4-7 (Ch.6 Random)

When the value of inventory is lower than its cost you must

"write down" inventory to its net realizable value in the period in which the price decline occurs.

To determine inventory quantities, manufacturers...

(1) take a physical inventory of goods on hand and (2) determine the ownership of goods in transit or on consignment.

Cost of Goods Sold Equation

(Beginning Inventory + Purchases) − Ending Inventory

Cost of goods available for sale includes

(a) cost of beginning inventory and (b) cost of goods purchased.

Compute ending inventory using FIFO and LIFO. (LO 2) In its first month of operations, Moncada Company made three purchases of merchandise in the following sequence: (1) 200 units at $7, (2) 300 units at $8, and (3) 150 units at $ 9. Assuming there are 220 units on hand, compute the cost of the ending inventory under the (a) FIFO method and (b) LIFO method. Moncada use a periodic inventory system.

(a)The ending inventory under FIFO consists of (150 units at $9) + (70 units at $8) for a total allocation of $1,910 ($1,350 + $560). (b)The ending inventory under LIFO consists of (200 units at $7) + (20 units at $8) for a total allocation of $1,560 ($1,400 + $160).

High inventory level considerations (1-3)

1- Storage costs 2- Interest cost on funds tied up in inventory 3- Costs associated with the obsolescence of technical goods or shifts in fashion.

Manufacturing Company has _____ classifications on the balance sheet: ______, _______, and ________

3 / Raw Materials, Work in Process, Finished Goods

Days in Inventory Equation

365 days / Inventory Turnover

The LIFO reserve is: (a)the difference between the value of the inventory under LIFO and the value under FIFO. (b)an amount used to adjust inventory to the lower-of-cost-or-net realizable value. (c)the difference between the value of the inventory under LIFO and the value under average-cost. (d)an amount used to adjust inventory to historical cost.

A

The cost flow method that often parallels the actual physical flow of merchandise is the: a. F I F O method. b. L I F O method. c. average cost method. d. gross profit method.

A

The lower-of-cost-or-net realizable value rule for inventory is an example of the application of: (a)the conservatism convention. (b)the historical cost principle. (c)the materiality concept. (d)the economic entity assumption.

A

Which of the following should not be included in the inventory of a company using IFRS? (a)Goods held on consignment from another company. (b)Goods shipped on consignment to another company. (c)Goods in transit from another company shipped FOB shipping point. (d)None of the above.

A

Which of the following should not be included in the physical inventory of a company? (a)Goods held on consignment from another company. (b)Goods shipped on consignment to another company. (c)Goods in transit from another company shipped FOB shipping point. (d)All of the above should be included.

A

_________or________ in inventory suggests that management is reducing the amount of inventory on hand, relative to cost of goods sold.

A higher inventory turnover or lower average days

Effect on Assets, Liabilities, and SE / Ending Inventory Error - OVERSTATED

Assets Overstated, Liabilities (no effect), SE Overstated

Effect on Assets, Liabilities, and SE / Ending Inventory Error - UNDERSTATED

Assets Understated, Liabilities (no effect), SE Understated

Allocates cost of goods available for sale on the basis of weighted-average unit cost incurred.

Average-Cost Flow Assumption

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. (a)$230,000. (b)$215,000. (c)$228,000. (d)$193,000.

B

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: (a)73 days. (b)121.7 days. (c)102.5 days. (d)84.5 days.

B

Cost of goods available for sale consists of two elements: beginning inventory and: (a)ending inventory. (b)cost of goods purchased. (c)cost of goods sold. (d)All of the answer choices are correct.

B

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: (a)understated and overstated. (b)overstated and understated. (c)overstated and overstated. (d)understated and understated.

B

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: (a)overstated at December 31, 2021, and understated at December 31, 2022. (b)overstated at December 31, 2021, and properly stated at December 31, 2022. (c)understated at December 31, 2021, and understated at December 31, 2022. (d)overstated at December 31, 2021, and overstated at December 31, 2022.

B

In a period of inflation, the cost flow method that results in the lowest income taxes is the: a. FIFO method. b. LIFO method. c. average cost method. d. gross profit method.

B

Understating ending inventory will overstate: a. assets. b. cost of goods sold. c. net income. d. owner's equity.

B

Which method of inventory costing is prohibited under IFRS? (a)Specific identification. (b)LIFO. (c)FIFO. (d)Average-cost.

B

In periods of falling prices LIFO produces a higher net income because

Because lower unit costs of the first goods purchased are matched against revenue.

Cost of Goods Sold Equation

Beginning Inventory + Cost of Goods Purchased − Ending Inventory

In periods of rising prices, LIFO will produce: (a)higher net income than FIFO. (b)the same net income as FIFO. (c)lower net income than FIFO. (d)higher net income than average-cost.

C

Kam Company has the following units and costs. UnitsUnit CostInventory, Jan. 1 8,000$11Purchase, June 1913,000 12Purchase, 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? (a)$99,000. (b)$108,000. (c)$113,000. (d)$117,000.

C

Effect on Cost of Goods Sold and Net income / Inventory Error - Beginning inventory overstated

COGS, Overstated / Net Income, Understated

Effect on Cost of Goods Sold and Net income / Inventory Error - Ending inventory understated

COGS, Overstated / Net Income, Understated

Effect on Cost of Goods Sold and Net income / Inventory Error - Beginning inventory understated

COGS, Understated / Net Income, Overstated

Effect on Cost of Goods Sold and Net income / Inventory Error - Ending inventory overstated

COGS, Understated / Net Income, Overstated

Under a Perpetual System physical inventory taken for two reasons:

Check accuracy of inventory records. / Determine amount of inventory lost due to wasted raw materials, shoplifting, or employee theft.

_______________ exist when one party holds the goods of other parties while trying to sell the goods for the other parties for a fee without taking ownership of the goods

Consigned Goods

_________ includes all expenditures necessary to acquire goods and place them in a condition ready for sale.

Cost

___________ can have significant impacts both on income and on evaluations of income in periods of inflation

Cost flow assumption

Inventory Turnover equation

Cost of Goods Sold / Average Inventory

Regardless of the company type, companies report all inventories under ________ on the balance sheet.

Current Assets

Considerations that affect the selection of an inventory costing method do not include: (a)tax effects. (b)balance sheet effects. (c)income statement effects. (d)perpetual versus periodic inventory system.

D

Goods in transit should be included in the inventory of the buyer when the: a. public carrier accepts the goods from the seller. b. goods reach the buyer. c. terms of sale are F O B destination. d. terms of sale are F O B shipping point.

D

In a perpetual inventory system: (a)LIFO cost of goods sold will be the same as in a periodic inventory system. (b)average costs are based entirely on unit-cost simple averages. (c)a new average is computed under the average-cost method after each sale. (d)FIFO cost of goods sold will be the same as in a periodic inventory system.

D

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: (a)$91,000. (b)$80,000. (c)$18,200. (d)$16,000.

D

When is a physical inventory usually taken? (a)When the company has its greatest amount of inventory. (b)When a limited number of goods are being sold or received. (c)At the end of the company's fiscal year. (d)Both (b) and (c).

D

Which of these would cause inventory turnover to increase the most? (a)Increasing the amount of inventory on hand. (b)Keeping the amount of inventory on hand constant but increasing sales. (c)Keeping the amount of inventory on hand constant but decreasing sales. (d)Decreasing the amount of inventory on hand and increasing sales.

D

Under a Periodic System physical inventory taken for two reasons:

Determine the inventory on hand. / Determine the cost of goods sold for the period.

Include in inventory or not? / Goods held on consignment for Steele Corp. since December 12.

Do not include in inventory

Include in inventory or not? / Goods purchased FOB destination from a supplier on January 25 that are still in transit.

Do not include in inventory

Include in inventory or not? / Goods shipped to a customer, FOB shipping point, on January 29 that are still in transit.

Do not include in inventory

Include in inventory or not? / Office supplies on hand at January 31.

Do not include in inventory

In the balance sheet: _____________ will have the same effect on total assets and total stockholders' equity and no effect on liabilities.

Ending inventory errors

In a period of rising prices, income and inventory are higher and cash flow is lower under _______

FIFO

In periods of inflation, _______ produces a higher net income

FIFO

Income Statement Effects With Falling Prices _________ produces a lower net income

FIFO

Under ________, the cost of the earliest goods on hand prior to each sale is charged to cost of goods sold.

FIFO

In the balance sheet, ______ results in an ending inventory that is closest to current value, whereas the inventory under______ is the farthest from current value.

FIFO / LIFO

Common causes of inventory errors

Failure to count or price inventory correctly and not properly recognizing the transfer of legal title to goods in transit.

Costs of the earliest goods purchased are the first to be recognized in determining cost of goods sold in which method

First-In, First-Out (FIFO)

How companies determine the units and cost of the ending inventory

First-In, First-Out (FIFO)

Which method has units in the most recent purchase times cost per unit

First-In, First-Out (FIFO)

Which method often parallels actual physical flow of merchandise.

First-In, First-Out (FIFO)

________ are sold goods not yet delivered.

Goods in transit

_________are sold goods not yet delivered.

Goods in transit

A ______ inventory turnover or _______ average days in inventory suggests that management is trying to keep inventory levels low relative to its sales level.

Higher/lower

Include in inventory or not? / Goods purchased FOB shipping point from a supplier on January 25 that are still in transit.

Include in Inventory

Include in inventory or not? / Goods shipped on consignment to Logan Holdings Inc. on January 5.

Include in Inventory

Include in inventory or not? / Goods shipped to a customer, FOB destination, on January 29 that are still in transit.

Include in Inventory

Inventory Errors affect both the ________ and __________.

Income statement and balance sheet

_____________ is classified in the balance sheet as a current asset immediately below receivables.

Inventory

_________ affect the computation of cost of goods sold and net income.

Inventory errors

In the "Analysis of Inventory", ______________is a critical task

Inventory management

Under _________, companies recognize the loss in the period in which the price decline occurs.

LCNRV

In periods of inflation, _______ produces a lower net income

LIFO

Income Statement Effects With Falling Prices _________ produces a higher net income

LIFO

Under ______ average-cost can moderate the impact of changing prices.

LIFO

Under _______, the cost of the most recent purchase prior to sale is charged to cost of goods sold.

LIFO

________ results in the lowest income taxes (because of lower taxable income).

LIFO

When the value of inventory is lower than its cost, companies that use_________ or the ___________ are not required to use lower-of-cost-or-net realizable value

LIFO or retail inventory method

Companies using LIFO are required to report the difference between inventory reported using LIFO and inventory using FIFO

LIFO reserve

The ________________represents the difference between ending inventory using LIFO and ending inventory if FIFO were employed instead. For some companies this difference can be significant, and ignoring it can lead to inappropriate conclusions when using the current ratio or inventory turnover.

LIFO reserve

Costs of the latest goods purchased are the first to be recognized in determining cost of goods sold in this method

Last-In, First-Out (LIFO)

This method seldom coincides with actual physical flow of merchandise. Exceptions include goods stored in piles, such as coal or hay.

Last-In, First-Out (LIFO)

__________consideration may lead to lost sales

Low inventory level

The net amount a company expects to realize from the sale of inventory

Net realizable value

Freight costs incurred by the seller are an ________ expense.

Operating

A ___________ is taken when the business is closed or business is slow or at the end of the accounting period.

Physical Inventory

Items still in inventory are specifically costed to arrive at the total cost of the ending inventory. Based on the actual physical flow. Practice is relatively rare.

Specific Identification

Cost flow methods used for inventory

Specific identification, First-In First-Out, Last-In First-Out, Average-cost

Involves counting, weighing, or measuring each kind of inventory on hand.

Taking a Physical Inventory

Weighted-average unit cost

Total cost of inventory purchases plus beginning inventory divided by total units purchased plus beginning units

T or F / Cost flow assumptions do not need to be consistent with the physical movement of goods.

True

T or F / Goods in Transit should be included in the inventory of the company that has legal title to the goods.

True

Cost of the ending inventory

Weighted-average unit cost times units on hand

Regardless of whether prices are rising or falling, ____________ produces net income between L I F O and F I F O.

average-cost

Under the __________________, a new average cost is computed after each purchase.

average-cost method

Effect of inventory errors on the balance sheet is determined by using the____________

basic accounting equation:

Using Inventory Cost Flow Methods Consistently enhances ______

comparability

When the value of inventory is lower than its cost this is an example of

conservatism

Many car, boat, and antique dealers sell goods on

consignment

The primary basis of accounting for inventories is_____

cost.

Manufacturers, usually classify inventory into three categories:

finished goods, work in process, and raw materials.

In periods of inflation, LIFO produces a lower net income because

higher unit costs of the last goods purchased are matched against revenue

In periods of falling prices FIFO produces a lower net income because

higher unit costs of the last units purchased are matched against revenue

In periods of inflation, FIFO produces a higher net income because

lower unit costs of the first units purchased are matched against revenue

When the value of inventory is lower than its cost, companies that use LIFO or the retail inventory method must use a

lower-of-cost-or-market approach

Companies use the ___________ basis when the net realizable value is less than cost.

lower-of-cost-or-net realizable value (LCNRV)

Inventory Presentation in a classified balance sheet there also should be disclosure of ____________, ____________, and ____________

major inventory classifications, basis of accounting (cost, or lower-of-cost-or-market), and cost method (F I F O, L I F O, or average-cost).

Merchandisers need only one inventory classification, __________, to describe the different items that make up total inventory.

merchandise inventory

In a ___________ statement, cost of goods sold is subtracted from net sales.

multiple-step income

Income Statement Effects With Falling Prices, results from the use of FIFO and LIFO are _______

reversed

Inventory for a Merchandising company is a_________ classification on the balance sheet labeled as ______

single / Merchandise Inventory

The inventory cost flow methods are.....

specific identification and three assumed cost flow methods—FIFO, LIFO, and average-cost.

When prices are rising, ____________ results in lower cost of goods sold and higher net income than the average-cost and _________ methods.

the first-in, first-out (FIFO) method / the last-in, first-out (LIFO)