Acct. 2110 Miller exam 3 part 1

The following selected financial information is available for Medina for the year ended December 31, 2012.Refer to the information provided for Medina Enterprises. What is the inventory turnover ratio for 2012? Net sales $450,000Inventory, 1/1/12$48,400Cost of goods sold 299,500Inventory, 12/31/1249,670

$299,500 / [(48,400 + 49,670) / 2] = 6.108 times

If the cost of an item of inventory is $50 and the market value is $57, the amount included in inventory according to the lower-of-cost-or-market is:

$50.

The following selected financial information is available for Medina for the year ended December 31, 2012.Refer to the information provided for Medina Enterprises. Calculate Medina's days-in-inventory ratio. Net sales $450,000Inventory, 1/1/12 $48,400Cost of goods sold 299,500Inventory, 12/31/1249,670

365 / 6.108 = 59.76 days

Which one of the following statements regarding changing inventory costing methods is true?

A change in inventory costing methods can be justified if the change is made after the completed financial period. (Changing inventory costing methods violates consistency). One place that the reader of an annual report would be able to identify that a company changed inventory costing methods is the statement of stockholders' equity. Tax advantages are valid justification for changing inventory costing methods.

Ronn Industries reported net income of $95,000 for 2012. Early in 2013, Ronn discovered that its 2012 ending inventory was overstated by $5,000 Refer to the information provided for Ronn Industries. Determine the effects of the inventory errors for 2012.

Assets and equity would have been overstated by $5,000 on the balance sheet; expenses would have been understated by $5,000 on the income statement, thus net income would have been overstated by $5,000

Ahi Corporation purchased merchandise on account from Yudder Inc. on December 12, 2012. On December 13, 2012, Ahi returned damaged merchandise to Yudder and was granted an adjustment on its account. Ahi uses the periodic inventory system. What effect does the merchandise return have on Ahi's accounting equation?

Assets and liabilities decrease.

What effects occur on a retail store's accounting equation when it records purchase of merchandise on account, assuming the use of a perpetual inventory system?

Assets and liabilities increase

For which type of merchandise would a company most likely use the specific identification method of inventory costing?

Gasoline held in storage tanks Cases of bottled water (Fine jeweler)

Which method of inventory costing is not acceptable for financial accounting purposes?

Retail cost

In recording the cost of merchandise sold for cash, based on data available from perpetual inventory records, the journal entry is:

debit Cost of Merchandise Sold; credit Merchandise Inventory

Cost of goods sold is equal to the beginning inventory plus the cost of net purchases minus ____________________.

ending inventory

The days-in-inventory ratio:

measures the length of time it takes to acquire, sell, and replace the inventory.

Inventory turnover:

measures the relationship between the volume of goods sold and amount of inventory carried.

Under the ____________________ inventory system, the inventory account is updated after each purchase or sale.

perpetual

The cost of goods sold is equal to:

the cost of goods available for sale less ending inventory.

If a company does not update the inventory and cost of goods sold accounts during the period, it means company is using:

the periodic inventory system.

Which inventory cost flow method assigns the cost of the most recent items purchased to cost of goods sold?

LIFO

If the amount assigned to ending inventory is incorrect, then:

both the balance sheet and income statement are affected.

The amount of inventory expensed during the year is reported on the income statement as:

cost of goods sold.

When inventories are written down due to the application of the lower-of-cost-or-market (LCM) rule, which of the following is usually increased?

Cost of goods sold

Transportation-in is:

part of the cost of net purchases.

Pollet Company started business at the beginning of 2012. Pollet selected the FIFO method for its inventory costing. The profits will maximize for 2012 under this method, in a period of:

rising prices.

Stephan, Inc. has an inventory turnover rate of 8 times.Refer to the information provided for Stephan, Inc. If its cost of goods sold is $150,000, then the company:

$150,000 / 8 = $18,750

If the cost of an item of inventory is $60 and the market value is $50, the amount included in inventory according to the lower-of-cost-or-market is:

$50.

Shelton Brothers uses a periodic inventory system. It purchased merchandise from BXP on account Inc. on July 7, 2012, for $15,000. The credit terms were 1/10, n/30. Shelton paid the amount due on July 15.Refer to the information provided for Shelton Brothers, Inc. What effect does recording the purchase of merchandise on July 7, 2012, have on Shelton's accounting equation?

Assets and liabilities increase.

Ronn Industries reported net income of $95,000 for 2012. Early in 2013, Ronn discovered that its 2012 ending inventory was overstated by $5,000. Refer to the information provided for Ronn Industries. Determine the financial statement effects of the inventory error for 2013.

Expenses will be overstated and net income will be understated.

During a period of increasing purchase prices, which inventory costing method will yield the lowest cost of goods sold?

FIFO

Which inventory cost flow method assigns the cost of the most recent items purchased to ending inventory?

FIFO

Which inventory costing method results in the highest inventory balance during a period of rising purchase prices?

FIFO

Which inventory cost flow method assigns the average unit cost to all units whether sold or left in ending inventory?

Weighted average

Stephan, Inc. has an inventory turnover rate of 8 times.Refer to the information provided for Stephan, Inc. Calculate the company's days-in-inventory ratio.

365 / 8 = 45.625 days

How are purchase returns and purchase discounts recorded by a company using the periodic inventory system?

In contra-accounts to the Purchases account.

If a company understates its inventory, what are the effects on cost of goods sold and net income for the current year?

Cost of goods sold will be overstated and net income will be understated.

Which of the following statements regarding the application of the lower-of-cost-or-market method is true?

Generally, historical cost is lower than the market value so the lower-of-cost-or-market rule is applied. When the lower-of-cost-or-market method is used, inventories are valued at their selling price. (The lower-of-cost-or-market method is most commonly applied on a total inventory basis because it is a more conservative approach. The lower-of-cost-or-market method is an exception to the historical cost principle).

When the market value of inventory items has declined below their cost, which method would be the most appropriate in complying with GAAP?

Lower-of-cost-or-market

What effects on a retail store's accounting equation occur when the retail store pays a third-party carrier to transport inventory to its warehouse?

No net effect.

Augustus, Inc. buys designer clothing to sell in its retail stores. Since much of the merchandise comes from New York and Europe, Augustus must pay freight charges to get the merchandise shipped in. Which of the following statements must be true?

Transportation-in is included in the total cost of purchases used to determine cost of goods sold in a periodic system.

The lower-of-cost-or-market rule applies to the write-down of inventory values when market value exceeds cost. Why does this rule not allow for write-ups in inventory value?

Writing up inventory to market value would be inconsistent with the conservatism principle.