ACC 201 CHAPTER 7 LEARNSMART

When costs are rising, ______ produces a larger Inventory balance (making the balance sheet appear to be stronger) and smaller Cost of Goods Sold (resulting in a larger Gross Profit) which makes the company look more profitable.

FIFO

True or false: GAAP requires that a business must use an inventory accounting method that is the same as the physical flow of goods in and out of the business.

False Reason: A business may use specific identification, or it may use a cost flow assumption (LIFO, FIFO, or weighted average) that does not mimic the physical flow of goods.

Apply the specific identification method Contrast the effect of inventory costing methods when costs are rising Define FIFO

study these more

The weighted average cost method uses the ______ cost for Cost of Goods Sold on the income statement and the ______ cost for Inventory on the balance sheet.

average; average

FIFO, an inventory costing method, actually describes how to calculate the cost of ______.

goods sold Reason: FIFO describes the order in which goods are assumed to be sold and hence determines the amount of the cost of the goods sold. FIFO assumes the older goods ("first in") are sold first ("first out").

When costs to purchase inventory are rising, using LIFO leads to reporting a ______ than FIFO.

lower value for Inventory on the balance sheet Reason: When prices are rising, using LIFO assumes the newer, more expensive inventory is sold first and the older, lower priced inventory is left in Inventory on the balance sheet.

Which of these would explain an increase in a company's inventory turnover ratio?

A decrease in total inventory An increase in the demand for the company's products

When costs to purchase inventory are rising, using LIFO leads to reporting ______ cost of goods sold and ______ net income than FIFO.

higher; lower Reason: When prices are rising, using LIFO assumes the newer, more expensive inventory is sold first, resulting in a higher cost of goods sold and lower, not higher, net income.

If a company's inventory costs are rising, ______ inventory costing method(s) typically results in a higher income tax expense.

the FIFO Reason: When costs are rising, cost of goods sold will be lower using FIFO because it assumes the older, less expensive items are sold first. A lower cost of goods sold results in a higher net income and hence higher income taxes.When costs are rising, cost of goods sold will be higher using LIFO because it assumes the newer, more expensive items are sold first. A higher cost of goods sold results in a lower net income and hence lower income taxes.

Delta Diamonds had 5 one-carat diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using a periodic specific identification, its Inventory after the December 24 sale is ______.

$2,250

Blog Inc., has net sales of $50,000, cost of goods sold of $30,000, and selling expenses of $5,000. Its gross profit is

$20,000 Reason: Gross profit = sales-cost of goods sold.

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10. It purchased 3 more at $12. It sold 4 units during the period. What is the Cost of Goods Sold using the weighted average cost method?

$44.80 Reason: The Cost of Goods Available equals $56 (=(2x$10)+(3x$12)). The Weighted Average Cost equals $11.20 ($56 Goods Available/5 units). Cost of Goods Sold equals $44.80 = ($11.20/unit x 4 units sold).

Alpha Company bought 75 units of inventory for $4 each and 25 units of inventory for $5 each. Alpha's weighted average cost per unit is ______.

4.25 Reason: ((75 x $4) + (25 x $5))/100=$4.25

Which financial statements are needed to calculate the inventory turnover ratio? (Check all that apply.)

Balance sheet Income statement

What effect does the inventory costing method have on the income statement? The inventory methods affects the amount of the ______.

Cost of Goods Sold, Gross Profit, Income from Operations, Income before Income Tax Expense, Income Tax Expense and Net Income

In times of rising prices, why would a company choose LIFO over FIFO?

LIFO would result in a higher Cost of Goods Sold making the Income Tax Expense lower than FIFO.

Which of the following may occur with a higher inventory turnover ratio?

Reduction in obsolescence Reduction in inventory storage costs

What may cause inventory turnover ratios to vary significantly between companies in the same industry? (Check all that apply.)

Some companies may sell more lower-cost goods. Some companies may sell fewer higher-cost goods.

Which inventory method is typically used when accounting for expensive and unique inventory items?

Specific identification

Assuming sales remain unchanged, if Cost of Goods Sold increases then Gross Profit ____________

decreases

When costs to purchase inventory are falling over time, using LIFO leads to reporting ______ than FIFO.

higher Inventory on the balance sheet Reason: When prices are falling, using LIFO assumes the newer, less expensive inventory is sold first and the older, higher priced inventory is left in Inventory on the balance sheet (not the income statement). lower Inventory on the balance sheet

The assumption that a company makes about its inventory cost flow can affect cost of goods sold on its ______ and inventory on its ______.

income statement; balance sheet

FIFO uses the ______ cost for Cost of Goods Sold on the income statement and the ______ cost for Inventory on the balance sheet.

oldest; newest Reason: FIFO assumes the older items are sold first as Cost of Goods Sold and the newer items remain in Inventory.

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10 each. It purchased 3 more at $12 each. What is the weighted average cost per unit?

$11.20 Reason: The weighted average cost is $11.20 (=((2 x $10) + (3 x $12))/5).

Delta Diamonds had 5 one-carat diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using a periodic specific identification, its Inventory after the December 24 sale is ______.

$2,250 Reason: Inventory equals $2,250 (=$500 + 550 + (2x$600)). Cost of Goods Sold equals $550.

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using first-in, first-out, Cost of Goods Sold equals ______.

$30

Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using periodic weighted average cost, its Cost of Goods Sold is ______.

$560

Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500; 2 purchased July 9 for $550 each; and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using LIFO periodic, its Cost of Goods Sold is ______.

$600 Reason: LIFO assumes that the last diamond purchased was the first to be sold. Thus, the diamond purchased on September 23 for $600 is assumed to be sold first.

If cost of acquiring inventory is rising, LIFO will result in which of the following compared to FIFO? (Check all that apply.)

-Income Tax Expense will be lower. -Cost of Goods Sold will be higher. -Gross Profit will be lower. Reason: When prices are rising, LIFO assumes the higher costing goods are sold first. Thus, cost of goods sold will be higher causing gross profit to be lower. Since taxes are based on profits, a lower profit will result in lower income taxes.

Which of these inventory accounting methods are acceptable under US GAAP?

-LIFO -FIFO -Specific identification -Weighted average

Merchandise inventory ______.

-consists of products acquired in a finished condition that are available for sale -is reported as a current asset on the balance sheet

Rank in order, from highest (top) to lowest (bottom), the anticipated inventory turnover ratios for the following companies.

1. walmart 2. Tiffany and co 3. bath and body works

Barry, Inc.'s sales equal $30,000 and cost of goods sold equals $10,000. Its beginning inventory was $800 and its ending inventory is $1,200. Barry's inventory turnover ratio equals ______ times.

10 Reason: Inventory turnover ratio=cost of goods sold/average inventory or $10,000/ (($800 + $1,200)/2).

If Vito, Inc. has an inventory turnover ratio of 5 times, then its days to sell must be ______.

73 days

Which statements are true? (Select all that apply.)

A grocery store may or may not use the Last-in, First-out inventory method. The inventory method is an assumed cost flow and does not have to correspond with the actual physical flow of goods.

Which of the following statements are true?

An increased inventory balance is desirable if management is building up stock in anticipation of higher sales. An increased inventory balance is undesirable if it is a result of an accumulation of unsaleable inventory.

Which company will have the higher number of days to sell? Company A whose cost of goods sold equals $1,000 and whose average inventory is $100. Company B whose cost of goods sold equals $2,000 and whose average inventory is $100.

Company A Reason: Days to sell (=365/inventory turnover ratio) would be higher for Company A at 36.5 days (=365 days/($1,000/$100)) versus Company B at 18.25 days (=365 days/($2,000/$100)).

Risen, Inc. has beginning inventory of $16 which consists of 2 units at $8 each. It purchased 10 units at $10 each. It sold 5 units for $20 each. Which would result in the higher Gross Profit, FIFO or LIFO and why?

FIFO because the older, less expensive units are assumed to be sold first making Cost of Goods Sold lower and Gross Profit higher than LIFO Reason: FIFO's COGS equals $46 (=(2 older units x $8) + (3 newer units x $10)). LIFO COGS equals $50 (=5 newer units x $10). Gross Profit is higher with FIFO because the COGS is lower.

Which of the following is merchandise inventory?

Goods held for sale in the normal course of business

_________ ______ equals Net Sales minus Cost of Goods Sold and is reported on the income statement.

Gross Profit

Which of the following income statement line items are affected by the inventory method chosen? (Select all that apply.)

Income before Income Tax Expense Net Income Income Tax Expense Income from Operations Gross Profi

The weighted average cost method uses the weighted average cost to calculate the value of ______

Inventory Cost of Goods Sold

Which inventory costing methods are based on assumptions that accountants make about the flow of inventory costs? (Check all that apply.)

LIFO FIFO

Which inventory costing method assumes that inventory costs flow out in the opposite order from which the goods were purchased?

LIFO Reason: FIFO assumes the first items purchased are the first sold. LIFO is the opposite and assumes the newer items are sold first.

Which of these would you expect to have the highest inventory turnover ratio?

McDonald's

Which of these would you expect to have the highest inventory turnover ratio?

McDonalds

Which statement is true?

Specific identification, weighted average cost, LIFO and FIFO are acceptable GAAP costing methods.

Specific identification is ______.

an inventory method that tracks which item is actually sold and debits Cost of Goods Sold for the actual cost of the item

Days to sell measures the average number of ______.

days from the time inventory is purchased to the time it is sold

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using first-in, first-out, the 3 goods sold are assumed to be ______.

from the beginning inventory

An increase in a company's inventory balance from a prior year is ______.

good if the inventory turnover ratio is higher

A ______ inventory turnover ratio may result in a reduction in storage and obsolescence costs as well as reduced borrowing.

higher Reason: A lower turnover means the goods are taking longer to sell and thus storage, obsolescence and borrowing costs would be higher, not less.

A company had beginning inventory of 3 units that cost $5 each. During the month, 17 units were purchased for $6 each. The company sold 15 units during the month and had 5 remaining in ending inventory. If the company uses FIFO instead of LIFO to calculate cost of goods sold, then cost of goods sold will be ______.

lower using FIFO, leading to higher gross profit and higher income taxes Reason: FIFO cost of goods sold includes the older units purchased at lower prices. Lower cost means higher profit and higher taxes.

The inventory turnover measures the ______.

number of times the average inventory balance is bought and sold

On May 1, there were 4 inventory items that cost $30 each. On May 5, 2 items were purchased for $35 each. Given one item from the beginning inventory and one from the May 5 inventory were sold, under the ______________ inventory method, cost of goods sold would equal $65.

specific identification

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold Reason: The inventory turnover ratio directly measures the times per period the average inventory balance is sold. The days to sell measures the average number of days to sell.

Mountain Made started the month with 3 quilts in its beginning inventory that cost $200 each. During the month, Mountain Made purchased 7 additional quilts for $210 each. At the end of the month, Mountain Made counted its inventory and found that 2 quilts remained unsold. If Mountain Made uses periodic weighted average cost, its Cost of Goods Sold for the month is ______.

$1,656

Beta Company bought 80 units of inventory for $12 each and 20 units of inventory for $12.50 each. It sold 90 units for $25 each. Beta's weighted average cost is ______.

$12.10 Reason: This is a simple average, not a weighted average. Weighted average=((80 x $12) + (20 x $12.50))/100

Delta Diamonds had 5 diamonds available for sale this year: June 1 - purchased 1 for $500; July 9 - purchased 2 for $550 each; and on September 23 - purchased 2 for $600 each. On December 24, it sold 1 of the diamonds. Using LIFO periodic, its ending inventory is ______.

$2,200 Reason: With LIFO, the 1 diamond sold is assumed to be the most recently purchased on September 23 at $600. Thus ending inventory (using LIFO) are the older remaining diamonds which equals $2,200 (=$500 + (2 x 550) + 600).

Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using periodic weighted average cost, its Cost of Goods Sold is ______.

$560 Reason: Cost of Goods Sold (using weighted average)=($500 + (2 x $550) + (2 x $600))/(1 + 2 + 2)=$560 per unit; $560 x 1 unit=$560

Chicken Little started the month with 5 eggs in its inventory that cost $2 each. During the month, Chicken Little bought 30 more eggs that cost $2.50 each. At the end of the month, Chicken Little counted its inventory and found that 8 eggs remained unsold. If Chicken Little uses FIFO periodic, its Cost of Goods Sold for the month is ______.

$65 Reason: Since 8 eggs of the 35 eggs available to sell were left, then 27 eggs were sold. FIFO assumes the oldest eggs are to be sold first. Thus, Cost of Goods Sold equals (5 eggs x $2) + (22 eggs x $2.50).

Widget Company started the month with 10 gadgets in its Inventory that cost $5 each. During the month, Widget bought 50 more gadgets that cost $6 each. At the end of the month, Widget counted its inventory and found that 8 gadgets remained unsold. If Widget uses FIFO, its Cost of Goods Sold for the month is ______.

302 Reason: Of the 52 gadgets sold, the oldest gadgets are assumed to be sold first. Thus, Cost of Goods Sold equals (10 gadgets x $5) + (42 gadgets x $6).

Barrry Bees, Inc.'s Cost of Goods Sold equals $10,000. Its beginning inventory was $800, and its ending inventory was $1,200. Barry Bee's days to sell equals

36.5

Barrry Bees, Inc.'s Cost of Goods Sold equals $10,000. Its beginning inventory was $800, and its ending inventory was $1,200. Barry Bee's days to sell equals _____ days (assume 365 days per year).

36.5 or 37

If Barry Bees, Inc.'s days to sell equals 73 days based on a 365-day year, then its inventory turnover ratio equals _______ times

5

King Costume started the month with 8 masks in its beginning inventory that cost $10 each. During the month, King Costume purchased 40 additional masks for $12 each. At the end of the month, King counted its inventory and found that 5 masks remained unsold. If King Costume uses LIFO periodic, its Cost of Goods Sold for the month is ______.

510 Reason: The cost of the 43 masks sold equals (40 masks x $12) + (3 masks x $10). Ending inventory equals the 5 remaining masks at $10 each or $50.

f you had 1 unit that cost $3 in beginning inventory, purchased 1 more at $2 and then later another at $1, which method would result in the higher Cost of Goods Sold and lower Gross Profit if you sold 2 of the units?

FIFO Reason: FIFO would assume the $3 and $2 units were sold making CGS $5. LIFO would assume the $1 and $2 units were sold making CGS only $3. Reason: The price charged customers would be the same regardless of the inventory costing method used. FIFO would assume the $3 and $2 units were sold making CGS $5. LIFO would assume the $1 and $2 units were sold making CGS only $3.

Lux Company started the month with 20 lamps in its beginning inventory that cost $30 each. During the month, Lux purchased 80 additional lamps for $31 each. At the end of the month, Lux counted its inventory and found that 25 lamps remained unsold. If Lux uses periodic weighted average cost, its Cost of Goods Sold for the month is ______.

2,310 Reason: This is weighted average ending inventory, not cost of goods sold. The weighted average cost per lamp equals ((20 x $30)+(80 x $31))/100 which is then multiplied the 75 lamps sold to get cost of goods sold.

The assumption that a company makes about its inventory cost flow has ______.

an effect on the company's income statement an effect on the company's balance sheet

Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using FIFO, its Inventory at December 31 is ______.

$2,300 Reason: Inventory using FIFO =(2 x $550) + (2 x $600). Cost of Goods Sold using FIFO =1 x $500. FIFO assumes the oldest one is sold first even if it was the one purchased on July 1.

Which inventory costing method assumes that the inventory's cost flow out in the same order the goods are received?

FIFO

If a company assumes that its inventory costs flow out in the opposite order from which the goods were purchased, it uses ______________ to value its inventory.

LIFO

A company had beginning inventory of 5 units that cost $10 each. During the month, 15 units were purchased for $11 each. The company sold 12 units during the month and had 8 remaining in ending inventory. If the company uses FIFO to calculate cost of goods sold, then its gross profit will be $5 than if it had used LIFO

higher

Which company is most likely to have a higher inventory turnover than its competitors within the same industry?

A company with lower-priced goods and lower gross profit Reason: If the quality of the goods is similar, a company with lower-priced goods will be apt to sell more goods making the inventory turnover higher.

If you had 1 unit that cost $3 in beginning inventory, purchased 1 more at $2 and then later another at $1, which method would result in the higher Cost of Goods Sold and lower Gross Profit if you sold 2 of the units?

FIFO Reason: FIFO would assume the $3 and $2 units were sold making CGS $5. LIFO would assume the $1 and $2 units were sold making CGS only $3.

True or false: The inventory method selected by management does not have to correspond to the physical flow of goods to be in accordance with GAAP.

True Reason: The inventory method is an assumed cost flow and does not have to correspond with the actual physical flow of goods. For example, a grocery store may use Last-in, First-out inventory method.