CHAPTER 5

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

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

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.)

Current assets Net income Cost of goods sold

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 statements is correct regarding goods in transit?

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

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

The inventory turnover ratio assesses how quickly a company is selling its merchandise, so that it can generate cash to pay debts.

All of the following are safeguards for inventory except:

Using counters that are responsible for inventory.

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

expense recognition

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.)Compute recorded cost of each inventory item with its replacement cost. List lower of cost or market. 6.)Adjust inventory downward when market is less than cost.

The kind of business that would use the specific identification method of inventory costing includes:

A car dealership

Determine which of the following statements are correct regarding damaged or obsolete goods. (Check all that apply.)

A loss in value is reported in the period when goods are damaged or become obsolete. Damaged goods are included in inventory at their net realizable value. Damaged goods are not included in inventory if they cannot be sold. If damaged goods can be sold at a reduced price, they are included in inventory.

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.

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

Blank 1: consignor Blank 2: consignee

When costs regularly ________________ , FIFO gives the highest cost of goods sold yielding the lowest gross profit and income.

Blank 1: decline, fall, or decrease

Many companies choose to use LIFO inventory costing during periods of rising purchase costs because reported cost of goods sold will be (lowest/highest). This means that income taxes paid will be (lower/higher) than if the company used FIFO or weighted average inventory costing.

Blank 1: highest Blank 2: lower or lowest

Estimates of inventory are not usually required when a company uses a ___________________ (FIFO/LIFO/periodic/perpetual) inventory system because they would presumably have updated inventory data.

Blank 1: perpetual

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.

Blank 1: purchaser Blank 2: seller

Which of the statements below explain why LCM is used? (Check all that apply.)

Companies never want to report inventory on a balance sheet that is higher than replacement cost. Assets are not shown at an inflated value on the balance sheet, but rather at lower of cost or replacement cost. LCM allows companies to recognize a loss in value of an asset in the period the loss occurs.

Assuming purchase costs are rising, 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. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold. Companies using FIFO will report the highest gross profit and net income. Companies using FIFO will report the smallest cost of goods sold.

Assuming purchase costs are declining, determine which statements below correctly describe what happens to cost of goods sold under FIFO, LIFO and weighted average cost flow methods. (Check all that apply.)

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

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

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

In year 1, Shell Company understated their ending inventory. What is the effect of this error in year 2?

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

Guns 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.

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

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

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 will effect 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.

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

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

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

Sometimes companies must estimate ending inventory. Review the reasons given below for estimating inventory and choose all of the correct responses. (Check all that apply.)

The store was flooded. Interim financial statements need to be prepared. Fire destroyed the inventory warehouse.

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

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

The adjusting entry to decrease merchandise inventory due to LCM computations, includes Multiple choice question.

credit to Merchandise Inventory

An advantage of the LIFO method is that it best matches

current costs with revenues

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.

Damaged goods which can be sold are reported in inventory at

net realizable value

In step 2 of the gross profit method, the estimated cost of goods sold are

subtracted from the goods available for sale at cost

The adjusting entry to decrease merchandise inventory due to LCM computations, includes

credit to Merchandise Inventory

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.

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

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.

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

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.

Recall the formula for figuring 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.)

Storage costs Insurance costs Invoice cost

Identify the safeguards that companies implements when taking a physical inventory count. (Check all that apply.)

Taking a second count by a different counter. Using prenumbered inventory tickets.

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.