ACCT 206 Video Lecture & Assessment LO 5-1, 2, 3, 5
An analysis of the inventory owned by Owens Company as of the Company's fiscal closing date is shown in the following table. Item Quantity Cost per Unit Market Value per Unit A 200 $ 20 $ 17 B 190 $ 50 $ 52 C 400 $ 34 $ 30 D 320 $ 25 $ 29 Assuming Owens applies the lower of cost or market rule on an individual basis, the Company would be required to recognize an expense amounting to:
$2,200 (Since the market values of A and C are below their cost, these items would have to be written-down as follows. Item A [200 units x ($20-$17)] = $600 write-down. Item C [400 units ($34-$30)] = $1,600. Total write-down is $600 + $1,600 = $2,200.)
The following information was drawn from the inventory records of Alpha Company as of December, Year 2. Beginning inventory (purchased in Year 1) 200 Units @ $5 each Purchases made in Year 2 800 Units @ $8 each Units Sold 900 Units @ $12 each Which of the following is the amount of the gross margin shown on the Year 2 income statement assuming Alpha uses a LIFO cost flow method?
$3,900 (The amount of sales revenue is $10,800 (900 units x $12 per unit). The cost of goods sold is $6,600. There are 1,000 units available for sale (200 units purchased in Year 1 + 800 units purchased in Year 2). Given that there were 900 units sold you must determine which of the 1,000 units available for sale were considered to have been sold. The 800 units purchased in Year 2 represent the last items purchased and under LIFO will be the first items sold. The remaining 100 units (900 - 800) are drawn from the units in beginning inventory. The specific computation is shown below: Purchases made in Year 2 800 Units @ $8 each = $ 6,400 Beginning inventory (purchased in Year 1) 100 Units @ $5 each = 500 Cost of goods sold $ 6,900 The gross margin is $3,900 ($10,800 Sales revenue - $6,900 Cost of goods sold).)
Weiss Company purchased two identical inventory items. The first purchase cost $30 and the second cost $32. The Company sold one of the items for $40. If the Company uses the LIFO cost flow method, the balance in the inventory account after the sales transaction will be
$30 (LIFO is an acronym meaning "last in first out". In other words, the last item coming into the business (last item purchased) is the first item going out of the business (first item sold). If the Company is using LIFO, it would have recognized $32 of cost of goods sold (last item purchased) and there would be $30 left in inventory)
An analysis of the inventory owned by Owens Company as of the Company's fiscal closing date is shown in the following table. Item Quantity Cost per Unit Market Value per Unit A 200 $ 20 $ 17 B 190 $ 50 $ 52 C 400 $ 34 $ 30 D 320 $ 25 $ 29 Assuming Owens applies the lower of cost or market rule on an individual basis the amount of inventory shown on the balance sheet would be
$32,900 (Since the market value of items A and C is below the cost, these items would have to be written down to the market value. GAAP does not permit inventory to be written up when market value exceeds cost. Instead these items must continue to be reported at cost. Accordingly, the book value of the inventory shown on the balance sheet is computed as follows: Item Quantity × Lower of Cost or Market = Statement Amount A 200 × $ 17 = $3,400 B 190 × $ 50 = $9,500 C 400 × $ 30 = $12,000 D 320 × $ 25 = $8,000 Total $ 32,900 )
The following information was drawn from the inventory records of Alpha Company as of December, Year 2. Beginning inventory (purchased in Year 1) 200 Units @ $5 each Purchases made in Year 2 800 Units @ $8 each Units Sold 900 Units @ $12 each Which of the following is the amount of the gross margin shown on the Year 2 income statement assuming Alpha uses a weighted average cost flow method?
$4,140 (The amount of sales revenue is $10,800 (900 units x $12 per unit). The cost of goods sold is $6,600. Determine the weighted average cost per unit as follows: Beginning Inventory (purchased in Year 1) 200 Units @ $5 each = $ 1,000 Purchases made in Year 2 800 Units @ $8 each = 6,400 Cost of goods available for sale $ 7,400 Weighted average cost per unit is $7.40 ($7,400 Cost of goods available for sale ÷ 1,000 units). Cost of goods sold is $6,660 ($7.40 per unit x 900 units sold). The gross margin is $4,140 ($10,800 Sales revenue - $6,660 Cost of goods sold).)
The following information was drawn from the inventory records of Alpha Company as of December 31, Year 2. Beginning inventory (purchased in Year 1) 200 Units @ $5 each Purchases made in Year 2 800 Units @ $8 each Units Sold 900 Units @ $12 each Which of the following is the amount of the gross margin assuming Alpha uses a FIFO cost flow method?
$4,200 (The amount of sales revenue is $10,800 (900 units x $12 per unit). The cost of goods sold is $6,600. There are 1,000 units available for sale (200 units purchased in Year 1 + 800 units purchased in Year 2). Given that there were 900 units sold you must determine which of the 1,000 units available for sale were considered to have been sold. The200 units in beginning inventory represents the first items coming into the business and under FIFO will be the first items charged to cost of goods sold. The remaining 700 units (900 sold - 200 from beginning inventory) would have been drawn from the units purchased in Year 2. The specific computation is shown below: -Beginning Inventory (purchased in Year 1) 200 Units @ $5 each = $ 1,000 -Purchases made in Year 2 700 Units @ $8 each = 5,600 -Cost of goods sold $ 6,600 The gross margin is $4,200 ($10,800 Sales revenue - $6,600 Cost of goods sold).)
The following information was drawn from the inventory records of Preston Company. Beginning inventory (purchased in Year 1) 100 Units @ $10 each 1stPurchasemade in Year 2 400 Units @ $12 each 2ndPurchase made in Year 2 500 Units @ $14 each Units Sold 950 Units @ $15 each Based on this information, which of the following represents the amount of ending inventory appearing on the balance sheet assuming a LIFO cost flow?
$500 (Calculate cost of goods available for sale: Beginning inventory (purchased in Year 1) 100 Units @ $10 each = $ 1,000 1stPurchase made in Year 2 400 Units @ $12 each = 6,400 2ndPurchase made in Year 2 500 Units @ $14 each = 7,000 Cost of goods available for sale $ 12,800 Calculate cost of goods sold: Under LIFO determining the cost of the 950 units sold would start with the last 500 items purchased, then proceed with the next 400 items purchased and then take the final 50 units from the beginning inventory. The specific calculations are as follows: 2nd Purchase made in Year 2 500 Units @ $14 each = $ 7,000 1stPurchase made in Year 2 400 Units @ $12 each = 4,800 Beginning inventory(purchased in Year 1) 50 Units @ $10 each = 500 Cost of goods sold $ 12,300 Calculate ending inventory: Cost of goods available for sale $ 12,800 Less: Cost of goods sold 12,300 Ending Year 2 inventory balance $ 500 )
Weiss Company purchased two identical inventory items. The first purchase cost $30 and the second cost $32. The Company sold one of the items for $40. If the Company uses the weighted average cost flow method, the amount of gross margin shown on the income statement will be
$9 (The weighted average cost flow method applies the weighted average cost of inventory to both cost of goods sold and ending inventory. In this case the weighted average cost of inventory is $31 per unit [($30 + $32) ÷ 2]. Based on this computation, $31 would be recognized as cost of goods sold and $31 would be left in inventory after the sales transaction. Recall that the amount of gross margin is equal to the amount of sales revenue minus the cost of goods sold. Therefore, the amount of gross margin is $9 ($40 sales revenue - $31 cost of goods sold).)
If the amount of ending inventory is overstated, the amount of
-net income will be overstated -total assets will be overstated -retained earnings will be overstated (Cost of goods available for sale is allocated between cost of goods sold and ending inventory. In other words, by the end of the accounting period everything that was available for sale has either been sold or is still in inventory. If the amount in ending inventory is overstated, then the amount in cost of goods sold has to be understated and net income is overstated. Since net income is added to retained earnings, overstating net income will also overstate retained earnings.)
Which of the following formulas is used to calculate the number of days to sell inventory?
365/inventory turnover
The following information was drawn from the accounting records of Kassouf Sales Company (KSF). Sales Revenue $124,000 Cost of Goods Sold $90,000 Gross Margin $34,000 The inventory account showed a $17,000 beginning balance and a $19,000 ending balance. Based on this information, the inventory turnover ratio is (if necessary round calculations to two decimal points)
5.00 times (Inventory Turnover = Cost Of Goods Sold / ((Beginning Inventory + Ending Inventory) / 2) Inventory turnover = Cost of goods sold ÷ Average inventory Inventory turnover = $90,000 ÷ [($17,000 + $19,000) ÷2] = 5 times)
The following information was drawn from the accounting records of Kassouf Sales Company (KSF). Sales Revenue $124,000 Cost of Goods Sold $90,000 Gross Margin $34,000 The inventory account showed a $17,000 beginning balance and a $19,000 ending balance. Based on this information, the number of days to sell inventory is (if necessary round calculations to two decimal points)
73 days (365/inventory turnover)= (365/5=73)
Which of the following statements is true?
A high inventory turnover ratio produces a low number of days to collect inventory. (The number of days to sell inventory is calculated by dividing 365 days by the inventory turnover ratio. The higher the denominator (inventory turnover) the lower the result (number of days to sell inventory))
Assume a company paid $800 for a computer that it plans to sell to its customers. Suppose that as a result of new technology the company could buy the same computer today for $600. Which of the following journal entries would be required to show the inventory at the lower of cost or market?
Cost of Goods Sold: Debit 200 Inventory: Credit 200 (Writing down the inventory reduces the amount of total assets and increases expenses which decrease net income and stockholders' equity. Debit entries reduce stockholders' equity and credit entries decrease assets. In this case, the cost of goods sold account is debited and the inventory account is credited.)
Which of the following formulas is used to calculate the inventory turnover ratio?
Cost of goods sold ÷ Inventory
Weiss Company purchased two identical inventory items. The first purchase cost $30 and the second cost $32. When the Company sold one of the items for $40, it expensed $30 to its cost of goods sold account. Based on this information which of the following cost flow methods is the company using?
FIFO (FIFO is an acronym meaning "first in first out". In other words, the first item coming into the business (first item purchased) is the first item going out of the business (first item sold). In this case the first item the business purchased cost $30. Since cost of goods sold is $30, the business must be using the FIFO method.)
GAAP requires that inventory be shown on the balance sheet at its cost (the price paid) regardless of its current value. This statement is
False (GAAP requires that inventory be shown in the balance sheet at the lower of cost or market. For example, assume a company paid $800 for a computer that it plans to sell to its customers. Suppose that as a result of new technology the company could buy the same computer today for $600. Under these circumstances, GAAP would require the computer to be shown in the balance sheet at $600 (market) rather than the $800 (cost) that the company originally paid to buy the inventory (computer).)
Which of the following cost flow methods would provide the lowest amount of net income in an inflationary environment?
LIFO (In an inflationary environment the last items in (last items purchased) are the most expensive items. If the last items in (most expensive items) are the items recognized as cost of goods sold, the amount of gross margin and net income will be the lowest.)
The cash flow associated with buying and selling inventory is not affected by the inventory cost flow method. This statement is
True (Cash flow depends on when cash is collected and paid. It is independent from when expenses are recognized. Since inventory cost flow focuses on expense recognition, it is not related to cash flow.)
Because of its size, cost of goods sold normally has a significant impact on the amount of net income that is reported on the income statement. Since the reported balance in the inventory account has a direct effect on the amount of cost of goods sold, inventory manipulation is a target for unscrupulous managers seeking to control the amount of reported earnings. These statements are
True (Cost goods sold is the largest expense item shown on the income statements of most merchandising companies. Due to its size a small percentage change in the amount of cost of goods sold will cause a much larger percentage change in the amount of reported net income. Consider the case of a company that is reporting $100,000 of cost of goods sold and $10,000 of net income. A 2% change in cost of goods sold would amount to $2,000 ($100,000 x .02). This slight change would result in a 20% change in the amount of reported net income ($2,000 ÷$10,000). This relationship has appeal to unscrupulous managers hoping their efforts to manipulate earnings will go unnoticed.)
Which of the following industries is likely to have the highest number of days to sell inventory?
Wine producers (Wine production requires an aging process that requires the manufacturer to hold the inventory for extended periods of time thereby increasing the number of days required to sell inventory. Grocery stores and fast food restaurants use perishable merchandise that must be sold rapidly to avoid spoilage. Discount stores operate on a strategy that sets low margins designed to stimulate high turnover.)
All other things being equal, the profitability is maximized when a company sells inventory with
a high gross margin per unit and a high inventory turnover. (The most profitable option is to sell highly profitable items rapidly.Unfortunately, this situation is rarely available in the real world. Instead, companies frequently have to make tradeoffs. For example, discount stores seek profits by setting low margins in order to encourage rapid turnover. Alternative, high-end department stores set high margins while expecting slow turnover. While these tradeoffs are unavoidable in the real world, all companies would like to raise their margins while increasing their turnover.)
If the amount of ending inventory is overstated, the amount of
cost of goods sold will be understated (Cost of goods available for sale is allocated between cost of goods sold and ending inventory. In other words, by the end of the accounting period everything that was available for sale has either been sold or is still in inventory. If the amount in ending inventory is overstated, then the amount in cost of goods sold has to be understated.)
The journal entry to recognize the write down of inventory based on the lower of cost or market rule will
increase the amount of expenses. (Writing down inventory decreases the amount of assets and increases the amount of expenses which decreases net income and ultimately stockholders' equity. Liabilities and cash flow are not affected.)
Assume that the amount of ending inventory is overstated in Year 1. Further assume the overstatement in Year 1 is not discovered and the ending inventory in Year 2 is reported accurately. Under these circumstances,
the Year 2 ending balance in retained earnings will be accurate. (If inventory is overstated in Year 1, then the amount of assets, net income, and retained earnings shown in the Year 1 financial statements are overstated. Since the inventory overstatement in Year 1 is not discovered, the beginning inventory in Year 2 is overstated. If the beginning inventory in Year 2 is overstated, the amount of cost of goods available for sale in Year 2 is overstated. Since cost of goods available for sale is overstated and ending inventory is accurate, the Year 2 cost of goods sold is overstated. Since cost of goods sold is overstated in Year 2, the amount of net income and retained earnings are understated. However, the understatement in retained earnings in Year 2 is offset by the overstatement of retained earnings in Year 1, thereby rendering the Year 2 ending retained earnings balance accurate.)
To avoid the risk of fraud associated with inventory manipulation
the employee in charge of counting inventory should be different from the employee in charge of recording inventory transactions. (The separation of duties is a common internal control practice that reduces the likelihood of fraud. When one employee's duties check the accuracy of another employee's duties, collusion is required to hide unscrupulous activity.)
