ACCT- SMARTBOOK #7

Which of these might cause the value of inventory to fall below its original cost?

- Damage - Increased competition - Obsolescence from going out of style

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

- Reduction in inventory storage costs - Reduction in obsolescence

The goals of inventory managers include ______.

- making sure that inventory quality meets customer expectations - keeping the costs of buying and storing inventory as low as possible - having enough inventory on hand to meet customer demand

How is the lower-of-cost-or-market rule applied when there are more than 2 types of inventory?

Only the items that have market values lower than the costs will be written down.

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.

True or false: Accounting rules allow companies to choose, from a variety of methods, the inventory method that best fits their business environment.

True Reason: Managers may choose the method that best fits their business environment

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

Risen, Inc. has a 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

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

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.

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

FIFO

Ending inventory errors in 2019 ______.

will affect the 2020 goods available for sale but will not affect the 2020 ending 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 $10x3 = 30 The cost of goods sold= cost of beginning inventory x units sold

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. During the month it sold 52 gadgets, using FIFO perpetual inventory, Cost of Goods Sold equals ______.

$302

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

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 1 of the diamonds that was purchased on July 9. Using periodic specific identification, its Cost of Goods Sold is ______.

$550 Reason: Specific identification records the actual cost of the actual diamond sold. The diamond that was purchased on July 9 cost $550.

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: $17.50 is LIFO ending inventory, not FIFO Cost of Goods Sold. Since 8 eggs of the 35 eggs available to sell were left, then 27 eggs were sold. The oldest eggs are assumed to be sold first. Thus, Cost of Goods Sold equals (5 eggs x $2) + (22 eggs x $2.50).

List from top to bottom, in order of highest ending inventory to lowest ending inventory value.

1. FIFO 2. Weighted average 3. LIFO

understatement of the 2019 ending inventory will affect ______.

2019 Cost of Goods Sold 2020 Cost of Goods Sold 2020 Beginning Inventory

Which financial statements are needed to calculate the inventory turnover ratio?

Balance sheet Income Statement

Inventory costing methods allowed by US GAAP include:1) specific__________ 2)_________average; 3) last in,___________out; and 4) first in,__________out.

Blank 1: identification Blank 2: weighted Blank 3: first Blank 4: first

Of the 4 companies listed below, which company is more likely to use specific identification to value its inventory and cost of goods sold?

Custom home builder Reason: Specific identification is typically used by companies that sell unique and expensive goods.

Which inventory costing method uses the oldest cost for Cost of Goods Sold on the income statement and the newest cost for Inventory on the balance sheet?

FIFO

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 Reason: When prices are rising, FIFO assumes the older, less expensive items are sold 1st making CGS smaller on the income statement leaving the more expensive items in Inventory on the balance sheet.

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

Which of the following is merchandise inventory?

Goods held for sale in the normal course of business

As inventory quality increases, its cost usually _______.

Increases

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

Inventory Cost of Goods Sold

Which of the following statements concerning inventory is correct?

Inventory is reported as a current asset because it will be converted into cash within a year of the balance sheet date.

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

Which statement is true?

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

The company has 1,000 of each of the following items in its inventory: Jeans $20- Cost per Item $21- Market Value per item T-shirts $4- Cost per Item $3-Market Value per item What is the amount of the lower-of-cost-or-market write down, if any?

The write down would be $1,000. Reason: The write down would apply to the T-shirts and is $1,000 (=$1 drop in value x 1,000 T-shirts).

True or false: Specific identification is an inventory method typically used when accounting for expensive and unique inventory items.

True Reason: Specific identification requires keeping track of each specific unit and is a cumbersome method for inexpensive, high-volume inventory items.

Which of the following statements are true?

Using a different inventory accounting method leads to reporting a different amount for cost of goods sold. Managers can choose the method of accounting for inventory cost (i.e., FIFO, LIFO, etc.) that best fits their business.

What is the inventory costing method that adds together the total cost of all goods available for sale during the period, and then divides that by the number of units available for sale to get a value to assign to all goods sold and all goods remaining in inventory?

Weighted average cost

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.

In a perpetual inventory system, Inventory is initially recorded at ______.

cost

When using the specific identification inventory method, cost of goods sold equals the ______.

cost of the actual item sold

Days to sell measures the average number of ______.

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

Assuming sales remain unchanged, if Cost of Goods Sold increases then Gross Profit__________.

decreases

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

good if the inventory turnover ratio is higher

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

goods sold

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 ________ han if it had used LIFO.

greater

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

Applying the lower of cost or market rule results in inventory being reported at the ______.

market value if lower than cost

LIFO uses the ______ unit costs for Cost of Goods Sold on the income statement and the ______ unit costs for Inventory on the balance sheet.

newest; oldest

The inventory turnover measures the ______.

number of times the average inventory balance is bought and sold

Inventory shrinkage as a result of theft, damage or obsolescence that is discovered during a physical inventory count at the end of the accounting period is recorded with a decrease to Inventory ______.

only in perpetual system

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10 each. It purchases 3 more at $12 each. It sold 2 units. Using the________ _________ cost inventory method, Cost of Goods Sold equals $22.40.

weighted average

At year end, CurlZ, Inc.'s inventory consists of 200 bottles of CleanZ at $1 per bottle and 100 boxes of DyeZ at $10 per box. Market values are $1.20 per bottle for CleanZ and $8 per box for DyeZ. CurlZ should report its inventory at ______.

$1,000 Reason: The lower-of-cost-or-market rule requires the DyeZ boxes be recorded at the lower market value of $8 instead of the higher cost of $10. Thus, Inventory equals $1,000 (=(200 bottles x $1) + (100 boxes x $8)).

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

How does the inventory costing methods affect the income statement when costs tend to rise over time?

Cost of Goods Sold on the income statement differs between the methods causing Income Tax Expense to differ.

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: Weighted average=((80 x $12) + (20 x $12.50))/100

Which of the following income statement line items are affected by the inventory method chosen?

- Gross Profit - Income before Income Tax Expense - Net Income - Income Tax Expense - Income from Operations

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).

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, not lower, cost of goods sold and lower net income.

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. 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)).

Which statements are true?

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

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.

On May 1, beginning inventory consists of 10 items at a cost of $10 each. On May 3, 10 items are purchased at $12 each. On May 8, 12 items are sold. On May 15, 10 items are purchased at $14 each. Will Cost of Goods Sold be higher using a FIFO periodic inventory system or FIFO perpetual inventory system?

Cost of Goods Sold will be the same