ch 6 questions

The lower-of-cost-or-net realizable value rule for inventory is an example of the application of:

a. Conservatism means that the best choice among accounting alternatives is the method that is least likely to overstate assets and net income. The other choices are incorrect because (b) historical cost means that companies value assets at the original cost, (c) materiality means that an amount is large enough to affect a decision-maker, and (d) economic entity means to keep the company's transactions separate from the transactions of other entities.

Which of the following should not be included in the physical inventory of a company?

a. Goods held on consignment should not be included because another company has title (ownership) to the goods. The other choices are incorrect because (b) goods shipped on consignment to another company and (c) goods in transit from another company shipped FOB shipping point should be included in a company's ending inventory. Choice (d) is incorrect because (a) is not included in the physical inventory.

The LIFO reserve is:

a. The LIFO reserve is the difference in ending inventory value under LIFO and FIFO. The other choices are therefore incorrect.

*16. (LO 5) Fran Company's ending inventory is understated by $4,000. The effects of this error on the current year's cost of goods sold and net income, respectively, are:

b. Because ending inventory is too low, cost of goods sold will be too high (overstated) and since cost of goods sold (an expense) is too high, net income will be too low (understated). Therefore, the other choices are incorrect.

Carlos Company had beginning inventory of $80,000, ending inventory of $110,000, cost of goods sold of $285,000, and sales of $475,000. Carlos's days in inventory is:

b. Carlos's days in inventory = 365/Inventory turnover = 365/[$285,000/($80,000 + $110,000)/2)] = 121.7 days, not (a) 73 days, (c) 102.5 days, or (d) 84.5 days.

Cost of goods available for sale consists of two elements: beginning inventory and:

b. Cost of goods available for sale consists of beginning inventory and cost of goods purchased, not (a) ending inventory or (c) cost of goods sold. Therefore, choice (d) is also incorrect.

Harold Company overstated its inventory by $15,000 at December 31, 2021. It did not correct the error in 2021 or 2022. As a result, Harold's stockholders' equity was:

b. Stockholders' equity is overstated by $15,000 at December 31, 2021, and is properly stated at December 31, 2022. An ending inventory error in one period will have an equal and opposite effect on cost of goods sold and net income in the next period; after two years, the errors have offset each other. The other choices are incorrect because stockholders' equity (a) is properly stated, not understated, at December 31, 2022; (c) is overstated, not understated, by $15,000 at December 31, 2021, and is properly stated, not understated, at December 31, 2022; and (d) is properly stated at December 31, 2022, not overstated.

As a result of a thorough physical inventory, Railway Company determined that it had inventory worth $180,000 at December 31, 2022. This count did not take into consideration the following facts. Rogers Consignment Store currently has goods worth $35,000 on its sales floor that belong to Railway but are being sold on consignment by Rogers. The selling price of these goods is $50,000. Railway purchased $13,000 of goods that were shipped on December 27, FOB destination, that will be received by Railway on January 3. Determine the correct amount of inventory that Railway should report.

b. The inventory held on consignment by Rogers should be included in Railway's inventory balance at cost ($35,000). The purchased goods of $13,000 should not be included in inventory until January 3 because the goods are shipped FOB destination. Therefore, the correct amount of inventory is $215,000 ($180,000 + $35,000), not (a) $230,000, (c) $228,000, or (d) $193,000.

In periods of rising prices, LIFO will produce:

c. In periods of rising prices, LIFO will produce lower net income than FIFO, not (a) higher than FIFO or (b) the same as FIFO. Choice (d) is incorrect because in periods of rising prices, LIFO will produce lower net income than average-cost. LIFO therefore charges the highest inventory cost against revenues in a period of rising prices.

Kam Company has the following units and costs. Units Unit Cost Inventory, Jan. 1 8,000 $11 Purchase, June 19 13,000 12 Purchase, Nov. 8 5,000 13 If 9,000 units are on hand at December 31, what is the cost of the ending inventory under FIFO?

c. Under FIFO, ending inventory will consist of 5,000 units from the Nov. 8 purchase and 4,000 units from the June 19 purchase. Therefore, ending inventory is (5,000 × $13) + (4,000 × $12) = $113,000, not (a) $99,000, (b) $108,000, or (d) $117,000.

When is a physical inventory usually taken?

d. A physical inventory is usually taken when a limited number of goods are being sold or received, and at the end of the company's fiscal year. Choice (a) is incorrect because a physical inventory count is usually taken when the company has the least, not greatest, amount of inventory. Choices (b) and (c) are correct, but (d) is the better answer.

Which of these would cause inventory turnover to increase the most?

d. Decreasing the amount of inventory on hand will cause the denominator to decrease, causing inventory turnover to increase. Increasing sales will cause the numerator of the ratio to increase (higher sales means higher COGS), thus causing inventory turnover to increase even more. The other choices are incorrect because (a) increasing the amount of inventory on hand causes the denominator of the ratio to increase while the numerator stays the same, causing inventory turnover to decrease; (b) keeping the amount of inventory on hand constant but increasing sales will cause inventory turnover to increase because the numerator of the ratio will increase (higher sales means higher COGS) while the denominator stays the same, which will result in a lesser inventory increase than decreasing amount of inventory on hand and increasing sales; and (c) keeping the amount of inventory on hand constant but decreasing sales will cause inventory turnover to decrease because the numerator of the ratio will decrease (lower sales means lower COGS) while the denominator stays the same.

In a perpetual inventory system:

d. FIFO cost of goods sold is the same under both a periodic and a perpetual inventory system. The other choices are incorrect because (a) LIFO cost of goods sold is not the same under a periodic and a perpetual inventory system; (b) average costs are based on a moving average of unit costs, not an average of unit costs; and (c) a new average is computed under the average-cost method after each purchase, not sale.

Considerations that affect the selection of an inventory costing method do not include:

d. Perpetual vs. periodic inventory system is not one of the factors that affect the selection of an inventory costing method. The other choices are incorrect because (a) tax effects, (b) balance sheet effects, and (c) income statement effects all affect the selection of an inventory costing method.

From the data in Question 4, what is the cost of the ending inventory under LIFO?

d. Under LIFO, ending inventory will consist of 8,000 units from the inventory at Jan. 1 and 1,000 units from the June 19 purchase. Therefore, ending inventory is (8,000 × $11) + (1,000 × $12) = $100,000, not (a) $113,000, (b) $108,000, or (c) $99,000.

Norton Company purchased 1,000 widgets and has 200 widgets in its ending inventory at a cost of $91 each and a net realizable value of $80 each. The ending inventory under lower-of-cost-or-net realizable value is:

d. Under the LCNRV basis, net realizable value is defined as the estimated selling price in the normal course of business, less estimated costs to complete and sell. Therefore, ending inventory would be valued at 200 widgets × $80 each = $16,000, not (a) $91,000, (b) $80,000, or (c) $18,200.

Davidson Electronics has the following: Units Unit Cost Inventory, Jan. 1 5,000 $ 8 Purchase, April 2 15,000 10 Purchase, Aug. 28 20,000 12 If Davidson has 7,000 units on hand at December 31, the cost of ending inventory under the average-cost method is:

d. Under the average-cost method, total cost of goods available for sale needs to be calculated in order to determine average cost per unit. The total cost of goods available is $430,000 = (5,000 × $8) + (15,000 × $10) + (20,000 × $12). The average cost per unit = ($430,000/40,000 total units available for sale) = $10.75. Therefore, ending inventory is ($10.75 × 7,000) = $75,250, not (a) $84,000, (b) $70,000, or (c) $56,000.