to Turn for financial reporting purposes?

LIFO only

The goods a wholesale company purchases in finished form are referred to as what?

Merchandise inventory

Orange Co., a computer retailer, shows the following selected assets on its balance sheet. Indicate which account would be properly classified as inventory.

Mouse pads

Which of the following are disadvantages of unit LIFO? (Select all that apply.)

Possibility of LIFO liquidation Significant recordkeeping costs

Advantages of using LIFO inventory pools include which of the following? (Select all that apply.)

Simplify recordkeeping Reduce the risk of LIFO layer liquidations

Which of the following situations would result in a LIFO liquidation for a company that has 200 units in beginning inventory and sales of 1,000 units?

The company purchases 950 units during the year.

True or false: Dollar-value LIFO allows a company to combine a large variety of goods into one pool.

True

The average cost method assumes that cost of goods sold consists of

a mixture of all the goods available for sale.

The dollar-value LIFO (DVL) inventory method

allows a broader range of goods to be included in pools.

Determining ownership of goods that are in transit at the end of the accounting period is important to

assure proper inventory cutoff.

The inventory turnover ratio is computed as cost of goods sold divided by _____.

average inventory

The dollar-value LIFO method extends the concept of inventory pools by allowing companies to

combine a large variety of goods in one pool.

In a perpetual inventory system the inventory account is

continually adjusted.

The inventory turnover ratio is computed as _____ divided by average inventory.

cost of goods sold

In a LIFO inventory system, inventory amounts shown in the balance sheet may be distorted because they may represent

costs incurred several years earlier.

At the end of an accounting period, it is important to ensure proper inventory _____ to determine the ownership of goods in transit.

cutoff

When inventory quantities _____ during a period, out-of-date inventory layers are liquidated and cost of goods sold will match noncurrent costs with current selling prices in a LIFO inventory costing system.

decline

A LIFO liquidation occurs when inventory quantities ______.

decrease

The FIFO method assumes that units sold are the _________ units acquired and that units remaining in ending inventory are the ________ units purchased.

first; last

Inventory cost flow assumptions can be used to assign dollar amounts to (Select all that apply.)

goods sold. ending inventory.

The gross profit ratio is computed as _____ divided by net sales.

gross profit

The specific identification method of inventory costing matches each unit with

its actual cost.

The layer year cost index is calculated by dividing the cost in ______ year by the cost in ______ year.

layer; base

Finished goods is a type of inventory found on a _____ company's balance sheet.

manufacturing

A _____ company resells goods while a _____ company produces goods.

merchandising; manufacturing

The gross profit ratio is computed as gross profit divided by _____.

net sales

Which inventory system allocates cost of goods available for sale only at the end of each reporting period?

periodic inventory system

A _____ inventory system recognizes cost of goods sold each time a sale occurs; a _____ inventory system decreases inventory each time a sale occurs.

perpetual; perpetual

The dollar-value LIFO (DVL) method (Select all that apply.)

simplifies recordkeeping. reduces the risk of liquidation of layers.

LIFO inventory pools

simplify recordkeeping.

What method of inventory valuation matches each unit on hand at the end of the period with its actual cost?

specific identification

A DVL pool is made up of items

that are likely to have similar cost change pressures.

The LIFO inventory method assumes that the units sold are

the most recent units purchased.

High recordkeeping costs and possible LIFO liquidation are disadvantages of

unit LIFO.

Which of the following accounts would be found on the balance sheet of a manufacturing company?

work in process