Ch 6 Accounting smartbook

Determine cost of goods sold for X-mart, assuming that beginning inventory was $5,000. Net purchases were $20,000 and ending inventory was $9,000.

$16,000 Reason: ($5,000 + $20,000) - $9,000 = $16,000

Determine which of the following statements is correct regarding consigned goods.

Consigned goods should be included in the consignor's inventory.

An advantage of the LIFO method is that it best matches

current costs with revenues

ABC Co. uses a perpetual inventory system and uses the FIFO cost flow assumption. During the month, it had two sales. Calculate the dollar value of its cost of goods sold for the first sale made on Jan. 10.

$141 you calculated sales. (8x$12) + (3x$15)=$141.

Storm Windows Company understated their ending inventory during their first year of operations by $2,000. What is the effect of this error at the end of the year? Select all answers which apply.

$2,000 overstatement of cost of goods sold. $2,000 understatement of net income.

Recall the formula for figuring Days' Sales in Inventory.

(Ending inventory/Cost of goods sold) x 365

Review the steps below that apply LCM to individual items of inventory. Place them in the correct order of occurrence.

1.List the number of units of each product 2.list the cost of each item 3.List the market price of each item 4.Compute total cost and total market value for each item 5.Compare recorded cost of each inventory item with its replacement cost. 6.Adjust inventory downward when market is less than cost

Assume that Widgets, Inc. uses a perpetual specific identification inventory system. During the period, it sold 4 units from beginning inventory, 8 units from the Jan. 5 purchase, and 2 units from the Jan. 29 purchases. Calculate the dollar value of its cost of goods sold for the period.

204 You figured an average cost of each unit sold. Cost of goods sold =(4@$12)+(8@$15) +(2@$18).

The owner of consigned goods is called the and the one who sells goods for the owner is called the

Consignor;consignee

Grow R Us overstated its ending inventory in the current year by $5,000. The company incorrectly reported $100,000 of net income. Explain the consequences of this error on the current period's income statement.

Cost of goods sold will be too low by $5,000.

Explain what lower of cost or market means in regards to reporting merchandise inventory on the balance sheet.

Inventory should be reported at the current market value of replacing it when lower than cost.

Which of the statements below are true about LCM? (Check all that apply.)

Market value is used as the replacement cost when using the LIFO method. When market value is lower than cost, a loss is recorded. A decline in market value means a loss in value of inventory.

Review the statements below and select the ones that are correct regarding the days' sales in inventory ratio. (Check all that apply.)

The ratio reveals how much inventory is available in terms of the number of days' sales. The ratio estimates how many days it will take to convert inventory into accounts receivable or cash. The ratio is useful in evaluating how quickly inventory is being sold. The ratio is often viewed as a measure of the buffer against out-of-stock inventory.

Sparky's incorrectly included inventory that was on consignment in its ending inventory count. Consequently, the ending inventory was overstated on the balance sheet. Explain how this error will affect this year's income statement. (Check all that apply.)

This year's cost of goods sold will be too low. This year's net income will be too high.

Q-mart failed to include inventory that was kept in a separate warehouse in its end-of-the-period inventory count. Explain how this error will affect this year's balance sheet. (Check all that apply.)

This year's total assets will be understated. This year's total equity will be understated.

True or false: If Dogs R Us overstates ending inventory on the balance sheet, then total equity on the balance sheet will be overstated as well.

True

All of the following are inventory costing methods used under a periodic inventory system except:

last in, last out

ABC Co. uses a perpetual inventory system and uses the weighted average cost flow assumption. During the month, it had two sales. Calculate the dollar value of its cost of goods sold for the first sale made on Jan. 10.

$151.80 Reason: ($96 +$180)/20 units = $13.80avg. (13.80 x11 units) = $151.80.

Assume that Sparks uses a perpetual FIFO inventory system. Its ending inventory consists of 9 units. Calculate the dollar value of its ending inventory. Jan 1: Begging inventory:10@ 12 Jan 8: Purchase: 20@18 Jan 15: Sale:21 units

$162

Assume that Sparks uses a perpetual specific identification inventory system. Its ending inventory consists of 2 units from beginning inventory, 4 units from the Jan. 5 purchase, and 10 units from the Jan. 29 purchases. Calculate the dollar value of its ending inventory.

$264 You figured what was sold. What is left =(2@$12)+(4@$15) +(10@$18). The question states the units left in ending inventory.

Chocolate Inc. uses the weighted average cost flow assumption in a perpetual inventory system. During the month, it had two sales totaling 15 units. Calculate the cost of goods sold for the first sale made on Mar. 20.

$276 Reason: ($250+$440)/30 units=$23/unit; $23 x 12 units= $276.

There are advantages to using each of the four inventory costing methods. Identify the statements below that are correct regarding these advantages. (Check all that apply.)

FIFO assigns an amount to inventory on the balance sheet that approximates its current cost. Weighted average tends to smooth out erratic changes in costs.

Which of the following lists the four methods used to assign costs to inventory and to cost of goods sold?

FIFO, LIFO, weighted average and specific Identification

Which of the following statements is correct regarding goods in transit?

Goods shipped FOB shipping point will be included in the buyer's inventory.

Recall the formula for computing a company's inventory turnover ratio.

Inventory turnover = Cost of goods sold/Average inventory

Which of the costs below would be included in the recorded cost of merchandise inventory? (Check all that apply.)

Invoice cost Insurance costs Storage costs

XYZ Company made a mistake in counting its ending inventory. Determine which of the items below will be affected by this error. (Check all that apply.)

Net income Current assets Cost of goods sold

Recall the four inventory costing methods used to assign costs to inventory and cost of goods sold under the periodic inventory system. (Check all that apply.)

Specific identification Last-in, first-out First-in, first-out Weighted average

Which of the following statements correctly explains what the inventory turnover ratio assesses.

The inventory turnover ratio assesses whether management is doing a good job controlling the amount of inventory.

Which of the following summarizes the weighted average cost flow assumption?

Weighted average assumes that costs flow at an average of the costs available.

Show your understanding of the ownership of goods in transit by completing the following statement. If goods are shipped FOB shipping point, then the ? (purchaser/seller) is responsible for paying freight charges and the ?(purchaser/seller) will not include the merchandise in their inventory.

purchaser;seller

Explain the inventory and cost of goods sold relationship by selecting the correct formula below.

Beginning inventory + Net purchases - Ending inventory = Cost of goods sold.

Assuming purchase costs are rising in a periodic inventory system, determine which of the statements below are correct regarding the cost of goods sold under FIFO, LIFO and weighted average cost flow methods. (Check all that apply.)

Companies using FIFO will pay higher taxes than companies using LIFO, assuming all else being equal. Companies using FIFO will report the smallest cost of goods sold. Companies using FIFO will report the highest gross profit and net income. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold.

In year 1, Shell Company understated their ending inventory. What is the effect of this error in year 2? (Check all that apply).

Cost of goods sold is understated. Beginning inventory is understated.

Match the cost flow assumption on the left with its definition on the right. Instructions

Fifo- Assumes costs flow in the order incurred; Lifo- Assumes costs flow in the reverse order incurred; Weighted Average- Assumes costs flow at an average of the costs available; Specific identification- Assumes costs flow can be specifically matched with the physical flow of items.

Assume that J-Mart uses a periodic weighted average inventory system. Calculate the average cost per unit.

Reason: ($180 + $75+ $180)/30 units = $14.50. Under the periodic system the average cost is computed at the end of the period based on all purchases plus beginning inventory.

Assume that three identical units are purchased separately on the following three dates and at the respective costs: June 1 at $10 June 2 at $15 July 4 at $20 The company sells two units during the period. Conclude which inventory items are sold first and which unit remains in ending inventory if the company is using the LIFO perpetual cost flow assumption.

The June 2 at $15 and the July 4 at $20 are both sold; the June 1 at $10 remains in ending inventory.

Determine which of the following statements is correct regarding the relationship of ending inventory and beginning inventory.

The ending inventory of the previous period is the beginning inventory of the current period.

Which statement(s) below is(are) correct regarding the purpose of taking a physical inventory count? (Check all that apply.)

The physical count is used to adjust the Inventory account balance to the actual inventory available. The physical count is used to determine if there has been any theft, loss, damage or errors in inventory.

The FIFO cost flow assumption assumes that the cost of items purchased (earliest/latest) are the costs that will be transferred first to cost of goods sold on the (balance sheet/income statement).

earliest; income statement

An inventory error not only affects the current year's cost of goods sold, gross profit, net income, current assets and equity, but also the next period's statements because

ending inventory of one period is the beginning inventory of the next period.

The _____ principle states that inventory costs are expensed as cost of goods sold when inventory is sold.

expense recognition

In year 1 ending inventory is overstated by $2,000. Explain the effect on cost of goods sold, gross profit and net income in year 1 and year 2 Select all answers that apply.

Gross profit in the current year, year 1, will be overstated. Cost of goods sold in the following year, year 2, will be overstated. Gross profit in the next year, year 2, will be understated. Cost of goods sold in the current year, year 1, will be understated.

Why would the physical count of inventory be different than what is shown in perpetual inventory records? (Check all that apply.)

Events such as damage Events such as loss Events such as errors Events such as theft

The _____ principle states that inventory costs are expensed as cost of goods sold when inventory is sold

expense recognition

The LIFO cost flow assumption assumes that the cost of items purchased ______ are the costs that will be transferred first to cost of goods sold on the ______ ______.

latest/income statement

If ending inventory at the end of the year is understated, what is the effect on cost of goods sold and net income?

Cost of goods sold will be overstated and net income will be understated.

Cake Mart understated its ending inventory in the current year by $5,000. The company incorrectly reported net income of $100,000. Determine the effect this error had on the financial statements.

Cost of goods sold will be too high by $5,000, and this caused net income to be understated by $5,000.

Identify the ways in which lower of cost or market can be applied to merchandise inventory. (Check all that apply.)

It can be applied to major categories of items. It can be applied to the inventory as a whole. It can be applied to each item individually.

Determine which of the following statements are correct regarding the difference between physical flow and the cost flow of inventory. (Check all that apply.)

Physical flow refers to the actual movement of goods. A business may adopt any cost flow assumption when accounting for perishable items. Cost flow is an assumption about which goods/items are sold. Perishable items usually have an actual physical flow of FIFO.

Recount the methods used to assign costs to inventory and cost of goods sold under both a perpetual and a periodic system. (Check all that apply.)

Specific identification Last-in, first-out Weighted average First-in, first-out

One identical unit is purchased on each of the following three dates and at the respective costs: June 1 at $10 June 2 at $15 July 4 at $20 The company sells two units during the period. Conclude which inventory items are sold first and which unit remains in ending inventory if the company is using the FIFO cost flow assumption.

The June 1 at $10 and the June 2 at $15 are both sold; the July 4 unit remains in ending inventory.

Q-mart failed to include inventory that was kept in a separate warehouse in its 12/31 end-of-the-period inventory count. Consequently, the ending inventory on 12/31 was understated on the balance sheet. Explain how this error affects the current year's income statement. (Check all that apply.)

The current year's cost of goods sold will be too high. The current year's net income will be too low.

Assuming purchase costs are declining and a periodic inventory system is used, determine the statements below which correctly describe what is happening to cost of goods sold under FIFO, LIFO and weighted average cost flow methods. (Check all that apply.)

Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold. Companies using LIFO will report the highest ending inventory on their balance sheets, as compared to companies using FIFO or weighted average. Companies using LIFO will report the smallest cost of goods sold. Companies using LIFO will pay higher taxes than companies using FIFO, assuming all else being equal.