ACG 2021 Paterson FSU Ch.6 Quiz
Ownership passes to the buyer when purchased goods are received by the buyer from a public carrier if the goods are shipped
FOB destination Solution: In FOB destination, ownership transfers when the buyer receives the purchased goods from the public carrier rather than when the public carrier accepts them from the seller.
Hogan Industries had the following inventory transactions: Units Cost/unit Feb. 1 Purchase 36 $45 Mar. 14 Purchase 62 $47 May 1 Purchase 44 $49 The company sold 102 units at $63 per unit. Assuming that a periodic inventory system is used, what is the company's gross profit using LIFO? (rounded to whole dollars)
$1,544 Solution: Sales = (102 x $63) = $6,426 Cost of goods sold = (44 x $49) + [(102 − 44) x $47] = $4,882 Gross margin = $6,426 - 4,882 = $1,544
Hogan Industries had the following inventory transactions: Units Cost/unit Feb. 1 Purchase 36 $45 Mar. 14 Purchase 62 $47 May 1 Purchase 44 $49 The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company's gross profit using FIFO? (rounded to whole dollars)
$1,696 Solution: Sales = (102 units x $63 per unit) = $6,426 Cost of goods sold using FIFO = (36 x $45) + (62 x $47) + (4 x $49) = $1,620 + 2,914 + 196 = $4,730 Gross profit = Sales - Cost of goods sold = $6,426 + 4,730 = $1,696
Salt Corporation has the following inventory data: July 1 Beginning inventory 30 units at $120 5 Purchases 180 units at $112 14 Sale 120 units 21 Purchases 90 units at $115 30 Sale 84 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis?
$11,022 Solution: Goods available for sale = 30 units + 180 units + 90 units = 300 units Cost of goods sold = 120 units + 84 units = 204 units Ending inventory = 300 units - 204 units = 96 units Using FIFO & periodic, the cost of goods sold includes the oldest 204 units and ending inventory includes the 96 newest units. Ending inventory = 90 units at $115/unit + 6 units x $112/unit = $10,350 + 672 = $11,022
Cost of goods purchased is $620,000, beginning inventory is $60,000, and cost of goods sold is $550,000. How much is ending inventory?
$130,000 Solution: *Beginning inventory + Purchases - Ending inventory = Cost of goods sold* 60,000 + 620,000 - Ending inventory = 550,000 Ending inventory = 60,000 + 620,000 - 550,000 = 130,000
South Jenkins Company developed the following information about its inventories in applying the lower-of-cost-or-market (LCM) basis in valuing inventories: Category Cost Market A $52,000 $61,000 B 60,000 37,000 C 75,000 83,000\ If South Jenkins applies the LCM basis, the value of the inventory reported on the balance sheet would be
$164,000 Solution: Category Cost Market LCM A $52,000 $61,000 $52,000 B 60,000 37,000 37,000 C 75,000 83,000 75,000 Total LCM = $164,000
Howe Industries had the following inventory transactions occur during the current year: Units Cost/unit Feb. 1 Purchase 40 $41 Mar. 14 Purchase 60 $42 May 1 Purchase 55 $43 The company sold 100 units at $80 each and has a tax rate of 20%. Assuming that a periodic inventory system is used and operating expenses are $1,200, what is the company's after tax net income using LIFO? (rounded to whole dollars)
$2,036 Solution: Using periodic LIFO, cost of goods sold includes the last inventory purchased (i.e., the newest inventory).Sales revenue = 100 x $80 = $8,000 Cost of goods sold = (55 x $43) + [(100 - 55) x $42] = $2,365 + 1,890 = $4,255 Gross profit = Sales revenue - cost of goods sold = $8,000- $4,255 = $3,745 Net income before taxes = 8,000 - 4,255 - 1,200 = 2,545 Net income = 2,545 x (100% - 20%) = 2,036
Bonny's Blankets has the following inventory data: July 1 Beginning inventory 15 units at $60 5 Purchases 90 units at $56 14 Sale 60 units 21 Purchases 45 units at $58 30 Sale 42 units Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis for July?
$2,754 Solution: When using perpetual LIFO, cost of goods sold includes the last inventory acquired that was on hand at the date of sale On July 14, the company sold 60 units from the July 5 layer of inventory. On July 30, the company sold 42 units from the July 21 layer of inventory. Ending inventory = (15 x $60) + (30 x $56) + (3 x $58) = $2,754
Sweet Company has the following inventory data: July 1 Beginning inventory 50 units at $110 5 Purchases 150 units at $120 21 Purchases 95 units at $113 The company sold 174 units. Assuming that a periodic inventory system is used, what is the cost of goods sold on a LIFO basis?
$20,215 Solution: Goods available for sale is 295 units (i.e., 50 + 150 + 95 = 295 units) The company sold 174 units (i.e., given) Ending inventory = 121 units (i.e., 295 - 174 = 121 units) Using LIFO & periodic, the cost of goods sold includes the newest 174 units and ending inventory includes the 121 oldest units. Cost of goods sold = (95 x 113) + [79 x 120] = $20,215
A company uses LIFO. At the beginning of the current year its inventory was $200,000, and at the end of the current year its inventory is $250,000. At the start of the year its LIFO reserve was $30,000 and at the end of the year its LIFO reserve is $40,000. The company operates in an inflationary environment. If the company used FIFO instead of LIFO, its ending inventory would be
$290,000 Solution: The LIFO reserve is the difference between inventory using LIFO and inventory using FIFO. If the company operates in an inflationary environment (i.e., rising prices), then the LIFO reserve is a positive number, add the LIFO reserve to LIFO inventory to determine the company's FIFO inventory. FIFO ending inventory = LIFO ending inventory + LIFO reserve = $250,000 + 40,000 = $290,000
Big Time Widgets has the following inventory data: December 1 Beginning inventory of 15 units at $6.00 per unit December 7 Purchased 60 units at $6.60 per unit December 12 Sold 35 units December 20 Purchases 30 units at $7.20 per unit December 29 Sold 25 units Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis for December? What if a periodic inventory system had been used instead of perpetual?
$291 using perpetual, and $288 using periodic Solution: When using perpetual LIFO, cost of goods sold includes the last inventory acquired that was on hand at the date of sale; it does not include inventory acquired after the sale occurred. For each sale date, determine the inventory sold using LIFO for each sale of inventory; the inventory not sold during the period belongs in ending inventory. On December 12, sold 35 of the units acquired on Dec. 7 On December 29, sold 25 of the units acquired on Dec. 20 Ending inventory includes the 45 units, including 15 units of beginning inventory, 25 units of inventory acquired on Dec. 7, and 5 units of inventory acquired on Dec. 29. Ending inventory = (15 x $6.00) + (25 x $6.60) + (5 x $7.20) = 90 + 165 + 36 = $291 When using periodic LIFO, cost of goods sold includes the last inventory acquired regardless of whether it was on hand at the date of sale; it can include inventory acquired after the sale occurred. For each sale date, determine the inventory sold using LIFO for each sale of inventory; the inventory not sold during the period belongs in ending inventory. On Dec. 12, the company sold 35 units. On Dec. 29, the company sold 25 units. Cost of goods sold is based on the last 60 units of inventory acquired; ending inventory includes the oldest 45 units of inventory = (15 x $6.00) + (30 x $6.60) = 90 + 198 = $288
Irwin Industries had the following inventory transactions occur during the current year: Units Cost/unit Feb. 1 Purchase 40 $42 Mar. 14 Purchase 60 $43 May 1 Purchase 53 $44 The company sold 100 units at $75 each and has a tax rate of 25%. Assuming that a periodic inventory system is used and operating expenses are $2,000, what is the company's gross profit using LIFO? (rounded to whole dollars)
$3,147 Solution: Using periodic LIFO, cost of goods sold includes the last inventory purchased (i.e., the newest inventory). Sales revenue = 100 x $75 = $7,500 Cost of goods sold = (53 x $44) + [(100 - 53) x $43] = $2,332+ 2,021= $4,353 Gross profit = Sales revenue - cost of goods sold = $7,500 - 4,353 = $3,147
Irwin Industries had the following inventory transactions occur during the current year: Units Cost/unit Feb. 1 Purchase 40 $42 Mar. 14 Purchase 60 $43 May 1 Purchase 53 $44 The company sold 100 units at $75 each and has a tax rate of 25%. Assuming that a periodic inventory system is used and operating expenses are $2,000, what is the company's gross profit using LIFO? (rounded to whole dollars)
$3,147 Solution: Learning objective 3 Using periodic LIFO, cost of goods sold includes the last inventory purchased (i.e., the newest inventory). Sales revenue = 100 x $75 = $7,500 Cost of goods sold = (53 x $44) + [(100 - 53) x $43] = $2,332+ 2,021= $4,353 Gross profit = Sales revenue - cost of goods sold = $7,500 - 4,353 = $3,147
Irwin Industries had the following inventory transactions occur during the current year: Units Cost/unit Feb. 1 Purchase 40 $42 Mar. 14 Purchase 60 $43 May 1 Purchase 45 $44 The company sold 100 units at $80 each and has a tax rate of 25%. Assuming that a periodic inventory system is used and operating expenses are $1,000, what is the company's gross profit using LIFO? (rounded to whole dollars)
$3,655 Solution: *Using periodic LIFO, cost of goods sold includes the last inventory purchased (i.e., the newest inventory).* Sales revenue = 100 x $80 = $8,000 Cost of goods sold = (45 x $44) + [(100 - 45) x $43] = $1,980+ 2,365= $4,345 *Gross profit = Sales revenue - cost of goods sold* = $8,000 - 4,345 = $3,655
At December 31, Moore Company's inventory records indicated a balance of $360,000. Upon further investigation it was determined that this amount included the following: (1) $56,000 in inventory purchases made by Moore shipped from the seller December 28 terms FOB shipping point, but not due to be received until January 2. (2) $24,000 in inventory purchases made by Moore shipped from the seller December 28 terms FOB destination, but not due to be received until January 3. (3) $8,000 in goods sold by Moore with terms FOB destination on December 28. The goods are not expected to reach their destination until January 4. (4) $9,000 in goods sold by Moore with terms FOB shipping point on December 28. The goods are not expected to reach their destination until January 5. (5) $13,000 of goods received on consignment from Dollywood Company. What is Moore's correct ending inventory balance at December 31?
$314,000 Solution: *Do not include the following in inventory:* --*FOB destination purchases not yet received* (i.e., $24,000) --*FOB shipping point goods sold and shipped* (i.e., $9,000) --*Goods held on consignment* (i.e., $13,000). Ending inventory = $360,000 - 24,000 - 9,000 - 13,000 = $314,000
A company uses LIFO. At the beginning of the current year its inventory was $300,000, and at the end of the current year its inventory is $340,000. At the start of the year its LIFO reserve was $10,000 and at the end of the year its LIFO reserve is $15,000. The company operates in an inflationary environment. If the company used FIFO instead of LIFO, its ending inventory would be
$355,000 Solution: The LIFO reserve is the difference between inventory using LIFO and inventory using FIFO. If the company operates in an inflationary environment (i.e., rising prices), then the LIFO reserve is a positive number, add the LIFO reserve to LIFO inventory to determine the company's FIFO inventory. FIFO ending inventory = LIFO ending inventory + LIFO reserve = $340,000 + 15,000 = $355,000
At December 31, Moore Company's inventory records indicated a balance of $400,000. Upon further investigation it was determined that this amount included the following: (1) $56,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB shipping point, but not due to be received until January 3. (2) $23,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB destination, but not due to be received until January 2. (3) $6,000 in goods sold by Moore with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6. (4) $8,000 in goods sold by Moore with terms FOB shipping point on December 27. The goods are not expected to reach their destination until January 4. (5) $13,000 of goods received on consignment from Dollywood Company. What is Moore's correct ending inventory balance at December 31?
$356,000 Solution: *Do not include the following in inventory:* --FOB destination purchases not yet received (i.e., $23,000) --FOB shipping point goods sold and shipped (i.e., $8,000) --Goods held on consignment (i.e., $13,000) Ending inventory = $400,000 - 23,000 - 8,000 - 13,000 = $356,000
At December 31, Moore Company's inventory records indicated a balance of $400,000. Upon further investigation it was determined that this amount included the following: (1) $56,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB shipping point, but not due to be received until January 3. (2) $23,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB destination, but not due to be received until January 2. (3) $6,000 in goods sold by Moore with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6. (4) $8,000 in goods sold by Moore with terms FOB shipping point on December 27. The goods are not expected to reach their destination until January 4. (5) $13,000 of goods received on consignment from Dollywood Company. What is Moore's correct ending inventory balance at December 31?
$356,000 Solution: Do not include the following in inventory: --FOB destination purchases not yet received (i.e., $23,000) --FOB shipping point goods sold and shipped (i.e., $8,000) --Goods held on consignment (i.e., $13,000) Ending inventory = $400,000 - 23,000 - 8,000 - 13,000 = $356,000
At December 31, Moore Company's inventory records indicated a balance of $420,000. Upon further investigation it was determined that this amount included the following: (1) $54,000 in inventory purchases made by Moore shipped from the seller December 29 terms FOB shipping point, but not due to be received until January 2. (2) $25,000 in inventory purchases made by Moore shipped from the seller December 29 terms FOB destination, but not due to be received until January 2. (3) $6,000 in goods sold by Moore with terms FOB destination on December 29. The goods are not expected to reach their destination until January 5. (4) $7,000 in goods sold by Moore with terms FOB shipping point on December 29. The goods are not expected to reach their destination until January 4. (5) $15,000 of goods received on consignment from Dollywood Company. What is Moore's correct ending inventory balance at December 31?
$373,000 Solution: *Do not include the following in inventory:* --FOB destination purchases not yet received (i.e., $25,000) --FOB shipping point goods sold and shipped (i.e., $7,000) --Goods held on consignment (i.e., $15,000). Ending inventory = $420,000 - 25,000 - 7,000 - 15,000 = $373,000
Widget Company Blankets has the following inventory data: July 1 Beginning inventory 15 units at $60 5 Purchases 90 units at $62 14 Sale 40 units 21 Purchases 45 units at $63 30 Sale 30 units Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis for July?
$4,945 Solution: When using perpetual LIFO, cost of goods sold includes the last inventory acquired that was on hand at the date of sale On July 14, the company sold 40 units from the July 5 layer of inventory. On July 30, the company sold 30 units from the July 21 layer of inventory. Ending inventory = (15 x $60) + (50 x $62) + (15 x $63) = $4,945
Big Time Widgets has the following inventory data: December 1 Beginning inventory of 15 units at $6.00 per unit December 7 Purchased 60 units at $6.60 per unit December 12 Sold 40 units December 20 Purchased 30 units at $7.20 per unit December 29 Sold 20 units Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for December? What if a periodic inventory system had been used instead of perpetual?
$408 using perpetual, and $414 using periodic Solution: When using perpetual LIFO, cost of goods sold includes the last inventory acquired that was on hand at the date of sale; it does not include inventory acquired after the sale occurred. On Dec. 12, the company sold 40 units from the Dec. 7 layer of inventory. On Dec. 29, the company sold 20 units from the Dec. 20 layer of inventory. Cost of goods sold = (40 x $6.60) + (20 x $7.20) = 264 + 144 = $408 When using periodic LIFO, cost of goods sold includes the last inventory acquired regardless of whether it was on hand at the date of sale; it can include inventory acquired after the sale occurred. On Dec. 12, the company sold 40 units. On Dec. 29, the company sold 20 units. Cost of goods sold is based on the last 60 units of inventory acquired = (30 x $7.20) + (30 x $6.60) = 216 + 198 = $414
Big Time Widgets has the following inventory data: December 1 Beginning inventory of 15 units at $6.00 per unit December 7 Purchased 60 units at $6.60 per unit December 12 Sold 40 units December 20 Purchased 30 units at $7.20 per unit December 29 Sold 20 units Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for December? What if a periodic inventory system had been used instead of perpetual?
$408 using perpetual, and $414 using periodic Solution: When using perpetual LIFO, cost of goods sold includes the last inventory acquired that was on hand at the date of sale; it does not include inventory acquired after the sale occurred. On Dec. 12, the company sold 40 units from the Dec. 7 layer of inventory. On Dec. 29, the company sold 20 units from the Dec. 20 layer of inventory. Cost of goods sold = (40 x $6.60) + (20 x $7.20) = 264 + 144 = $408 When using periodic LIFO, cost of goods sold includes the last inventory acquired regardless of whether it was on hand at the date of sale; it can include inventory acquired after the sale occurred. On Dec. 12, the company sold 40 units. On Dec. 29, the company sold 20 units. Cost of goods sold is based on the last 60 units of inventory acquired = (30 x $7.20) + (30 x $6.60) = 216 + 198 = $414
Classic Floors has the following inventory data: July 1 Beginning inventory 15 units at $6.00 5 Purchases 60 units at $6.60 14 Sale 40 units 21 Purchases 30 units at $7.20 30 Sale 28 units Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for July?
$465.60 Solution: When using perpetual LIFO, cost of goods sold includes the last inventory acquired that was on hand at the date of sale On July 14, the company sold 40 units from the July 5 layer of inventory. On July 30, the company sold 28 units from the July 21 layer of inventory. Cost of goods sold = (40 x $6.60) + (28 x $7.20) = 264 + 201.60 = $465.60
Spice Incorporated has the following inventory data: Nov. 1 Inventory 90 units for $5.00 per unit 8 Purchase 40 units for $5.10 per unit 17 Purchase 30 units for $5.30 per unit 25 Purchase 80 units for $5.50 per unit A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under LIFO and a periodic inventory system is
$501 Solution: Goods available for sale is 245 units (i.e., 90 + 40 + 30 + 80 = 240 units) Ending inventory = 100 units *Cost of goods sold = goods available for sale - ending inventory* = 240 units - 100 units = 140 units *Using LIFO & periodic, the cost of goods sold includes the newest* 140 *units and ending inventory includes the *100 *oldest units.* Ending inventory = (90 x $5.00) + [10 x $5.10] = $501
Spice Incorporated has the following inventory data: Nov. 1 Inventory 30 units for $5.20 per unit 8 Purchase 150 units for $5.00 per unit 17 Purchase 70 units for $5.40 per unit 25 Purchase 50 units for $5.10 per unit A physical count of merchandise inventory on November 30 reveals that there are 105 units on hand. Ending inventory under LIFO and a periodic inventory system is
$531 Solution: Goods available for sale is 245 units (i.e., 30 + 150 + 70 + 50 = 300 units) Ending inventory = 105 units *Cost of goods sold = goods available for sale - ending inventory* = 300 units - 105 units = 195 units Using LIFO & periodic, the cost of goods sold includes the newest 195 units and ending inventory includes the 105 oldest units. Ending inventory = (30 x $5.20) + [75 x $5.00] = $531
Pepper Company has the following inventory data: July 1 Beginning inventory 20 units at $20 $ 400 7 Purchases 70 units at $21 1,470 22 Purchases 10 units at $22 220 ________________ $2,090 A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the FIFO inventory method and a periodic inventory system, the amount allocated to ending inventory for July is
$535 Solution: Goods available for sale is $2,090 (100 units) Ending inventory = 25 units *Cost of goods sold = goods available for sale - ending inventory* = 100 units - 25 units = 75 units Using FIFO & periodic, the cost of goods sold includes the oldest 68 units and ending inventory includes the 32 newest units. Ending inventory = 10 units at $22/unit + (25 units - 10 units) x $21/unit = $220 + 315 = $535
At December 31, Sunrise Company's inventory records indicated a balance of $654,000. Upon further investigation it was determined that this amount included the following: (1) $68,000 of inventory sold and shipped by Sunrise on December 28 under the terms FOB destination, and this inventory was received by the buyer on January 6. (2) $98,000 of inventory purchased by Sunrise under the terms FOB destination, and this $98,000 of inventory did not arrive until January 2. (3) $4,000 of inventory held by Sunrise on consignment from another company. (4) $34,000 of inventory consigned to a third-party consignor that it continues to hold at the end of the year. What is Sunrise's correct ending inventory balance at December 31?
$552,000 Solution: The inventory balance of $654,000 should not include the $98,000 since ownership passes at destination on January 2. It should include the $68,000 because ownership does not pass at the shipping point on December 28. It should not include the $4,000 on consignment because these goods are not owned by Sunrise. It should include the inventory it consigned to a third-party, and it already does include it so no adjustment is necessary. The corrected inventory balance = $654,000 - $98,000 - $4,000 = $552,000.
Cost of goods purchased is $500,000, beginning inventory is $20,000, and cost of goods sold is $460,000. How much is ending inventory?
$60,000 Solution: *Beginning inventory + Purchases - Ending inventory = Cost of goods sold* 20,000 + 500,000 - Ending inventory = 560,000 Ending inventory = 20,000 + 500,000 - 460,000 = 60,000
Ray's Sounds has accumulated the following cost and market data on March 31: Cost Data Market Data iPods $22,000 $19,600 Cell phones $17,000 $18,500 DVDs $26,500 $28,600 Using the lower-of-cost-or-market, how much is the value of the ending inventory?
$63,100 Solution: Cost is compared to market for each inventory category as follows: iPods $19,600 + cell phones $17,000 + DVDs $26,500 = $63,100
At December 31, Sunrise Company's inventory records indicated a balance of $752,000. Upon further investigation it was determined that this amount included the following: (1) $112,000 of inventory purchased by Sunrise under the terms FOB destination, and this inventory did not arrive until January 2 (2) $74,000 of inventory sold and shipped by Sunrise on December 27 under the terms FOB destination, and this inventory was received by the buyer on January 6. (3) $6,000 of inventory held by Sunrise on consignment from another company. (4) $10,000 of inventory consigned to a third-party consignor that it continues to hold at the end of the year. What is Sunrise's correct ending inventory balance at December 31?
$634,000 Solution: The inventory balance of $752,000 should not include the $112,000 since ownership passes at destination on January 2. It should include the $74,000 because ownership does not pass at the shipping point on December 27. It should not include the $6,000 on consignment because these goods are not owned by Sunrise. It should include the inventory it consigned to a third-party, and it already does include it so no adjustment is necessary. The corrected inventory balance = $752,000 - $112,000 - $6,000 = $634,000.
Pepper Inc. has the following inventory data: July 1 Beginning inventory 20 units at $19 $ 380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $22 220 _____________________ $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the FIFO inventory method and a periodic inventory system, the amount allocated to ending inventory for July is
$660 Solution: Goods available for sale is $2,000 (100 units) Ending inventory = 32 units Cost of goods sold = goods available for sale - ending inventory = 100 units - 32 units = 68 units Using FIFO & periodic, the cost of goods sold includes the oldest 75 units and ending inventory includes the 25 newest units. Ending inventory = 10 units at $22/unit + (32 units - 10 units) x $20/unit = $220 + 440 = $660
On December 31, Nelson Corporation has three categories of inventory in stock: Category Cost Market value Tin $400 $350 Stainless steel 200 150 Aluminum 300 500 Apply the lower of cost or market rule to determine the company's ending inventory.
$800 Solution: LCM for Tin = $350 LCM for Stainless steel = $150 LCM for Aluminum = $300 Total LCM = $800
Sweet Company uses a periodic inventory system. Details for the inventory account for the month of January are as follows: Dates Units Per unit price Total Balance, January 1 200 $5.00 $1,000 Purchase, January 15 100 5.30 530 Purchase, January 28 100 5.50 550 An end of the month there are 160 units unsold. If the company uses LIFO, what is the value of the ending inventory?
$800 Solution: Goods available for sale is $2,080 ($1,000 + 530 + 550 = $2,080) Ending inventory = 160 units *Cost of goods sold = goods available for sale - ending inventory* = 400 units - 160 units = 240 units *Using LIFO & periodic, the cost of goods sold includes the newest* 240 *units and ending inventory includes the* 160 *oldest units.* Ending inventory = 160 units x $5 per unit = $800
Freehan Company's accounting records has the following information about its inventory: Units Unit Cost Inventory, Jan. 1 6,000 $ 8 Purchase, April 2 18,000 10 Purchase, Aug. 28 16,000 12 If the company has 8,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?
$84,000 Solution: [Average periodic ending inventory] Ending inventory cost equals the average cost per unit times the number of units of inventory in ending inventory. The average cost per unit equals the total cost of all inventory amounts divided by the number of inventory units. Average cost per unit = [(6,000 x $8) + (18,000 x $10) + (16,000 x $12)] ÷ (6,000 + 18,000 + 16,000) = $420,000 ÷ 40,000 units = $10.5 per unit. Ending inventory = $10.5 x 8,000 units = $84,000.
Salt Company has the following inventory data: Nov. 1 Inventory 30 units @ $4.00 each 8 Purchase 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each 25 Purchase 90 units @ $4.40 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under FIFO and a periodic inventory system is
$846 Solution: Goods available for sale is 300 units Ending inventory = 100 units Cost of goods sold = goods available for sale - ending inventory = 300 units - 100 units = 200 units Using FIFO & periodic, the cost of goods sold includes the oldest 200 units and ending inventory includes the 100 newest units. Cost of goods sold = 30 units at $4/unit + 120 units x $4.30/unit + 50 units x $4.20 = $120 + 516 + 210 = $846
Cost of goods purchased is $620,000, ending inventory is $60,000, and cost of goods sold is $650,000. How much is beginning inventory?
$90,000 Solution: *Beginning inventory + Purchases - Ending inventory = Cost of goods sold* Beginning inventory + 620,000 - 60,000 = 650,000 Beginning inventory = 650,000 - 620,000 + 60,000 = 90,000
Freehan Company's accounting records has the following information about its inventory: Units Unit Cost Inventory, Jan. 1 8,000 $ 8 Purchase, April 2 17,000 10 Purchase, Aug. 28 15,000 12 If the company has 9,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?
$93,150 Solution: [Average periodic ending inventory] *Ending inventory cost equals the average cost per unit times the number of units of inventory in ending inventory. The average cost per unit equals the total cost of all inventory amounts divided by the number of inventory units. * Average cost per unit = [(8,000 x $8) + (17,000 x $10) + (15,000 x $12)] ÷ (8,000 + 17,000 + 15,000) = $414,000 ÷ 40,000 units = $10.35 per unit. Ending inventory = $10.35 x 9,000 units = $93,150.
A company uses the periodic inventory method. Beginning inventory is understated by $10,000 because the prior's year's ending inventory was understated by $10,000. The company's ending inventory for this period is correct. The current period's gross profit is _________________ and this year's ending retained earnings is ___________________.
(i) overstated; (ii) neither overstated nor understated Solution: In the periodic inventory system, cost of goods sold is computed at the end of the period using a formula that includes ending inventory which is determined by taking a physical inventory. Sometimes, the ending inventory is mis-counted (i.e., understated or overstated). An error in ending inventory results in an error in cost of goods sold in the opposite direction. For example, understating ending inventory overstates cost of goods sold. Moreover, an error in cost of goods sold causes an error in gross profit, net income, retained earnings, and stockholders' equity. For example, overstating cost of goods sold understates gross profit and retained earnings.
The following information was available for Bowyer Company: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; and sales $1,200,000. The company's days in inventory is
33.2 days *Inventory turnover = Cost of goods sold/average inventory* Inventory turnover = $880,000/[($90,000 + $70,000)/2] = 11 *Days in inventory = 365/inventory turnover* Days in inventory = 365/11 = 33.2
Barnett Company recorded the following: 2017 2016 Ending inventory $32,650 $30,490 Cost of goods sold 255,250 261,300 Sales revenue 420,000 480,000 What is the company's days in inventory for 2017? (rounded)
45.1 days Solution: *Inventory turnover = Cost of goods sold/average inventory* Inventory turnover = $255,250/[($32,650 + $30,490)/2] = 8.085 *Days in inventory = 365/inventory turnover* Days inventory = 365/8.085 = 45.1441
The following information was available for Camaro Company: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $560,000; and sales $800,000. The company's inventory turnover is
5.6 times Solution: Average inventory = (80,000 + 120,000)/2 = 100,000 *Inventory turnover = Cost of goods sold/average inventory* Inventory turnover = 560,000/100,000 = 5.6
The following information came from the income statement of the Watson Company: sales revenue $2,400,000; beginning inventory $150,000; ending inventory $250,000; and gross profit $1,000,000. Inventory turnover is 7 times per year. What is Watson's days in inventory?
52.1 days Solution: Dividing 365 days of the year by the inventory turnover of 7 results in an average of 52.1 days in inventory.
The following information came from the income statement of the Wilkens Company: sales revenue $1,800,000; beginning inventory $160,000; ending inventory $240,000; and gross profit $600,000. What is Wilkens' inventory turnover ratio?
6.0 times Solution: Cost of goods sold is the difference between sales revenue and gross profit: $1,800,000 - $600,000 = $1,200,000. Inventory turnover ratio = Cost of goods sold divided by average inventory: $1,200,000/[($160,000 + $240,000)/2] = 6.0.
Which one of the following statements is true? All of these A merchandising company will normally have raw materials as an inventory account classification. A manufacturing company will normally have raw materials, work in process, and finished goods as inventory account classifications. A service company will normally have work in process as an inventory account classification. None of these
A manufacturing company will normally have raw materials as an inventory account classification. Solution: *A manufacturing operation utilizes raw materials, work in process, and finished goods as inventory account classifications. A merchandising company buys goods that are ready to sell and does not manufacture them.*
What accounting concept is employed when using the lower-of-cost-or-market valuation?
Conservatism Solution: Conservatism dictates the lower-of-cost-or-market inventory valuation. Inventory that has not yet sold has not reached revenue recognition. In simple terms, conservatism means that accounting rules are designed to report assets, income, etc. on a conservative basis—that financial reports should not overstate a company assets, profits, etc. The lower-of-cost-or-market principle avoids overstating ending inventory on a company's balance sheet.
Ownership passes to the buyer when the public carrier accepts the goods if the goods are shipped
FOB shipping point Solution: *Under FOB shipping point, ownership transfers when the carrier accepts the goods from the seller.*
Which of the following should NOT be included in the physical inventory of a company? All of the answer choices are correct. Goods held on consignment from another company Goods in transit from another company shipped FOB shipping point Goods shipped on consignment to another company None of these choices is correct.
Goods held on consignment from another company Solution: Goods shipped on consignment to another company remain owned. Goods held on consignment are owned by company that shipped them. Inventory should include all goods owned by the company regardless of whether the company holds physical possession or not. Goods in transit from another company shipped FOB shipping point should be included in the physical inventory of the firm to whom the goods are being shipped because title (i.e., legal ownership) passes when the goods leave the seller's place of business.
Which of these transactions would cause the days in inventory ratio to increase the most? These affect the inventory ratio equally Decreasing the amount of inventory on hand and increasing sales Increasing the amount of inventory on hand and increasing sales Decreasing the amount of inventory on hand and decreasing sales Increasing the amount of inventory on hand and decreasing sales
Increasing the amount of inventory on hand and decreasing sales Solution: Days in inventory = 365 days ÷ inventory turnover (where inventory turnover = cost of goods sold ÷ average inventory). Similarly: Days in inventory = 365 days ÷ (cost of goods sold ÷ average inventory). Decreasing sales will decrease cost of goods sold which increases the days in inventory ratio. A corresponding increase in inventory decreases the inventory turnover ratio. Thus, both a decrease of sales (and cost of goods sold) and an increase in inventory will cause the inventory turnover to increase.
Which of the following is true of the FIFO inventory method?
It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold.
Which of the following would most likely employ the specific identification method of inventory costing? All of these are equally likely to use specific identification Gasoline station Jewelry store Hardware store Grocery store
Jewelry store Solution: Jewelry stores use the specific identification method because of the high value and uniqueness of many of the inventory items. The average item in the grocery store is low in value and generic in nature. As such, the specific identification method would not be desirable. While numerous items within the store may warrant the specific identification method, the vast majority of items would not warrant the cost of implementing the specific identification method. A gasoline station would be unable to utilize the specific identification method for its fuel sales from a single holding tank. Its product is generic and of relatively low value.
A company started business in August and it made the following purchases of inventory: (1) on August 1, it purchased 100 units for $1,500; (2) on August 12, it purchased 100 units for $1,550; and (3) on August 24, it purchased 100 units for $1,575. A physical count of the inventory on August 31 reveals that there are 500 units on hand. What inventory method produces the lowest gross profit for August?
LIFO method Solution: On August 1, it spent $15 per unit; on Aug. 12, it spent $15.50 per unit; and on Aug. 24, it spent $15.750 per unit. This company is experiencing inflation. Low gross profit (i.e., low gross margin) occurs with higher cost of goods sold. During periods of inflation, the inventory costing method that considers the most expensive inventory to be sold is LIFO (i.e., last-in, first-out). The LIFO method will produce the lowest gross profit because LIFO results in the highest cost goods sold in periods of rising prices. The choice of a periodic versus perpetual inventory system does not change whether LIFO or FIFO produces the highest or lowest cost of goods sold or gross profit.
In a period of inflation, the costs allocated to ending inventory and reported on the balance sheet will likely understate their current cost by the largest amount if the
LIFO method is used Solution: In order for ending inventory to closely correspond to the current cost of inventory, ending inventory should include the most recently purchased inventory. First-in, first-out (FIFO) uses the oldest inventory to compute cost of goods sold and uses the newest inventory to compute ending inventory. In contrast, last-in, first-out (LIFO) uses the newest inventory to compute cost of goods sold leaving the oldest inventory to compute ending inventory.
Which of the following statements is true? All of these Specific identification method inventory valuation requires the physical flow of goods to be representative of the cost flow. LIFO inventory valuation requires the physical flow of goods to be representative of the cost flow. None of these FIFO inventory valuation requires the physical flow of goods to be representative of the cost flow.
Specific identification method inventory valuation requires the physical flow of goods to be representative of the cost flow. Solution: The specific identification method has this constraint. There is no requirement for the physical flow of goods under the LIFO or FIFO inventory valuation concepts to match cost flow.
What is the LIFO reserve?
The difference between inventory reported using LIFO and inventory using FIFO
Which situation requires using the lower-of-cost-or-market basis to valuing inventory instead of the cost basis?
a decline in the current replacement cost of inventory Solution: To comply with the concepts of conservatism (e.g., accounting rules should avoid overstating assets, profits, etc.), inventory should be valued at the lower-of-cost-or-market rather than at its cost. When there is a decline in the current replacement cost of inventory and a company had paid more for inventory than similar inventory's current replacement cost, the company's inventory account is considered to be overstated. The amount recorded as inventory should be reduced or lowered from cost to "market". Be careful because "market value" is not the company's sales price to its customers. Rather, "market value" is the current replacement cost or how much the company can buy inventory from its suppliers. For example, a company might purchase $100 of inventory and record it at cost of $100. The company might plan on selling the inventory for $150. Before selling that inventory, the current replacement cost might decline to $95 so the company records a $5 decline in inventory. However, the company might be able to still sell at $150 or perhaps approximately $145. Conservatism simply means that accounting rules are designed to report assets, income, etc. on a conservative basis—that is let's avoid overstating how much a company has as assets, profits, etc. Similarly, let's avoid overstating its inventory and the lower-of-cost-or-market helps us avoid overstating the value of inventory reported on a company's balance sheet.
The situation that requires a departure from the cost basis of accounting to the lower of cost or market basis in valuing inventory is necessitated by
a decline in the value of the inventory Solution: To comply with the concepts of conservatism (e.g., accounting rules should avoid overstating assets, profits, etc.), inventory should be valued at the lower-of-cost-or-market rather than at its cost. When there is a decline in the current replacement cost of inventory and a company had paid more for inventory than similar inventory's current replacement cost, the company's inventory account is considered to be overstated. The amount recorded as inventory should be reduced or lowered from cost to "market". Be careful because "market value" is not the company's sales price to its customers. Rather, "market value" is the current replacement cost or how much the company can buy inventory from its suppliers. For example, a company might purchase $100 of inventory and record it at cost of $100. The company might plan on selling the inventory for $150. Before selling that inventory, the current replacement cost might decline to $95 so the company records a $5 decline in inventory. However, the company might be able to still sell at $150 or perhaps approximately $145. Conservatism simply means that accounting rules are designed to report assets, income, etc. on a conservative basis—that is let's avoid overstating how much a company has as assets, profits, etc. Similarly, let's avoid overstating its inventory and the lower-of-cost-or-market helps us avoid overstating the value of inventory reported on a company's balance sheet.
When is a physical inventory is taken, what is included? none of these all of these finished goods inventory raw materials work in progress
all of these Solution: Taking a physical inventory involves counting, weighing, or measuring each kind of inventory on hand. The types of inventory include finished goods inventory, work in process, and raw materials. A physical inventory count is usually taken at the end of the company's fiscal year as a step in the preparation of the company's financial statements. For example, every company must report its end-of-period inventory on its balance sheet.
Inventory is accounted for at cost. After a company has determined the quantity of units of inventory, it applies unit costs to the quantities to determine the total cost of inventory and the cost of goods sold. Which of the following statements is not a method for computing the cost of inventory? average-cost specific identification allowance estimation first-in, first-out last-in, first-out
allowance estimation Solution: A company's management decides which method of computing the cost of inventory. Choices of method include (1) specific identification, (2) first-in, first-out, (3) last-in, first-out, and (4) average cost methods.
A company uses the periodic inventory method. An understatement of ending inventory in one period results in
an overstatement of net income of the next period. Solution: In the periodic inventory system, cost of goods sold is computed at the end of the period (rather than tracked day-by-day as done in a perpetual inventory system). The periodic inventory system uses a formula to compute cost of goods sold: Beginning inventory plus purchased minus ending inventory = cost of goods sold The accuracy of cost of goods sold depends on the accuracy of the beginning and ending physical counts of inventory. Sometimes, a portion of inventory is not counted and inventory is understated. At other times, some inventory may be counted twice resulted in inventory being overstated. Regardless of over- versus under-stating inventory, errors in the amount of inventory results in errors in cost of goods sold. For example, an understatement of ending inventory becomes an understatement of beginning inventory in the next period, and an understatement of beginning inventory in the next period adds too little when computing cost of goods sold, and cost of goods sold of next year is understated. The next effect is that too little cost of goods sold is subtracted from revenue to compute gross profit making gross profit of next year overstated (and making net income of next year overstated). However, Retained Earnings at the end of next year has the correct balance because it was understated in the current year due to understated ending inventory in the current year, and too much net income was closed to retained earnings in the next year. Recall that an error in ending inventory in one year will have a reverse effect on net income in the next accounting period.
A company uses the periodic inventory method and the beginning inventory is overstated by $4,000 because the ending inventory in the previous period was overstated by $4,000; the ending inventory for this period is correct. The amounts reflected in the current end of the period balance sheet are
assets are correct and stockholders' equity is correct. Solution: In the periodic inventory system, cost of goods sold is computed at the end of the period (rather than tracked day-by-day as done in a perpetual inventory system). The periodic inventory system uses a formula to compute cost of goods sold: Beginning inventory plus purchased minus ending inventory = cost of goods sold The accuracy of cost of goods sold depends on the accuracy of the beginning and ending physical counts of inventory. Sometimes, a portion of inventory is not counted and inventory is understated. At other times, some inventory may be counted twice resulted in inventory being overstated. Regardless of over- versus under-stating inventory, errors in the amount of inventory results in errors in cost of goods sold. For example, an overstatement of beginning inventory adds too much when computing cost of goods sold, and cost of goods sold becomes overstated. The next effect is that too much cost of goods sold is subtracted from revenue to compute gross profit making gross profit understated (and making net income understated). However, Retained Earnings has the correct balance because it was overstated in the prior year due to overstated ending inventory in the prior year and this year too little income was closed to retained earnings. Recall that an error in ending inventory in one year will have a reverse effect on net income in the next accounting period.
The lower of cost or market basis of valuing inventories is an example of
conservatism Solution: To comply with the concepts of conservatism (e.g., accounting rules should avoid overstating assets, profits, etc.), inventory should be valued at the lower-of-cost-or-market rather than at its cost. When there is a decline in the current replacement cost of inventory and a company had paid more for inventory than similar inventory's current replacement cost, the company's inventory account is considered to be overstated. The amount recorded as inventory should be reduced or lowered from cost to "market". Be careful because "market value" is not the company's sales price to its customers. Rather, "market value" is the current replacement cost or how much the company can buy inventory from its suppliers. For example, a company might purchase $100 of inventory and record it at cost of $100. The company might plan on selling the inventory for $150. Before selling that inventory, the current replacement cost might decline to $95 so the company records a $5 decline in inventory. However, the company might be able to still sell at $150 or perhaps approximately $145. Conservatism simply means that accounting rules are designed to report assets, income, etc. on a conservative basis—that is let's avoid overstating how much a company has as assets, profits, etc. Similarly, let's avoid overstating its inventory and the lower-of-cost-or-market helps us avoid overstating the value of inventory reported on a company's balance sheet.
Inventory costing methods place primary reliance on assumptions about the flow of
costs Solution: The inventory costing methods, such as first-in first-out, place a primary reliance on assumptions about the costs of inventory to cost of goods sold and ending inventory.
A low number of days in inventory may indicate
there is a relatively low chance of inventory becoming obsolete before it can be sold. Solution Inventory turnover equals cost of goods sold divided by average inventory. Days in inventory equals 365 divided by the inventory turnover. A low number of days in inventory indicates that inventory is held by the company fewer days, on average. A low days in inventory suggests there is a (i) relatively high chance that sales opportunities may be lost because of inventory shortages, (ii) a relatively ow chance of inventory becoming obsolete before it can be sold, and (iii) the company has a relatively small amount of funds tied up in inventory.
