Interm accounting chap 8 SB

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. Reason: Currently cost of goods sold ($22,000) is computed using the 1,000 units at $20 plus 200 units at $10 ((1,000 x $20) + (200 x $10))so the units from beginning inventory are liquidated. If they had purchased at least 1,200 units, cost of goods sold would have been $24,000 (1,200 x $20); $2,000 higher; resulting in lower pretax income of $2,000.

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

$723,600 Reason: $758,100/1.05 = $722,000 giving 2 layers of $690,000 and $32,000. $690,000 x 1.0 = $690,000 $32,000 x 1.05 = $33,600 $690,000 + $33,600 = $723,600

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

$758,200 Reason: $815,400/1.08 = $755,000 giving 2 layers of $715,000 and $40,000. $715,000 x 1.0 = $715,000 $40,000 x 1.08 = $43,200 $715,000 + $43,200 = $758,200

Smith Company purchases merchandise for $10,000. The payment terms are stated as 2/10, n/30. If the company utilizes the net method to record purchases, the merchandise will be recorded at what amount?

$9,800. Reason: $10,000 x 2% = 200 discount

1. Periodic inventory 2. Perpetual inventory

1. A separate freight-in account is used 2.Freight is added directly to the inventory account.

1. FIFO 2. LIFO

1. Most closely approximates the actual physical flow of inventory 2. Provides better matching of current revenues with current inventory cost

1. Wholesale and retail companies 2. Manufacturing companies

1. Purchase goods that are primarily in completed form. 2.Purchase goods that are used to produce another product.

Rudy Company reports gross sales revenue of $5.2 million, net sales revenue of $5 million, and cost of goods sold of $3 million. Its inventory balance was $250,000 at the beginning of the accounting period and $300,000 at the end of the accounting period. The company's inventory turnover ratio is closest to

11 Reason: $3 million/($250,000+$300,000/2)=10.9 rounded to 11

On December 31, Salz Company sells 1,000 units of merchandise to Wein Corp. and 2,000 units to Torr Corp. Shipping terms are f.o.b. destination for the 1,000-unit sale and f.o.b. shipping point for the 2,000-unit sale and the goods have shipped. If Salz still has 10,000 physical units in its inventory after these sales, how many units should Salz include in its ending inventory on December 31?

11,000 units Reason: The 10,000 units in ending inventory plus the 1,000 units shipped f.o.b. destination are included in Salz's 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

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%. Reason: Gross profit ratio is computed as gross profit/NET SALES. Be sure to use the net sales number, not gross sales. ($5 million -$3 million)/$5 million

The terms 5/15, n/45 mean what?

A 5% purchase discount if payment is made within 15 days.

Which of the following statements is correct? Multiple choice question. A company can apply more than one inventory cost flow assumption. A company must apply the same cost flow assumption to all its inventory. A company must apply one cost flow assumption to at least 80% of the inventory.

A company can apply more than one inventory cost flow assumption.

Terms like 2/10, n/30 represent what?

A purchase discount

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

When a buyer returns goods to the seller, the buyer records a(n) ____ ____

Blank 1: purchase Blank 2: return

In a periodic inventory system, purchase returns are closed to what account at the end of the reporting period?

Cost of goods sold

What type of expenditures should be included in the cost of inventory of a manufacturing company? (Select all that apply.) Multiple select question. Expenditures necessary to bring inventory to sales location. Cost of storing inventory after it has arrived at sales location. Expenditures necessary to acquire inventory.

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

Which inventory costing method assumes that items sold are those that were acquired first?

FIFO

Which of the following is a correct interpretation of the information provided by the gross profit margin?

It indicates the percentage of each sales dollar available to cover other expenses.

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

LIFO

If a company uses Blank______ 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 Blank______ inventory method provides the best matching of revenue and expenses.

LIFO

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

LIFO Reason: In a period of rising prices, LIFO results in goods with the highest cost being sold first resulting in higher cost of goods sold.

Another name for the LIFO reserve account is

LIFO allowance.

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.) Multiple select question. Possibility of LIFO liquidation Significant recordkeeping costs Inventory pools are costly to implement Disallowed by U.S. GAAP

Possibility of LIFO liquidation Significant recordkeeping costs

Advantages of using LIFO inventory pools include which of the following? (Select all that apply.) Multiple select question. Simplify recordkeeping Reduce the risk of LIFO layer liquidations Account for each type of inventory separately

Simplify recordkeeping Reduce the risk of LIFO layer liquidations

Which inventory costing method matches each unit sold with its actual cost?

Specific identification

When merchandise is shipped f.o.b. shipping point, who includes the inventory on their balance sheet when the goods are with the common carrier?

The purchaser

Which of the following represent a reason why managers closely monitor inventory levels? (Select all that apply.) Multiple select question. To minimize costs of ordering and carrying inventory. To ensure that layers are not liquidated under the FIFO method. To ensure that sufficient units are available.

To minimize costs of ordering and carrying inventory. To ensure that sufficient units are available.

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

True

True or false: LIFO, FIFO, and the weighted average inventory costing methods are all allowed under U.S. GAAP.

True Reason: U.S. GAAP permits the use of all three while IFRS does not permit the use of LIFO.

The average cost method assumes that ending inventory consists of

a mixture of all the goods available for sale.

In a perpetual inventory system, freight costs on purchases are

added to the inventory account.

The dollar-value LIFO (DVL) inventory method

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

A just-in-time (JIT) inventory system (Select all that apply.) Multiple select question. allows companies to maintain relatively low inventory balances. tends to increase storage costs. assists managers with inventory management. reduces the need for coordination with suppliers.

allows companies to maintain relatively low inventory balances. assists managers with inventory management.

In a periodic inventory system, purchase returns

are recorded in a separate contra purchases account.

Cost flow _____________ are made to assign dollar amounts to the physical quantities of goods sold and remaining in ending inventory.

assumptions or assumption

A periodic inventory system allocates cost of goods available for sale Blank______; a perpetual inventory system allocates cost of goods available for sale Blank______.

at the end of the period; each time goods are sold

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.

In a periodic inventory system, the inventory account during the accounting period reflects

cost of beginning inventory.

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

cost of goods sold

When a company utilizes a periodic inventory system, a physical count is necessary to determine cost of goods sold because

cost of goods sold is not determined at the time of sale.

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 Blank______ 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

When a company returns inventory to the seller, net purchases ______

decrease

Inventory cost flow assumptions can be used to assign dollar amounts to (Select all that apply.) Multiple select question. ending inventory. sales revenue. goods sold. purchases.

ending inventory. goods sold.

The cost of inventory includes (Select all that apply.) Multiple select question. the cost to store the inventory once it arrives at desired location expenditures to acquire the inventory the cost to bring inventory to its desired location

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

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

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

first; last

Ownership of inventory at the end of the accounting period is determined for (Select all that apply.) Multiple select question. goods shipped to customers. goods shipped by suppliers. unfulfilled sales orders. unfulfilled purchase orders.

goods shipped to customers. goods shipped by suppliers.

The ______ ratio indicates the percentage of each sales dollar available to cover expenses other than cost of goods sold and then to provide a profit

gross profit

The inventory turnover ratio shows

how many times the average inventory balance is sold during the current reporting period.

Items held for sale in the normal course of business are referred to as __________

inventory or inventories

Steiner Company's average days in inventory has decreased during the current year as compared to the prior year. From this information, we can conclude that Steiner (Select all that apply.) Multiple select question. is selling its inventory slower. is selling its inventory faster. has a lower inventory turnover ratio. has a higher inventory turnover ratio.

is selling its inventory faster. has a higher inventory turnover ratio.

The definition of inventory includes which of the following items? (Select all that apply.) Multiple select question. items held for use or disposal items used currently in the production of goods to be sold items currently in production for future sale items held for resale

items used currently in the production of goods to be sold items currently in production for future sale items held for resale

The specific identification method of inventory costing matches each unit with

its actual cost.

The ______ inventory method assumes that the units in ending inventory were the items acquired first.

last-in, first-out

When prices increase, the _____ inventory method tends to decrease a company's tax liability during a particular fiscal period relative to other inventory methods.

last-in, first-out

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 Blank______ company's balance sheet.

manufacturing

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

net sales

A(n) __________ inventory system adjusts inventory at the end of each reporting period.

periodic

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

Companies closely monitor inventories to maintain a sufficient ______ of inventory to meet customer demand, while also controlling the Blank______ of carrying inventory.

quantity; cost

The dollar-value LIFO (DVL) method (Select all that apply.) Multiple select question. reduces the risk of liquidation of layers. prevents liquidation of layers. simplifies recordkeeping. increases the risk of liquidation of layers.

reduces the risk of liquidation of layers. simplifies recordkeeping.

LIFO inventory pools

simplify recordkeeping.

A JIT inventory system allows companies to maintain ______ inventory levels.

smaller

In a period of rising prices, LIFO produces a higher cost of goods sold, lower net income and therefore, lower ____________ liability.

tax

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.

The LIFO inventory method assumes that the units that remain in ending inventory are

the oldest units in inventory.

High recordkeeping costs and possible LIFO liquidation are disadvantages of

unit LIFO.

The LIFO reserve shows how ending inventory would have differed if the company had utilized Blank______ or Blank______, instead of LIFO. (Select all that apply.) Multiple select question. weighted-average FIFO specific identification

weighted-average FIFO

In a perpetual inventory system the inventory account is adjusted (Select all that apply.) Multiple select question. when inventory is sold. when temporary accounts are closed. when inventory is purchased.

when inventory is sold. when inventory is purchased.

Which of the following accounts are typically reported on the balance sheet of a manufacturing company? (Select all that apply.) Multiple select question. work in process finished goods merchandise inventory cost of goods sold raw materials

work in process finished goods raw materials