Chapter 6 Accounting HW

Determine the ending inventory using the FIFO cost flow method, assuming that only one item was sold on March 24 for $14.DateItemUnitsCostTotalMarch 3Purchase1$6$6March 8Purchase1 7 7March 22Purchase1 8 8 Total3$21 a.$14 b.$15 c.$7 d.$13

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Control of Inventory

-safeguarding the inventory from damage or theft -reporting inventory in the financial statements

Computerized Perpetual Inventory System

Automatically stores items, analyzes effectiveness of ad campaigns and promotions, can let you know to reorder stock before it runs out Useful for large companies like Best Buy

number of days sales in inventory formula

Average Inventory / Average Daily Cost of Goods Sold (divide COGS/365)

Effects of Changing Costs: FIFO and LIFO Periods of rising prices and Weighted Average

FIFO: results in higher gross profit and net income than the LIFO method - but, when prices rise rapidly inventory must be replaced at increasingly higher costs - which will cause higher gross profit / income to be called inventory profits or illusionary profits LIFO: more realistically reflects the cost of goods against actual sales on the income statement - bc of the higher cost of goods sold, the gross profit is lower thus offering income tax savings - but, on balance sheet, ending inventory balance may be different from its current replacement cost Weighted Average: Compromise between FIFO and LIFO cost methods

Specific Identification Cost Flow Method

Inventory method in which the unit sold is identified with a specific purchase.

net realizable value or "market" in Lower cost of market

The estimated selling price of an item of inventory less any direct costs of disposal, such as advertising / sales commissions.

Net realizable Value

The estimated selling price of an item of inventory less any direct costs of disposal, such as sales commissions. estimated selling price - direct cost of disposal

LCM method (lower of cost or market)

a method of valuing inventory that reports the inventory at the lower of its cost or current market value

2. Which cost flow assumption assumes that the last units purchased are the first units sold? a. LIFO b. FIFO c. Specific identification d. Weighted average cost

a. LIFO

2. Which inventory method results in the highest net income during periods of falling prices? a. LIFO b. Weighted average c. FIFO d. Specific identification

a. LIFO

2. With a perpetual inventory system, when should a physical count of inventory be taken? a. Near year-end b. Mid-year c. Never; a physical count is not needed with a perpetual inventory system d. Weekly

a. Near year-end

2. The number of days' sales in inventory is calculated as __________ divided by __________. a. average inventory; average daily cost of goods sold b. ending inventory; cost of goods sold c. net income; sales d. cost of goods sold; average inventory

a. average inventory; average daily cost of goods sold

2. When using the retail method of inventory costing, the ending inventory cost is estimated by a. multiplying the ending inventory at retail by the cost to retail ratio. b. multiplying the ending inventory at cost by the cost to retail ratio. c. deducting the estimated cost of goods sold from the merchandise available for sale. d. deducting the estimated gross profit from the sales.

a. multiplying the ending inventory at retail by the cost to retail ratio.

3. On the balance sheet, if ending inventory is overstated, then total assets will be __________ and stockholders' equity will be __________. a. overstated; overstated b. understated; understated c. overstated; understated d. understated; overstated

a. overstated; overstated

Determine the gross profit using the periodic inventory system and the FIFO inventory method, assuming that 18 units were sold at a sales price of $14. Date. Item. Units. Cost. Total. June 1. Beginning inventory 6. $5. $30 June 12Purchase. 10. 6. 60 June 18Purchase. 8. 7. 56 Totals. 24. $146 a.$148 b.$104 c.$136 d.$252

a.$148 FIFO: Sales − Cost of Goods Sold = Gross Profit; (18 × $14) − [(6 × $5) + (10 × $6) + (2 × $7)] = $148

When using the periodic FIFO inventory cost method, which of the following statements is FALSE? a.The cost of inventory on hand is made up of the earliest costs. b.The cost of inventory on hand is made up of the most recent costs. c.The cost of goods sold is made up of the earliest purchases. d.The physical count determines the inventory on hand.

a.The cost of inventory on hand is made up of the earliest costs. When using the periodic FIFO inventory cost method, the cost of inventory on hand is made up of the earliest purchases, the cost of goods sold is made up of the most recent costs, and the physical count determines the inventory on hand.

The lower-of-cost-or-market method cannot be applied to a.each item sold. b.each major class or category of inventory. c.each item in the inventory. d.inventory as a whole.

a.each item sold. The lower-of-cost-or-market method can be applied to each item in the inventory, each major class or category of inventory, and inventory as a whole.

The specific identification inventory method cannot be used: a.when all units sold are alike. b.by an automobile dealer where automobiles have unique serial numbers. c.when each inventory unit can be specifically identified. d.when the unit sold is identified with a specific purchase.

a.when all units sold are alike. The specific identification inventory method cannot be used when all units sold are alike.

Applying LCM to total inventory

always gives highest value to inventory

1. The lower-of-cost-or-market method cannot be applied to: a. each item of inventory. b. each major class or category of inventory. c. total inventory as a whole. d. any inventory not yet received.

any inventory not yet received.

Purchase order

authorizes the purchase of the inventory from an approved vendor

1. Which cost flow assumption assumes that the first units purchased are the first units sold? a. LIFO b. FIFO c. Specific identification d. Weighted average cost

b. FIFO

1. Which of the following documents is not often used for inventory control? a. Vendor's invoice b. Sales receipt c. Receiving report d. Purchase order

b. Sales receipt

2. Why does the specific identification inventory method work well for business such as automobile dealerships? a. The inventory keeps track of the automobiles that are first-in first-out. b. This method works because each automobile has a unique serial number. c. It best shows the current cash flow at all times. d. It's the easiest method to factor the perpetual inventory costs.

b. This method works because each automobile has a unique serial number.

1. Inventory turnover is calculated as __________ divided by __________. a. cost of goods sold; inventory b. cost of goods sold; average inventory c. cost of goods sold; total assets d. average inventory; cost of goods sold

b. cost of goods sold; average inventory

Determine the cost of goods sold for the transaction on October 25 using the perpetual inventory system and the FIFO method. Date. Item. Units. Cost. Total Beginning inventory. 5 $10 $50 October 4Purchase 8 11. 88 October 8 Sale. 6 Oct 20 Purchase. 15. 12. 180 October 25 Sale. 12 a.$144 b.$137 c.$180 d.$138

b.$137 FIFO: (7 × $11) + (5 × $12) = $137

Which inventory cost method offers income tax savings during periods of rising prices? a.Specific identification inventory cost method b.LIFO inventory cost method c.FIFO inventory cost method d.Weighted average inventory cost method

b.LIFO inventory cost method Correct. During periods of rising prices (or inflation), the LIFO method shows a lower profit and, therefore, offers income tax savings.

Which of the following is true regarding the perpetual LIFO inventory costing method? a.The LIFO inventory costing method must be used with the weighted average cost method. b.The cost of the units sold is the cost of the most recent purchases. c.Costs are included in the cost of goods sold in the order in which units were purchased. d.Unit costs for each item are averaged each time a purchase is made.

b.The cost of the units sold is the cost of the most recent purchases. Correct. Under the perpetual LIFO inventory method, the cost of the units sold is the cost of the most recent purchases.

2. Jacobs Company had inventory of 15 units at a cost of $12 each on June 1. On June 5, Jacobs purchased 10 units at $13 per unit. On June 12, it purchased 20 units at $14 per unit. On June 17, it sold 30 units. Using FIFO, what is the value of the inventory at June 17 after the sale? a. $140 b. $160 c. $210 d. $380

c. $210 I DONT KNOW HOW AAAAA

1. Which statement applies to the specific identification inventory method? a. This method is also known as the average cash flow method. b. The ending inventory is made up of the most recent purchases. c. Each unit sold is identified with a specific purchase. d. This is closely related to a perpetual inventory system.

c. Each unit sold is identified with a specific purchase.

1. Which inventory method results in the highest net income during periods of rising prices? a. LIFO b. Weighted average c. FIFO d. Specific identification

c. FIFO

2. Which statement about Best Buy's computerized inventory system is correct? a. Given the number of transactions, the system is not as effective as a manual inventory system. b. The system is only used to track advertising campaigns and promotions. c. It allows the company to analyze sales patterns to determine when to mark down merchandise or when to restock seasonal merchandise. d. The computerized system catches thieves before they leave a store.

c. It allows the company to analyze sales patterns to determine when to mark down merchandise or when to restock seasonal merchandise.

Several controls are used to safeguard inventory except a.installing sensors at all exits. b.keeping high-priced inventory behind lock and key. c.allowing all employees access to the materials warehouse. d.hiring security guards.

c. allowing all employees access to the materials warehouse. The materials inventory should only be accessible to authorized employees.

1. A business may need to estimate its amount of inventory except when a. perpetual inventory records are not maintained. b. a disaster has destroyed the inventory records and the inventory. c. the inventory is actually counted. d. monthly or quarterly financial statements are needed, but a physical inventory is taken only once a year.

c. the inventory is actually counted.

Which of the following is true regarding the perpetual FIFO inventory costing method? a.The cost of the units sold is always the cost of the original units purchased. b.The cost of the units sold is the cost of the most recent purchases. c.Costs are included in the cost of goods sold in the order in which units were purchased. d.Unit costs for each item are averaged each time a purchase is made.

c.Costs are included in the cost of goods sold in the order in which units were purchased. Under the perpetual FIFO inventory method, costs are included in the cost of goods sold in the order in which units were purchased.

Which of the following is true regarding consigned inventory? a.The unsold merchandise is part of the consignee's records at year-end. b.The retailer is the consignor. c.The manufacturer is the consignor. d.The consignee retains the title to the inventory.

c.The manufacturer is the consignor. Manufacturers sometimes ship merchandise to retailers who act as the manufacturer's selling agent. The manufacturer is referred to as the consignor.

Inventory cost flow assumptions address accounting issues when a.different units of merchandise are acquired at the same unit cost during the period. b.an item is purchased and it is necessary to determine its cost. c.identical units of merchandise are acquired at different unit costs during the period. d.an item is sold and it is necessary to determine its sales price.

c.identical units of merchandise are acquired at different unit costs during the period. Correct. Inventory cost flow assumptions address accounting issues when identical units of merchandise are acquired at different unit costs during the period.

1. When the weighted average cost method is used in a perpetual inventory system, a weighted average unit cost for each item is computed a. each time a sale is made. b. at the end of the year. c. at the beginning of each month. d. >each time a purchase is made.

d. >each time a purchase is made.

1. One reason businesses need an inventory control system is a. to evaluate the effectiveness of advertising campaigns. b. to determine when to mark down merchandise. c. for reporting inventory in the financial statements. d. all of these are true.

d. all of these are true.

When using the periodic LIFO inventory cost method, which of the following statements is TRUE? a.The cost of goods sold is made up by averaging the end-of-period and beginning-of-period purchases. b.The cost of goods sold is made up of the earlier purchases. c.The cost of inventory on hand is made up of the most recent purchases. d.The physical count determines the inventory on hand.

d.The physical count determines the inventory on hand. When using the periodic LIFO inventory cost method, the physical count determines the inventory on hand.

Morgan Industries is comparing and contrasting its ending inventory value in terms of the three common inventory costing methods in order to help management determine the most appropriate method to use. The company determines three values, which are $96,000, $100,000, and $105,000. If management determines that $100,000 is the most appropriate value for its ending inventory, what inventory cost method has it most likely chosen? a.Middle of cost or market method b.FIFO inventory cost method c.LIFO inventory cost method d.Weighted average inventory cost method

d.Weighted average inventory cost method Correct.

Several controls are used to safeguard inventory, and one of those is to a.allow one employee to order inventory, check in shipments, and stock shelves with inventory to prevent errors. b.keep low-priced inventory behind lock and key. c.allow all employees access to the materials warehouse. d.hire security guards.

d.hire security guards. Several controls are used to safeguard inventory, including using two-way mirrors, cameras, security tags, and guards.

Receiving Report

establishes an initial record of the receipt of the inventory

Applying LCM on an item by item basis

gives the lowest value for inventory

1. Using the data below, determine the ending inventory amount assuming the weighted average method under a periodic inventory system. Line Item DescriptionValueBeginning inventory10 unitsPurchases20 unitsTotal cost of units available for sale$3,000Ending inventory12 units a. $3,000b. $1,200c. $100d. $1,500

idk

2. Using the data below, calculate the cost of goods sold. Line Item DescriptionValueBeginning inventory$1,000Inventory purchased3,000Net income40,000Ending inventory2,000Sales185,000 a. $2,000b. $4,000c. $145,000d. $185,000

idk

number of days sales in inventory

measures the length of time it takes to acquire, sell, and replace the inventory

Inventory Turnover

measures the relationship between the cost of merchandise sold and the amount of inventory carried during the period cost of goods sold /average inventory (beginning of year inventory + end of year inventory / 2)

2. On the income statement, if beginning inventory is understated, then gross profit will be __________ and net income will be __________. a. overstated; overstated b. understated; understated c. overstated; understated d. understated; overstated

overstated; overstated think bc revenue is bigger

documents used for inventory control

purchase order receiving report vendor's invoice

Retail inventory method

requires costs and retail prices to be maintained for the merchandise available for sale

Physical inventory or count of inventory

should be taken near year-end to make sure that the quantity of inventory reported in the financial statements is accurate

Weighted Average Method Inventory Cost Flow Method

sometimes called the average cost flow method, the cost of the units sold and in ending inventory is a weighted average of the purchase costs

First-In, First-Out (FIFO) Inventory Cost Flow Method

the first units purchased are assumed to be sold and the ending inventory is made up of the most recent purchases

Last-In, First-Out (LIFO) Inventory Cost Flow Method

the last units purchased are assumed to be sold and the ending inventory is made up of the first purchases

When recording inventory on the balance sheet:

the method of determining cost of inventory FIFO LIFO or weighted average is disclosed the method of valuing the inventory (cost or the lower of cost or market)

Larger the inventory turnover

the more efficient a company is at managing inventory

Gross Profit Method

uses the estimated gross profit for the period to estimate the inventory at the end of the period

Over the course of two years, inventory errors

will correct themselves