CHAPTER 6

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A company just began business and made the following four inventory purchases in June: June 1 150 units $ 825 June 10 200 units 1,120 June 15 200 units 1,140 June 28 150 units 885 $3,970 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the average-cost method and a periodic inventory system, the amount allocated to the ending inventory on June 30 is

$1,134 Solution: [Average periodic ending inventory] Ending inventory equals the average cost per unit times the number of units of inventory in ending inventory. The average cost per unit equals the total cost of all inventory divided by the number of inventory units. Average cost per unit = $3,970/700 units = $5.6714 per unit. Ending inventory = $5.6714/unit x 200 units = $1,134

Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January are as follows: Units Per unit price Total Balance, Jan. 1 200 $5.00 $1,000 Purchase, Jan. 15 100 5.30 530 Purchase, Jan. 28 100 5.50 550 An end of January, inventory showed that 160 units were on hand. If the company uses FIFO and sells the units for $10 each, what is the gross profit for the month?

$1,188 Solution: Sales revenue = 240 units x $10/unit = $2,400 Inventory sold in units = 200 + 100 + 100 - 160 = 240 units Cost of goods sold using FIFO = (200 units x $5.00/unit) + (40 units x $5.30/unit) = $1,000 + 212 = $1,212 Gross profit = Sales revenue - Cost of goods sold = $2,400 - 1,212 = $1,188

Hogan Industries had the following inventory transactions: Units Cost/unit Feb. 1 Purchase 36 $45 Mar. 14 Purchase 62 $47 May 1 Purchase 44 $49 The company sold 102 units at $63 per unit. Assuming that a periodic inventory system is used, what is the company's gross profit using LIFO? (rounded to whole dollars)

$1,544 Sales = (102 x $63) = $6,426 Cost of goods sold = (44 x $49) + [(102 − 44) x $47] = $4,882 Gross margin = $6,426 - 4,882 = $1,544

Sugar Company has the following inventory data: July 1 Beginning inventory 20 units at $19 $ 380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $22 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using LIFO and a periodic inventory method, the amount allocated to cost of goods sold for July is

$1.380 Solution: Goods available for sale is $2,000 (i.e., 100 units) Ending inventory = 32 units Cost of goods sold = goods available for sale - ending inventory = 100 units - 32 units = 68 units Using LIFO & periodic, the cost of goods sold includes the newest 68 units and ending inventory includes the 32 oldest units. Cost of goods sold = $220 + [(100 - 32 - 10) x $20] = $1,380

Sweet Company has the following inventory data: July 1 Beginning inventory 30 units at $120 per unit 5 Purchases 180 units at $112 per unit 21 Purchases 90 units at $115 per unit The company sold 204 units. Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a LIFO basis?

$10,992 Solution: Goods available for sale is 300 units (i.e., 30 + 180 + 90 = 300 units) The company sold 204 units (i.e., given) Ending inventory = 96 units (i.e., 300 - 204 = 96 units) Using LIFO & periodic, the cost of goods sold includes the newest 204 units and ending inventory includes the 96 oldest units. Ending inventory = (30 x $120) + (66 x $112) = $3,600 + 7,392 = $10,992

Parrish Company has the following inventory units and costs: Number of units Cost per unit Beg. inventory, Jan. 1 7,000 $11 Purchase, June 19 10,000 $12 Purchase, Nov. 8 4,000 $13 If 8,000 units are on hand at December 31, what is the cost of the ending inventory under FIFO using a periodic inventory system?

$100,000 Solution: [FIFO periodic ending inventory] Ending inventory under FIFO uses the most recent costs of inventory to compute ending inventory. Ending inventory = (4,000 x $13) + (4,000 x $12) = $100,000.

Sweet Company has the following inventory data: July 1 Beginning inventory 45 units at $105 per unit 5 Purchases 200 units at $100 per unit 21 Purchases 75 units at $115 per unit The company sold 142 units. Assuming that a periodic inventory system is used, what is the cost of goods sold on a LIFO basis?

$15,325

South Jenkins Company developed the following information about its inventories in applying the lower-of-cost-or-market (LCM) basis in valuing inventories: Category Cost Market A $52,000 $61,000 B 60,000 37,000 C 75,000 83,000 If South Jenkins applies the LCM basis, the value of the inventory reported on the balance sheet would be

$164.000

West Jenkins Company developed the following information about its inventories in applying the lower-of-cost-or-market (LCM) basis in valuing inventories: Category Cost Market A $55,000 $52,000 B 48,000 58,000 C 77,000 65,000 If West Jenkins applies the LCM basis, the value of the inventory reported on the balance sheet would be

$165,000

Howe Industries had the following inventory transactions occur during the current year: Units Cost/unit Feb. 1 Purchase 40 $41 Mar. 14 Purchase 60 $42 May 1 Purchase 55 $43 The company sold 100 units at $80 each and has a tax rate of 20%. Assuming that a periodic inventory system is used and operating expenses are $1,200, what is the company's after tax net income using LIFO? (rounded to whole dollars)

$2,036

Sweet Company has the following inventory data: July 1 Beginning inventory 32 units at $205 per unit 5 Purchases 188 units at $222 per unit 21 Purchases 64 units at $210 per unit The company sold 102 units. Assuming that a periodic inventory system is used, what is the cost of goods sold on a LIFO basis?

$21,876

The following information is related to beginning of the year balances. Accounts receivable, $700,000 Allowance for doubtful accounts (credit balance), $60,000 During the current year, sales on account were $195,000 and collections from customer were $115,000. Also during the current year, the company wrote off $11,000 in uncollectible accounts. At year-end, the company's credit manager estimates that $72,000 of the outstanding accounts receivable will prove uncollectible. Bad debt expense for the current year is:

$23,000 Solution: At the end of the period, accounts receivable has a balance of $700,000 (i.e., given). The Allowance for Doubtful Accounts should be adjusted so that is will have a balance equal to $72,000 (i.e., given). Prior to the adjusting entry, the Allowance for Doubtful Accounts has a credit balance of $49,000 (i.e., $60,000 - 11,000 = $49,000). The adjusting entry records the difference of $23,000 (i.e., $72,000 - 49,000 = $23,000). This adjustment records Bad Debt Expense and the change to the Allowance for Doubtful Accounts.

Salt Corporation has the following inventory data: July 1 Beginning inventory 30 units at $120 5 Purchases 180 units at $112 14 Sale 120 units 21 Purchases 90 units at $115 30 Sale 84 units Assuming that a periodic inventory system is used, what is the cost of goods sold on a FIFO basis?

$23,088 Solution: Goods available for sale = 30 units + 180 units + 90 units = 300 units Cost of goods sold = 120 units + 84 units = 204 units Ending inventory = 300 units - 204 units = 96 units Using FIFO & periodic, the cost of goods sold includes the oldest 204 units and ending inventory includes the 96 newest units. Cost of goods sold = 30 units at $120/unit + 174 units x $112/unit = $3,600 + 19,488 = $23,088

At the start of the current year, a company's allowance for doubtful accounts had a credit balance of $15,000. During the current year, it had net credit sales of $600,000 and it wrote-off $24,000 of accounts receivable as uncollectible. The company's accounts receivable at the end of the year is $160,000. What is the required adjustment to the allowance for doubtful accounts at the end of the year if past experience indicates that the allowance should be 10% of the balance in receivables?

$25,000 Solution: At the end of the period, accounts receivable has a balance of $160,000 (i.e., given). The Allowance for Doubtful Accounts should be adjusted so that is has a balance equal to 10% of the end-of-period accounts receivable balance (i.e., given). So, the Allowance for Doubtful Accounts needs a credit balance of $16,000 (i.e., 10% x $160,000 = $16,000). Prior to recording the adjusting entry, it had a debit balance of $9,000 (i.e., credit balance of $15,000 but debited by $24,000 when receivables were written-off). In order to change the balance from a $9,000 debit balance to a $16,000 credit balance, the company needs to credit the Allowance for Doubtful Accounts by $25,000.

At December 31, Moore Company's inventory records indicated a balance of $360,000. Upon further investigation it was determined that this amount included the following: (1) $56,000 in inventory purchases made by Moore shipped from the seller December 28 terms FOB destination, but not due to be received until January 3. (2) $24,000 in inventory purchases made by Moore shipped from the seller December 28 terms FOB shipping point, but not due to be received until January 2. (3) $8,000 in goods sold by Moore with terms FOB shipping point on December 28. The goods are not expected to reach their destination until January 5. (4) $9,000 in goods sold by Moore with terms FOB destination on December 28. The goods are not expected to reach their destination until January 4. (5) $13,000 of goods received on consignment from Dollywood Company. What is Moore's correct ending inventory balance at December 31?

$283,000

A company uses LIFO. At the beginning of the current year its inventory was $200,000, and at the end of the current year its inventory is $250,000. At the start of the year its LIFO reserve was $30,000 and at the end of the year its LIFO reserve is $40,000. The company operates in an inflationary environment. If the company used FIFO instead of LIFO, its ending inventory would be

$290,000.

Irwin Industries had the following inventory transactions occur during the current year: Units Cost/unit Feb. 1 Purchase 40 $42 Mar. 14 Purchase 60 $43 May 1 Purchase 55 $44 The company sold 100 units at $75 each and has a tax rate of 20%. Assuming that a periodic inventory system is used and operating expenses are $1,000, what is the company's gross profit using LIFO? (rounded to whole dollars)

$3,145 Solution: Using periodic LIFO, cost of goods sold includes the last inventory purchased (i.e., the newest inventory). Sales revenue = 100 x $75 = $7,500 Cost of goods sold = (55 x $44) + [(100 - 55) x $43] = $2,420 + 1,935 = $4,355 Gross profit = Sales revenue - cost of goods sold = $7,500 - 4,355 = $3,145 Chapter 6, Learning objective 3

At December 31, Moore Company's inventory records indicated a balance of $420,000. Upon further investigation it was determined that this amount included the following: (1) $54,000 in inventory purchases made by Moore shipped from the seller December 29 terms FOB destination, but not due to be received until January 2. (2) $25,000 in inventory purchases made by Moore shipped from the seller December 29 terms FOB shipping point, but not due to be received until January 2. (3) $6,000 in goods sold by Moore with terms FOB shipping point on December 29. The goods are not expected to reach their destination until January 4. (4) $7,000 in goods sold by Moore with terms FOB destination on December 29. The goods are not expected to reach their destination until January 5. (5) $15,000 of goods owned by Moore Company held on consignment by Dollywood Company. What is Moore's correct ending inventory balance at December 31?

$360,000

At December 31, Moore Company's inventory records indicated a balance of $420,000. Upon further investigation it was determined that this amount included the following: (1) $54,000 in inventory purchases made by Moore shipped from the seller December 29 terms FOB shipping point, but not due to be received until January 2. (2) $25,000 in inventory purchases made by Moore shipped from the seller December 29 terms FOB destination, but not due to be received until January 2. (3) $6,000 in goods sold by Moore with terms FOB destination on December 29. The goods are not expected to reach their destination until January 5. (4) $7,000 in goods sold by Moore with terms FOB shipping point on December 29. The goods are not expected to reach their destination until January 4. (5) $15,000 of goods received on consignment from Dollywood Company. What is Moore's correct ending inventory balance at December 31?

$373,000

Spice Company has the following inventory data: Nov. 1 Inventory 30 units for $4.00 per unit 8 Purchase 120 units for $4.30 per unit 17 Purchase 60 units for $4.20 per unit 25 Purchase 90 units for $4.40 per unit A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under LIFO and a periodic inventory system is

$421 Solution: Goods available for sale is 300 units (i.e., 30 + 120 + 60 + 90 = 300 units) Ending inventory = 100 units Cost of goods sold = goods available for sale - ending inventory = 300 units - 100 units = 200 units Using LIFO & periodic, the cost of goods sold includes the newest 200 units and ending inventory includes the 100 oldest units. Ending inventory = (30 x $4.00) + [(100 - 30) x $4.30] = $421

Spice Incorporated has the following inventory data: Nov. 1 Inventory 90 units for $5.00 per unit 8 Purchase 40 units for $5.10 per unit 17 Purchase 30 units for $5.30 per unit 25 Purchase 80 units for $5.50 per unit A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under LIFO and a periodic inventory system is

$501

Cost of goods purchased is $500,000, beginning inventory is $20,000, and cost of goods sold is $460,000. How much is ending inventory?

$60,000

Spice incorporated has the following inventory data: Nov. 1 Inventory 50 units for $6.00 per unit 8 Purchase 90 units for $6.30 per unit 17 Purchase 35 units for $6.20 per unit 25 Purchase 70 units for $6.40 per unit A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under LIFO and a periodic inventory system is

$615 Solution: Goods available for sale is 245 units (i.e., 50 + 90 + 35 + 70 = 245 units) Ending inventory = 100 units Cost of goods sold = goods available for sale - ending inventory = 245 units - 100 units = 145 units Using LIFO & periodic, the cost of goods sold includes the newest 145 units and ending inventory includes the 100 oldest units. Ending inventory = (50 x $6.00) + [50 x $6.30] = $615

$620 Solution: Goods available for sale is $2,000 (i.e., 100 units) Ending inventory = 32 units Cost of goods sold = goods available for sale - ending inventory = 100 units - 32 units = 68 units Using LIFO & periodic, the cost of goods sold includes the newest 68 units and ending inventory includes the 32 oldest units. Ending inventory = $380 + (12 x $20) = $620

At December 31, Sunrise Company's inventory records indicated a balance of $752,000. Upon further investigation it was determined that this amount included the following: (1) $112,000 of inventory purchased by Sunrise under the terms FOB destination, and this inventory did not arrive until January 2, (2) $74,000 of inventory sold and shipped by Sunrise on December 27 under the terms FOB destination, and this inventory was received by the buyer on January 6. (3) $6,000 of inventory held by Sunrise on consignment from another company. (4) $10,000 of inventory consigned to a third-party consignor that it continues to hold at the end of the year. What is Sunrise's correct ending inventory balance at December 31?

$634,000

Cost of goods purchased is $480,000, beginning inventory is $40,000, and cost of goods sold is $440,000. How much is ending inventory?

$80,000

Salt Inc. uses a periodic inventory system. Details for the inventory account for the month of January are as follows: Units Per unit price Total Balance, January 1 200 $5.00 $1,000 Purchase, January 15 100 5.30 530 Purchase, January 28 100 5.50 550 An end of the month inventory showed that 160 units were on hand. If the company uses FIFO, what is the value of the ending inventory?

$868

Haggerty Industries had the following inventory transactions: Units Cost per unit Feb. 1 Beginning balance 30 $1.00 Feb. 14 Purchase 60 $1.05 Feb. 21 Purchase 40 $1.10 Feb. 28 Purchase 50 $1.12 The company sold 100 units at $2.00 per unit. Assuming that a periodic inventory system is used, what is the company's gross profit using LIFO? (rounded to whole dollars)

$89.50 Sales = (100 x $2) = $200 Cost of goods sold = (50 x $1.12) + (40 x $1.10) + (10 x $1.05) = $56 + 44 + 10.50 = $110.50 Gross profit = $200 − 110.50 = $89.50

A company uses the periodic inventory method. An error in the physical count of goods on hand at the end of a period resulted in a $10,000 overstatement of the ending inventory. The effect of this error in the current period is that (i) cost of goods sold is _________________ and (ii) net income is __________________.

(i) Understated and (ii) Overstated Solution: In the periodic inventory system, cost of goods sold is computed at the end of the period using a formula that includes ending inventory which is determined by taking a physical inventory. Sometimes, the ending inventory is mis-counted (i.e., understated or overstated). An error in ending inventory results in an error in cost of goods sold in the opposite direction. For example, understating ending inventory overstates cost of goods sold. Moreover, an error in cost of goods sold causes an error in gross profit, net income, retained earnings, and stockholders' equity. For example, overstating cost of goods sold understates gross profit and retained earnings.

The following information was available for Bowyer Company: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; sales $1,200,000, and net income of $40,000. The company's inventory turnover is

11.0 times.

Net sales are $2,000,000, cost of goods sold is $960,000, and average inventory is $30,000. How many days' sales are in inventory?

11.4 Solution: Days' sales in inventory is calculated as 365 days divided by inventory turnover. Inventory turnover = $960,000/$30,000 = 32 times Days' sales in inventory = 365/32 = 11.4 days

The following information came from the income statement of the Wilkens Company: sales revenue $2,200,000; beginning inventory $220,000; ending inventory $280,000; and gross profit $1,200,000. What is Wilkens' inventory turnover ratio?

4.0 times Solution: Cost of goods sold is the difference between sales revenue and gross profit: $2,200,000 - $1,200,000 = $1,000,000. Inventory turnover ratio = Cost of goods sold divided by average inventory: $1,000,000/[($220,000 + $280,000)/2] = 4.0.

Salt Company has the following inventory data: Nov. 1 Inventory 30 units @ $4.00 each 8 Purchase 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each 25 Purchase 90 units @ $4.40 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under FIFO and a periodic inventory system is

438 Solution: Goods available for sale is 300 units Ending inventory = 100 units Cost of goods sold = goods available for sale - ending inventory = 300 units - 100 units = 200 units Using FIFO & periodic, the cost of goods sold includes the oldest 200 units and ending inventory includes the 100 newest units. Ending inventory = 90 units at $4.40/unit + 10 units x $4.20/unit = $396 + 42 = $438 6,2,1

The following information was available for Camaro Company: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $560,000; sales $800,000, and net income $50,000. The company's inventory turnover is

5.6 times Solution: Average inventory = (80,000 + 120,000)/2 = 100,000 Inventory turnover = Cost of goods sold/average inventory Inventory turnover = 560,000/100,000 = 5.6

The following information came from the income statement of the Watson Company: sales revenue $2,400,000; beginning inventory $150,000; ending inventory $250,000; and gross profit $1,000,000. Inventory turnover is 7 times per year. What is Watson's days in inventory?

52.1 days Solution: Dividing 365 days of the year by the inventory turnover of 7 results in an average of 52.1 days in inventory.

The following information came from the income statement of the Wilkens Company: sales revenue $1,800,000; beginning inventory $160,000; ending inventory $240,000; and gross profit $600,000. What is Wilkens' inventory turnover ratio?

6.0 times Solution: Cost of goods sold is the difference between sales revenue and gross profit: $1,800,000 - $600,000 = $1,200,000. Inventory turnover ratio = Cost of goods sold divided by average inventory: $1,200,000/[($160,000 + $240,000)/2] = 6.0.

The following information was available for Camaro Company: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $560,000; and sales $800,000. The company's days in inventory is

65.2 days Inventory turnover = Cost of goods sold/average inventory Inventory turnover = $560,000/[($80,000 + $120,000)/2] = 5.6 Days in inventory = 365/inventory turnover Days in inventory = 365/ 5.6 = 65.2

Rodman Company had the following: 2017 2016 Ending inventory $34,580 $32,650 Cost of goods sold 182,000 163,000 Sales revenue 300,000 250,000 What is the company's days in inventory for 2017? (rounded)

67.4 days

Bartlett Company recorded the following: 2022 2021 Ending inventory $37,650 $30,490 Cost of goods sold 255,250 261,300 Sales revenue 480,000 500,000 Net income 40,000 30,000 What is the company's inventory turnover for 2022? (rounded)

7.5 times Solution: Inventory turnover = Cost of goods sold/average inventory Inventory turnover = $255,250/[($37,650 + $30,490)/2] = 7.492

Douglas Company has a $51,000 note that carries an annual interest rate of 10%. If the amount of the total interest on the note is equal to $3,400, then what is the duration of the note in months?

8 months The 10% note results in $3,400 and the face value of the note (i.e., principal) is $51,000. Interest equals the principal or face value times the annual interest rate times the number of years (or fraction of year). Interest = Principal x Interest rate x Periods Alternatively: Periods = Interest/(Principal x Interest rate) =$3,400/($51,000 x 10%) = 0.66667 or two-thirds of a year (i.e., 8 months).

Barnett Company recorded the following: 2022 2021 Ending inventory $32,650 $30,490 Cost of goods sold 255,250 261,300 Sales 520,000 560,000 Net income 50,000 40,000 What is the company's inventory turnover for 2022? (rounded)

8.1 times Solution: Inventory turnover = Cost of goods sold/average inventory Inventory turnover = $255,250/[($32,650 + $30,490)/2] = 8.085

The following information came from the income statement of the Watson Company: sales revenue $2,200,000; beginning inventory $220,000; ending inventory $280,000; and gross profit $1,200,000. Inventory turnover is 4 times per year. What is Watson's days in inventory?

91.25 days

Which situation requires using the lower-of-cost-or-market basis to valuing inventory instead of the cost basis?

A decline in the current replacement cost of the inventory

Which one of the following account pairs are both permanent accounts?

Accounts Receivable - Allowance for Doubtful Accounts

Which of the following is the correct sequence to report receivables on the balance sheet?

Accounts receivable, a 6-month note receivable, other receivables

In October, Oliver Company sold merchandise on account to Mr. Reed for $100 with terms 2/10, n/30. Oliver Company uses the percentage of receivables basis for estimating uncollectible accounts on December 31. On May 25, Oliver Company determines that it will not collect the amount due from Mr. Reed. Prepare the journal entry to record the write-off on May 25.

Allowance for Doubtful Accounts 100 Accounts Receivable 100 Solution: Accrual accounting requires the allowance method of accounting for bad debts which involves estimating uncollectible accounts at the end of each period. This method provide a better matching of revenues and expenses than the direct write-off method of accounting for uncollectible accounts. Several alternative procedures exist for estimating uncollectible accounts. Under the percentage of receivables basis, management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts. Under the allowance method, Bad Debts Expense is estimated and recorded at the end of the period as an adjusting entry. Simultaneously, the Allowance for Doubtful Accounts balance is adjusted to reflect the estimated portion of Accounts Receivable not expected to be collected. Writing-off a specific customer's account receivable requires a reduction in the Accounts Receivable. Writing-off an account under the allowance method requires a decrease in the amount set aside in the Allowance for Doubtful Accounts. The adjusting journal entry includes a debit to the Allowance for Doubtful Accounts and a credit to Accounts Receivable for the amount written-off. Since the customer did not pay within the discount period, the customer's opportunity for a discount had been forfeited. Thus, the full invoice price was the amount due, and it is the amount written-off by the company.

Young Company lends Dobson industries $40,000 on August 1 accepting a 9-month, 12% interest note. If Young Company prepares it financial statements as of December 31, what adjusting entry must it record?

Answer Interest Receivable 2,000 Interest Revenue 2,000 Solution: A 12% $40,000 note dated August 1 will accrued five months of interest by December 31 computed as follows: Interest = Principal x Interest rate x Periods = $40,000 x 12% x 5/12 =$2,000 The creditor making the loan will debit Interest Receivable for $2,000 and credit Interest Revenue for $2,000.

If the ending inventory is overstated, what occurs?

Assets are overstated and stockholders' equity is overstated.

Oak Company uses the percentage-of-receivables method for recording bad debts expense. The accounts receivable balance is $60,000 at year-end. The total credit sales were $2,300,000 for the year. Management estimates that 3% of receivables will be uncollectible. What adjusting entry should be made if the Allowance for Doubtful Accounts has a debit balance of $200 before the year-end adjusting entry for Bad Debt Expense?

Bad Debts Expense 2,000 Allowance for Doubtful Accounts 2,000 Solution: The Allowance for Doubtful Accounts needs an ending credit balance of 3% of $60,000 or $1,800. Since the pre-adjusted debit balance is $200, a credit of $2,000 is necessary to increase it to $1,800. The journal entry will record a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for $2,000.

In the table below the information for four companies is provided. Company Accounts Receivable turnover Alpha 16.0 Beta 18.1 Gamma 15.5 Delta 11.9 Industry Average 13.0 Assuming all four companies are in the same industry, which company appears to have the greatest likelihood of paying its current obligations?

Beta

What is the underlying rationale for the lower-of-cost-or-market rule?

Conservatism

A company loaned $30,000 to a debtor on April 1, at 12% interest for 4 months. What adjusting entry should the company record on June 30 before preparing the financial statements on June 30?

Debit Interest Receivable for $900 and credit Interest Revenue for $900

Which of these transactions would cause the inventory turnover ratio to increase the most?

Decreasing the amount of inventory on hand and increasing sales

Which inventory method usually results in ending inventory being the closest to the current cost of replacing inventory?

FIDO method

In a period of declining inventory costs, which inventory flow assumption will result in the lowest net income?

FIFO

In a period of rising prices which inventory method will result in the greatest amount of income tax expense?

FIFO

In a period of declining prices, which of the following inventory methods generally results in the lowest balance sheet figure for inventory?

FIFO method

In a period of inflation, the costs allocated to ending inventory will approximate their current cost if the

FIFO method is used

Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods purchased as inventory has increased during the period, then the company using

FIFO will have the highest retained earnings LIFO will have the highest cost of goods sold.

Ownership passes to the buyer when purchased goods are received by the buyer from a public carrier if the goods are shipped

FOB Destination

Ownership passes to the buyer when the public carrier accepts the goods if the goods are shipped

FOB shipping point

Which of these transactions would cause the days in inventory ratio to increase the most?

Increasing the amount of inventory on hand and decreasing sales

If there is an error in the ending inventory affecting the net income of the current period, what will happen to the net income of the next accounting period?

It will have the reverse effect on the net income during the next accounting period.

Jerry gives goods on consignment to Cecil who agrees to try to sell them for a 25% commission. At the end of the accounting period, the goods have not been sold. Which of the following parties includes in its inventory the consigned goods?

Jerry

In a period of declining inventory costs, which inventory flow assumption will result in the highest net income?

LIFO

Which inventory method will result in the lowest reported net income during periods with rising costs?

LIFO

A company started business in August and it made the following purchases of inventory: (1) on August 1, it purchased 100 units for $1,500; (2) on August 12, it purchased 100 units for $1,550; and (3) on August 24, it purchased 100 units for $1,575. A physical count of the inventory on August 31 reveals that there are 500 units on hand. What inventory method produces the lowest gross profit for August?

LIFO method

In a period of rising prices, which of the following inventory methods generally results in the lowest net income figure?

LIFO method

Reporting which one of the following allows analysts and other users of financial statements to make adjustments to compare companies that use different cost flow methods?

LIFO reserve

In periods of rising prices, what will LIFO produce?

Lower net income than FIFO

In periods of inflation, what will LIFO produce?

Lower total assets than FIFO

Which is true if the ending inventory is overstated?

Net income will be overstated and the stockholders' equity will be overstated.

Which of the following statements is true?

Specific identification method inventory valuation requires the physical flow of goods to be representative of the cost flow.

Which of the following statements is true?

Specific identification method inventory valuation requires the physical flow of goods to be representative of the cost flow. Solution: The specific identification method has this constraint--the physical flow of goods must represent . There is no requirement for the physical flow of goods under the LIFO or FIFO inventory valuation concepts to match cost flow.

All of the following statements are true regarding the LIFO reserve except:

The LIFO reserve normally decreases the longer a company uses LIFO.

Which of the following is an inventory account?

Work in Progress

A company uses the periodic inventory method. An understatement of ending inventory in one period results in

an overstatement of net income of the next period

A company uses the periodic inventory method. An overstatement of ending inventory in one period results in

an understatement of net income of the next period

A company uses the periodic inventory method and the beginning inventory is understated by $4,000 because the ending inventory in the previous period was understated by $4,000; the ending inventory for this period is correct. The amounts reflected in the current end of the period balance sheet are

assets are correct and stockholders' equity is correct.

Which of the following would most likely employ the specific identification method of inventory costing?

car dealer

Inventory costing methods place primary reliance on assumptions about the flow of

costs.

When applying the lower of cost or market rule to inventory valuation, market generally means

current replacement cost

An analysis of a company's accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,600 credit balance before adjustment, the adjustment to record bad debts for the period will require a

debit to Bad Debt Expense for $2,900 Solution: After the year-end adjusting entry, the allowance for doubtful accounts will equal the estimated uncollectible accounts which is given as $4,500. It will have a credit balance because the allowance for doubtful accounts is a contra assets (and contra assets normally have credit balances). Before the adjustment, it has a $1,600 credit balance. So, the year-end adjusting entry will credit the allowance for doubtful accounts by $2,900, and it will debit the bad debt expense for $2,900.

If a company fails to record its estimated bad debts expense then its

equity is overstated.

A company uses the periodic inventory method. An error in the physical count of goods on hand at the end of a period resulted in a $10,000 overstatement of the ending inventory. The effect of this error in the current period is that (i) gross profit is ________________ and (ii) retained earnings is ___________________.

i) Overstated and (ii) Overstated

A company uses the periodic inventory method. Beginning inventory is overstated by $10,000 because the prior's year's ending inventory was overstated by $10,000. The company's ending inventory for this period is correct. The current period's gross profit is _________________ and this year's ending retained earnings is ___________________.

i) understated; (ii) neither overstated nor understated

Goods held on consignment are

never owned by the company holding them

When terms are FOB shipping point

ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller

When terms are FOB destination

ownership of the goods remains with the seller until the goods reach the buyer

Companies must arrive at an accurate count of inventory for financial reporting purposes. What determines whether goods should be included in the inventory it reports on its balance sheet is

the company's title or ownership of the goods.

If goods in transit are shipped FOB destination

the seller has title to the goods until they are delivered to the buyer.

A low number of days in inventory may indicate

there is a relatively low chance of inventory becoming obsolete before it can be sold. there is a relatively high chance that sales opportunities may be lost because of inventory shortages. IF SWITCHED : the company has a relatively small amounts of funds tied up in inventory

If a company that uses the allowance method for uncollectible accounts collects an account receivable after having been previously written it off

there will be both a debit and a credit to accounts receivable

When is a physical inventory is taken, what is included?

work in process

Which statement concerning lower of cost or market (LCM) is false?

Under the LCM basis, inventory is recorded at market if it increases in value after it is acquired.

A company uses the periodic inventory method. If beginning inventory is understated by $10,000 because the prior's year's ending inventory was understated by $10,000. The company's ending inventory for this period is correct. The effect of this error in the current period is that (i) cost of goods sold is _________________ and (ii) net income is ___________________.

Understated & Overstated

A company uses the periodic inventory method. An error in the physical count of goods on hand at the end of a period resulted in a $10,000 understatement of the ending inventory. The effect of this error in the current period is that (i) gross profit is _________________ and (ii) retained earnings is ___________________.

Understated & Understated

Understated and (ii) Understated

A company uses the periodic inventory method. Beginning inventory is understated by $10,000 because the prior's year's ending inventory was understated by $10,000. The company's ending inventory for this period is correct. The current period's gross profit is _________________ and this year's ending retained earnings is ___________________.

i) overstated; (ii) neither overstated nor understated

Charlene Cosmetics Company just began business and made the following four inventory purchases in June: June 1 150 units $ 780 June 10 200 units 1,170 June 15 200 units 1,260 June 28 150 units 990 $4,200 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the average cost method and a periodic inventory system, the amount allocated to the ending inventory on June 30 is

$1,260 Solution: [Average periodic ending inventory] Ending inventory equals the average cost per unit times the number of units of inventory in ending inventory. The average cost per unit equals the total cost of all inventory divided by the number of inventory units. Average cost per unit = $42,000/700 units = $6 per unit. Ending inventory = $6/unit x 210 units = $1,260

Pepper Company has the following inventory data: July 1 Beginning inventory 20 units at $19 $ 380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $22 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the FIFO inventory method and a periodic inventory system, the amount allocated to cost of goods sold for July is

$1,340 Solution: Goods available for sale is $2,000 (100 units) Ending inventory = 32 units Cost of goods sold = goods available for sale - ending inventory = 100 units - 32 units = 68 units Using FIFO & periodic, the cost of goods sold includes the oldest 68 units and ending inventory includes the 32 newest units. Cost of goods sold = 20 units at $19/unit + (68 units - 20 units) x $20/unit = $380 + 960 = $1,340

A company uses LIFO to measure ending inventory and cost of goods sold. It reported $1,000 of beginning inventory and $1,300 of ending inventory using LIFO. It also reports a LIFO reserve of $100 at the end of the year. The company operates in an inflationary environment. If the company used FIFO instead of LIFO, its ending inventory would be

$1,400 Solution: The LIFO reserve is the difference between inventory using LIFO and inventory using FIFO. If the company operates in an inflationary environment (i.e., rising prices), then the LIFO reserve is a positive number, add the LIFO reserve to LIFO inventory to determine the company's FIFO inventory. FIFO ending inventory = LIFO ending inventory + LIFO reserve = $1,300 + 100 = $1,400

Pepper Inc. has the following inventory data: July 1 Beginning inventory 20 units at $20 $ 400 7 Purchases 70 units at $21 1,470 22 Purchases 10 units at $22 220 $2,090 A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the FIFO inventory method and a periodic inventory system, the amount allocated to cost of goods sold for July is

$1,555 Solution: Goods available for sale is $2,090 (100 units) Ending inventory = 25 units Cost of goods sold = goods available for sale - ending inventory = 100 units - 25 units = 75 units Using FIFO & periodic, the cost of goods sold includes the oldest 75 units and ending inventory includes the 25 newest units. Cost of goods sold = 20 units at $20/unit + (75 units - 20 units) x $21/unit = $400 + 1,155 = $1,555 6,2,1

Sugar Company has the following inventory data: July 1 Beginning inventory 20 units at $20 $ 400 7 Purchases 70 units at $21 1,470 22 Purchases 10 units at $22 220 $2,090 A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the LIFO inventory method and a periodic inventory system, the amount allocated to cost of goods sold for July is

$1,585 Solution: Goods available for sale is $2,090 (i.e., 100 units) Ending inventory = 25 units Cost of goods sold = goods available for sale - ending inventory = 100 units - 25 units = 75 units Using LIFO & periodic, the cost of goods sold includes the newest 75 units and ending inventory includes the 25 oldest units. Cost of goods sold = $220 + [(100 - 25 - 10) x $21] = $1,585

Cost of goods purchased is $480,000, ending inventory is $40,000, and cost of goods sold is $540,000. How much is beginning inventory?

$100,000 Solution: Beginning inventory + Purchases - Ending inventory = Cost of goods sold Beginning inventory + 480,000 - 40,000 = 540,000 Beginning inventory = 540,000 - 480,000 + 40,000 = 100,000

Parrish Company has the following inventory units and costs: Number of units Cost per unit Beg. inventory, Jan. 1 8,000 $11 Purchase, June 19 13,000 $12 Purchase, Nov. 8 5,000 $13 If 9,000 units are on hand at December 31, what is the cost of the ending inventory under FIFO using a periodic inventory system?

$113,000 Solution: [FIFO periodic ending inventory] Ending inventory under FIFO uses the most recent costs of inventory to compute ending inventory. Ending inventory = (5,000 x $13) + (4,000 x $12) = $113,000.

$164,000 Category Cost Market LCM A $52,000 $61,000 $52,000 B 60,000 37,000 37,000 C 75,000 83,000 75,000 Total LCM = $164,000

Howe Industries had the following inventory transactions occur during the current year: Units Cost/unit Feb. 1 Purchase 40 $41 Mar. 14 Purchase 60 $42 May 1 Purchase 55 $44 The company sold 100 units at $85 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses are $500, what is the company's after tax net income using LIFO? (rounded to whole dollars)

$2,583 Solution: Using periodic LIFO, cost of goods sold includes the last inventory purchased (i.e., the newest inventory). Sales revenue = 100 x $85 = $8,500 Cost of goods sold = (55 x $44) + [(100 - 55) x $42] = $2,420 + 1,890 = $4,310 Gross profit = Sales revenue - cost of goods sold = $8,500 - $4,310 = $4,190 Net income before taxes = 8,500 - 4,310 - 500 = 3,690 Net income = 3,690 x (100% - 30%) = 2,583

Sweet Company has the following inventory data: July 1 Beginning inventory 50 units at $110 5 Purchases 150 units at $120 21 Purchases 95 units at $113 The company sold 174 units. Assuming that a periodic inventory system is used, what is the cost of goods sold on a LIFO basis?

$20,215 Solution: Goods available for sale is 295 units (i.e., 50 + 150 + 95 = 295 units) The company sold 174 units (i.e., given) Ending inventory = 121 units (i.e., 295 - 174 = 121 units) Using LIFO & periodic, the cost of goods sold includes the newest 174 units and ending inventory includes the 121 oldest units. Cost of goods sold = (95 x 113) + [79 x 120] = $20,215

Sweet Company has the following inventory data: July 1 Beginning inventory 25 units at $205 per unit 5 Purchases 120 units at $220 per unit 21 Purchases 60 units at $215 per unit The company sold 120 units. Assuming that a periodic inventory system is used, what is the cost of goods sold on a LIFO basis?

$26,100 Solution: Goods available for sale is 205 units (i.e., 25 + 120 + 60 = 205 units) The company sold 120 units (i.e., given) Ending inventory = 85 units (i.e., 205 - 120 = 85 units) Using LIFO & periodic, the cost of goods sold includes the newest 120 units and ending inventory includes the 85 oldest units. Cost of goods sold = (60 x $215) + [60 x $220] = $26,100

At December 31, Moore Company's inventory records indicated a balance of $360,000. Upon further investigation it was determined that this amount included the following: (1) $56,000 in inventory purchases made by Moore shipped from the seller December 28 terms FOB destination, but not due to be received until January 3. (2) $24,000 in inventory purchases made by Moore shipped from the seller December 28 terms FOB shipping point, but not due to be received until January 2. (3) $8,000 in goods sold by Moore with terms FOB shipping point on December 28. The goods are not expected to reach their destination until January 5. (4) $9,000 in goods sold by Moore with terms FOB destination on December 28. The goods are not expected to reach their destination until January 4. (5) $13,000 of goods owned by Moore Company held on consignment by Dollywood Company. What is Moore's correct ending inventory balance at December 31?

$296,000 Solution: Do not include the following in inventory: 1. FOB destination purchases not yet received (i.e., $56,000) 2. FOB shipping point goods sold and shipped (i.e., $8,000) 3. Goods held on consignment (i.e., None). Ending inventory = $360,000 - 56,000 - 8,000 = $296,000

Irwin Industries had the following inventory transactions occur during the current year: Units Cost/unit Feb. 1 Purchase 40 $42 Mar. 14 Purchase 60 $43 May 1 Purchase 45 $44 The company sold 100 units at $80 each and has a tax rate of 25%. Assuming that a periodic inventory system is used and operating expenses are $1,000, what is the company's gross profit using LIFO? (rounded to whole dollars)

$3,655 Solution: Learning objective 3 Using periodic LIFO, cost of goods sold includes the last inventory purchased (i.e., the newest inventory). Sales revenue = 100 x $80 = $8,000 Cost of goods sold = (45 x $44) + [(100 - 45) x $43] = $1,980 + 2,365 = $4,345 Gross profit = Sales revenue - cost of goods sold = $8,000 - 4,345 = $3,655

At December 31, Moore Company's inventory records indicated a balance of $400,000. Upon further investigation it was determined that this amount included the following: (1) $56,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB destination, but not due to be received until January 2. (2) $23,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB shipping point, but not due to be received until January 3. (3) $6,000 in goods sold by Moore with terms FOB shipping point on December 27. The goods are not expected to reach their destination until January 4. (4) $8,000 in goods sold by Moore with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6. (5) $13,000 of goods received on consignment from Dollywood Company. What is Moore's correct ending inventory balance at December 31?

$325,000 Solution: Do not include the following in a company's inventory: 1. FOB destination purchases not yet received (i.e., $56,000) 2. FOB shipping point goods sold and shipped (i.e., $6,000) 3. Goods held on consignment (i.e., $13,000) Ending inventory = $400,000 - 56,000 - 6,000 - 13,000 = $325,000

A company uses LIFO. At the beginning of the current year its inventory was $225,000, and at the end of the current year its inventory is $300,000. At the start of the year its LIFO reserve was $20,000 and at the end of the year its LIFO reserve is $25,000. The company operates in an inflationary environment. If the company used FIFO instead of LIFO, its ending inventory would be

$325,000 Solution: The LIFO reserve is the difference between inventory using LIFO and inventory using FIFO. If the company operates in an inflationary environment (i.e., rising prices), then the LIFO reserve is a positive number, add the LIFO reserve to LIFO inventory to determine the company's FIFO inventory. FIFO ending inventory = LIFO ending inventory + LIFO reserve = $300,000 + 25,000 = $325,000 Chapter 6, Learning Objective 6

At December 31, Moore Company's inventory records indicated a balance of $360,000. Upon further investigation it was determined that this amount included the following: (1) $56,000 in inventory purchases made by Moore shipped from the seller December 28 terms FOB shipping point, but not due to be received until January 2. (2) $24,000 in inventory purchases made by Moore shipped from the seller December 28 terms FOB destination, but not due to be received until January 3. (3) $8,000 in goods sold by Moore with terms FOB destination on December 28. The goods are not expected to reach their destination until January 4. (4) $9,000 in goods sold by Moore with terms FOB shipping point on December 28. The goods are not expected to reach their destination until January 5. (5) $13,000 of goods owned by Moore Company held on consignment by Dollywood Company. What is Moore's correct ending inventory balance at December 31?

$327,000 Solution: Do not include the following in inventory: 1. FOB destination purchases not yet received (i.e., $24,000) 2. FOB shipping point goods sold and shipped (i.e., $9,000) 3. Goods held on consignment (i.e., None). Ending inventory = $360,000 - 24,000 - 9,000 = $327,000

At December 31, Moore Company's inventory records indicated a balance of $400,000. Upon further investigation it was determined that this amount included the following: (1) $56,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB destination, but not due to be received until January 2. (2) $23,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB shipping point, but not due to be received until January 3. (3) $6,000 in goods sold by Moore with terms FOB shipping point on December 27. The goods are not expected to reach their destination until January 4. (4) $8,000 in goods sold by Moore with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6. (5) $13,000 of goods owned by Moore Company held on consignment by Dollywood Company. What is Moore's correct ending inventory balance at December 31?

$338,000 Solution: Do not include the following in a company's inventory: 1. FOB destination purchases not yet received (i.e., $56,000) 2. FOB shipping point goods sold and shipped (i.e., $6,000) 3. Goods held on consignment (i.e., None) Ending inventory = $400,000 - 56,000 - 6,000 = $338,000

At December 31, Moore Company's inventory records indicated a balance of $420,000. Upon further investigation it was determined that this amount included the following: (1) $54,000 in inventory purchases made by Moore shipped from the seller December 29 terms FOB destination, but not due to be received until January 2. (2) $25,000 in inventory purchases made by Moore shipped from the seller December 29 terms FOB shipping point, but not due to be received until January 2. (3) $6,000 in goods sold by Moore with terms FOB shipping point on December 29. The goods are not expected to reach their destination until January 4. (4) $7,000 in goods sold by Moore with terms FOB destination on December 29. The goods are not expected to reach their destination until January 5. (5) $15,000 of goods received on consignment from Dollywood Company. What is Moore's correct ending inventory balance at December 31?

$345,000 Solution: Do not include the following in inventory: 1. FOB destination purchases not yet received (i.e., $54,000) 2. FOB shipping point goods sold and shipped (i.e., $6,000) 3. Goods held on consignment (i.e., $15,000). Ending inventory = $420,000 - 54,000 - 6,000 - 15,000 = $345,000

A company uses LIFO. At the beginning of the current year its inventory was $300,000, and at the end of the current year its inventory is $340,000. At the start of the year its LIFO reserve was $10,000 and at the end of the year its LIFO reserve is $15,000. The company operates in an inflationary environment. If the company used FIFO instead of LIFO, its ending inventory would be

$355,000

At December 31, Moore Company's inventory records indicated a balance of $400,000. Upon further investigation it was determined that this amount included the following: (1) $56,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB shipping point, but not due to be received until January 3. (2) $23,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB destination, but not due to be received until January 2. (3) $6,000 in goods sold by Moore with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6. (4) $8,000 in goods sold by Moore with terms FOB shipping point on December 27. The goods are not expected to reach their destination until January 4. (5) $13,000 of goods received on consignment from Dollywood Company. What is Moore's correct ending inventory balance at December 31?

$356,000 Solution: Do not include the following in a company's inventory: 1. FOB destination purchases not yet received (i.e., $23,000) 2. FOB shipping point goods sold and shipped (i.e., $8,000) 3. Goods held on consignment (i.e., $13,000) Ending inventory = $400,000 - 23,000 - 8,000 - 13,000 = $356,000

At December 31, Moore Company's inventory records indicated a balance of $400,000. Upon further investigation it was determined that this amount included the following: (1) $56,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB shipping point, but not due to be received until January 3. (2) $23,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB destination, but not due to be received until January 2. (3) $6,000 in goods sold by Moore with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6. (4) $8,000 in goods sold by Moore with terms FOB shipping point on December 27. The goods are not expected to reach their destination until January 4. (5) $13,000 of goods owned by Moore Company held on consignment by Dollywood Company. What is Moore's correct ending inventory balance at December 31?

$369,000 Solution: Do not include the following in a company's inventory: 1. FOB destination purchases not yet received (i.e., $23,000) 2. FOB shipping point goods sold and shipped (i.e., $8,000) 3. Goods held on consignment (i.e., None) Ending inventory = $400,000 - 23,000 - 8,000 = $369,000

Pepper Company has the following inventory data: July 1 Beginning inventory 20 units at $20 $ 400 7 Purchases 70 units at $21 1,470 22 Purchases 10 units at $22 220 $2,090 A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the FIFO inventory method and a periodic inventory system, the amount allocated to ending inventory for July is

$535 Solution: Goods available for sale is $2,090 (100 units) Ending inventory = 25 units Cost of goods sold = goods available for sale - ending inventory = 100 units - 25 units = 75 units Using FIFO & periodic, the cost of goods sold includes the oldest 68 units and ending inventory includes the 32 newest units. Ending inventory = 10 units at $22/unit + (25 units - 10 units) x $21/unit = $220 + 315 = $535

Ray's Sounds has accumulated the following cost and market data on March 31: Cost Data Market Data iPods $23,000 $21,600 Cell phones $16,000 $17,500 DVDs $21,000 $18,900 Using the lower-of-cost-or-market, how much is the value of the ending inventory?

$56,500 Solution: Learning objective 4 Cost is compared to market for each inventory category as follows: iPods $21,600 + cell phones $16,000 + DVDs $18,900 = $56,500.

Spice Incorporated has the following inventory data: Nov. 1 Inventory 30 units for $6.40 per unit 8 Purchase 120 units for $6.50 per unit 17 Purchase 50 units for $6.00 per unit 25 Purchase 70 units for $6.10 per unit A physical count of merchandise inventory on November 30 reveals that there are 90 units on hand. Ending inventory under LIFO and a periodic inventory system is

$582 Solution: Goods available for sale is 270 units (i.e., 30 + 120 + 50 + 70 = 270 units) Ending inventory = 90 units Cost of goods sold = goods available for sale - ending inventory = 270 units - 90 units = 180 units Using LIFO & periodic, the cost of goods sold includes the newest 180 units and ending inventory includes the 90 oldest units. Ending inventory = (30 x $6.40) + [60 x $6.50] = $582

At December 31, Sunrise Company's inventory records indicated a balance of $723,000. Upon further investigation it was determined that this amount included the following: (1) $5,000 of inventory held by Sunrise on consignment from another company. (2) $125,000 of inventory purchased by Sunrise under the terms FOB destination, and this inventory did not arrive until January 2. (3) $86,000 of inventory sold and shipped by Sunrise on December 29 under the terms FOB destination, and this inventory did not reach the buyer until January 3. (4) $44,000 of inventory consigned to a third-party consignor that it continues to hold at the end of the year. What is Sunrise's correct ending inventory balance at December 31?

$593,000

Dole Industries had the following inventory transactions: Units Cost/unit Feb. 1 Purchase 72 $90 Mar. 14 Purchase 124 $94 May 1 Purchase 88 $98 The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company's gross profit using LIFO? (rounded to whole dollars)

$6,176 Solution: Sales revenue = 204 units x $126/unit = $25,704 Cost of goods sold using LIFO = (88 units x $98/unit) + [(204 - 88) x $94/unit] = $8,624 + 10,904 = $19,528 Gross profit = Sales revenue - Cost of goods sold = $25,704 - 19,528 = $6,176

$6,784 Solution: Sales revenue = 204 units x $126/unit = $25,704 Cost of goods sold using FIFO = (72 units x $90/unit) + (124 units x $94/unit) + [(204 - 72 - 124) x $98] = $6,480 + 11,656 + 784 = $18,920 Gross profit = Sales revenue - Cost of goods sold = $25,704 - 18,920 = $6,784

Freehan Company's accounting records has the following information about its inventory: Units Unit Cost Inventory, Jan. 1: 5,000 $ 8 Purchase, April 2 15,000 10 Purchase, Aug. 28 20,000 12 If the company has 7,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?

$75,250 Solution: [Average periodic ending inventory] Ending inventory cost equals the average cost per unit times the number of units of inventory in ending inventory. The average cost per unit equals the total cost of all inventory amounts divided by the number of inventory units. Average cost per unit = [(5,000 x $8) + (15,000 x $10) + (20,000 x $12)] ÷ (5,000 + 15,000 + 20,000) = $430,000 ÷ 40,000 units = $10.75 per unit. Ending inventory = $10.75 x 7,000 units = $75,250.

Cost of goods purchased is $500,000, ending inventory is $20,000, and cost of goods sold is $560,000. How much is beginning inventory?

$80,000

Freehan Company's accounting records has the following information about its inventory: Units Unit Cost Inventory, Jan. 1 6,000 $ 8 Purchase, April 2 18,000 10 Purchase, Aug. 28 16,000 12 If the company has 8,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?

$84,000 Solution: [Average periodic ending inventory] Ending inventory cost equals the average cost per unit times the number of units of inventory in ending inventory. The average cost per unit equals the total cost of all inventory amounts divided by the number of inventory units. Average cost per unit = [(6,000 x $8) + (18,000 x $10) + (16,000 x $12)] ÷ (6,000 + 18,000 + 16,000) = $420,000 ÷ 40,000 units = $10.5 per unit. Ending inventory = $10.5 x 8,000 units = $84,000.

Salt Company has the following inventory data: Nov. 1 Inventory 30 units @ $4.00 each 8 Purchase 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each 25 Purchase 90 units @ $4.40 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under FIFO and a periodic inventory system is

$846 Solution: Goods available for sale is 300 units Ending inventory = 100 units Cost of goods sold = goods available for sale - ending inventory = 300 units - 100 units = 200 units Using FIFO & periodic, the cost of goods sold includes the oldest 200 units and ending inventory includes the 100 newest units. Cost of goods sold = 30 units at $4/unit + 120 units x $4.30/unit + 50 units x $4.20 = $120 + 516 + 210 = $846 6,2,1

Spice Company has the following inventory data: Nov. 1 Inventory 30 units @ $4.00 each 8 Purchase 120 units @ $4.30 each 17 Purchase 60 units @ $4.20 each 25 Purchase 90 units @ $4.40 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under LIFO and a periodic inventory system is

$863 Solution: Goods available for sale is 300 units (i.e., 30 + 120 + 60 + 90 = 300 units) Ending inventory = 100 units Cost of goods sold = goods available for sale - ending inventory = 300 units - 100 units = 200 units Using LIFO & periodic, the cost of goods sold includes the newest 200 units and ending inventory includes the 100 oldest units. Cost of goods sold = (90 x $4.40) + (60 x $4.20) + [(200 - 150) x $4.30] = $863

Lance Company has the following inventory units and costs: Number of units Cost per unit Beg. inventory, Jan. 1 5,000 $11 Purchase, June 19 11,000 $12 Purchase, Nov. 8 7,000 $13 If 8,000 units are on hand at December 31, what is the cost of the ending inventory under LIFO using a periodic inventory system?

$91,000 Solution: [LIFO periodic ending inventory] Ending inventory under LIFO uses the oldest (i.e., earliest) costs of inventory to compute ending inventory. Ending inventory = (5,000 x $11) + (3,000 x $12) = $91,000

Freehan Company's accounting records has the following information about its inventory: Units Unit Cost Inventory, Jan. 1 8,000 $ 8 Purchase, April 2 17,000 10 Purchase, Aug. 28 15,000 12 If the company has 9,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?

$93,150 Solution: [Average periodic ending inventory] Ending inventory cost equals the average cost per unit times the number of units of inventory in ending inventory. The average cost per unit equals the total cost of all inventory amounts divided by the number of inventory units. Average cost per unit = [(8,000 x $8) + (17,000 x $10) + (15,000 x $12)] ÷ (8,000 + 17,000 + 15,000) = $414,000 ÷ 40,000 units = $10.35 per unit. Ending inventory = $10.35 x 9,000 units = $93,150.

Tidwell Company needs to determine its year-end inventory. There are four categorizes of goods in transit at year-end. Which of these should Tidwell include in its ending inventory? (1) Goods in transit sold by Tidwell FOB destination (2) Goods in transit sold by Tidwell FOB shipping point (3) Goods in transit purchased by Tidwell FOB destination (4) Goods in transit purchased by Tidwell FOB shipping point. Which items should be included in Tidwell's inventory at December 31?

1 & 4 Solution: Ending inventory includes inventory owned at year-end. When goods are sold FOB shipping point, title (i.e., ownership) transfers from the seller to the buyer once the seller ships the goods; goods in transit are owned by the buyer. When goods are sold FOB destination point, title (i.e., ownership) transfers from the seller to the buyer when the buyer receives the goods; goods in transit are owned by the seller.

Carlos Company had beginning inventory of $80,000, ending inventory of $110,000, cost of goods sold of $285,000, and sales revenue of $475,000. What is Carlos' days in inventory?

121.7 days Solution: Days in inventory equals 365 days ÷ inventory turnover (cost of goods sold ÷ average inventory) = 365 ÷ ($285,000 ÷ [($80,000 + $110,000) ÷ 2]) = 121.7 days

Net sales are $2,200,000, cost of goods sold is $1,200,000, and average inventory is $50,000. How many days' sales are in inventory?

15.2 Solution: Days' sales in inventory is calculated as 365 days divided by inventory turnover. Inventory turnover = $1,200,000/$50,000 = 24 times Days' sales in inventory = 365/24 = 15.2 days

Tilson Company needs to determine its year-end inventory. There are four categorizes of goods in transit at year-end. Which of these should Tilson include in its ending inventory? (1) Goods in transit purchased by Tilson FOB destination (2) Goods in transit purchased by Tilson FOB shipping point. (3) Goods in transit sold by Tilson FOB destination (4) Goods in transit sold by Tilson FOB shipping point Which items should be included in Tilson's inventory at December 31?

2 & 3

The following information was available for Bowyer Company: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; and sales $1,200,000. The company's days in inventory is

33.2 days Inventory turnover = Cost of goods sold/average inventory Inventory turnover = $880,000/[($90,000 + $70,000)/2] = 11 Days in inventory = 365/inventory turnover Days in inventory = 365/11 = 33.2

Rodman Company had the following: 2017 2016 Ending inventory $32,650 $30,490 Cost of goods sold 178,000 174,200 Sales revenue 245,000 233,000 What is the company's inventory turnover for 2017? (rounded)

5.6 times Solution: Inventory turnover = Cost of goods sold/average inventory Inventory turnover = $178,000/[($32,650 + $30,490)/2] = 5.6382

Barrett Company recorded the following: 2022 2021 Ending inventory $37,650 $30,490 Cost of goods sold 225,750 261,300 Sales revenue 480,000 500,000 Net income 60,000 50,000 What is the company's inventory turnover for 2022? (rounded)

6.6 times Solution: Inventory turnover = Cost of goods sold/average inventory Inventory turnover = $225,750/[($37,650 + $30,490)/2] = 6.626

Carlos Company had beginning inventory of $75,000, ending inventory of $105,000, cost of goods sold of $405,000, and sales revenue of $515,000. What is Carlos' days in inventory?

81.1 days Solution: Days in inventory equals 365 days ÷ inventory turnover (cost of goods sold ÷ average inventory) = 365 ÷ ($405,000 ÷ [($75,000 + $105,000) ÷ 2]) = 81.1 days

The situation that requires a departure from the cost basis of accounting to the lower of cost or market basis in valuing inventory is necessitated by

A decline in the value of the inventory Solution: To comply with the concepts of conservatism (e.g., accounting rules should avoid overstating assets, profits, etc.), inventory should be valued at the lower-of-cost-or-market rather than at its cost. When there is a decline in the current replacement cost of inventory and a company had paid more for inventory than similar inventory's current replacement cost, the company's inventory account is considered to be overstated. The amount recorded as inventory should be reduced or lowered from cost to "market". Be careful because "market value" is not the company's sales price to its customers. Rather, "market value" is the current replacement cost or how much the company can buy inventory from its suppliers. For example, a company might purchase $100 of inventory and record it at cost of $100. The company might plan on selling the inventory for $150. Before selling that inventory, the current replacement cost might decline to $95 so the company records a $5 decline in inventory. However, the company might be able to still sell at $150 or perhaps approximately $145. Conservatism simply means that accounting rules are designed to report assets, income, etc. on a conservative basis—that is let's avoid overstating how much a company has as assets, profits, etc. Similarly, let's avoid overstating its inventory and the lower-of-cost-or-market helps us avoid overstating the value of inventory reported on a company's balance sheet.

Which one of the following statements is true?

A manufacturing company will normally have raw materials, work in process, and finished goods as inventory account classifications.

Which of the following is a legitimate business reason for taking a physical inventory?

All of these

Which of the following is a legitimate business reason for taking a physical inventory?

All of these. Taking a physical inventory involves counting, weighing, or measuring each kind of inventory on hand. Reasons to take a physical inventory include: (i) to check the accuracy of the perpetual inventory records, (ii) to determine cost of goods sold, and (iii) to determine if any inventory has been lost from waste, shoplifting, or employee theft.

Inventory is accounted for at cost. After a company has determined the quantity of units of inventory, it applies unit costs to the quantities to determine the total cost of inventory and the cost of goods sold. Which of the following statements is not a method for computing the cost of inventory?

Allowance estimation Solution: A company's management decides which method of computing the cost of inventory. Choices of method include (1) specific identification, (2) first-in, first-out, (3) last-in, first-out, and (4) average cost methods.

The lower of cost or market basis of valuing inventories is an example of

Conservatism

What accounting concept is employed when using the lower-of-cost-or-market valuation?

Conservatism

Which of the following statements is true?

Goods held on consignment are not owned by the company that holds them, and they should not be included in the ending inventory of the company that holds them. Solution: Companies must arrive at an accurate count of inventory for financial reporting purposes. What determines whether goods should be included in the inventory it reports on its balance sheet is the company's ownership or title of the goods. Possession of goods does not meet the company owns the goods. For example, companies sometimes hold goods on consignment for others without owning them. Goods held on consignment for others should not be reported on the company's balance sheet; those goods should be reported on the balance sheet of the person or company that owns them.

Which of the following should not be included in the physical inventory of a company?

Goods held on consignment from another company

In periods of deflation, what will LIFO produce?

Higher net income than FIFO Solution: LIFO (i.e., last-in, first-out) uses the cost of the most recently purchased inventory to determine cost of goods sold. Declining prices (i.e., deflation) suggests the most recently purchased inventory is the least expensive inventory. As a result, LIFO and deflation produces the lowest cost of goods sold (i.e., low expenses). Low cost of goods sold produces high gross profit (i.e., gross margin), high net income, high retained earnings, and high total stockholders' equity. Low cost of goods sold (i.e., selling the less expensive inventory) also produces high ending inventory (i.e., keeping the expensive inventory) and high total assets. Chapter 6, Learning objective 3

Which of the following is true of the FIFO inventory method?

It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold.

In a period of inflation, the costs allocated to ending inventory and reported on the balance sheet will likely understate their current cost by the largest amount if the

LIFO method is used. Solution: In order for ending inventory to closely correspond to the current cost of inventory, ending inventory should include the most recently purchased inventory. First-in, first-out (FIFO) uses the oldest inventory to compute cost of goods sold and uses the newest inventory to compute ending inventory. In contrast, last-in, first-out (LIFO) uses the newest inventory to compute cost of goods sold leaving the oldest inventory to compute ending inventory.

With the assumption of costs and prices generally rising, which of the following is correct?

LIFO provides the closest valuation of cost of goods sold to replacement cost of inventory sold. Solution: LIFO assumes that the most recently purchased inventory is sold first. The cost to replace inventory that has been sold in likely closest to the cost of the most recently purchased inventory. Thus, LIFO provides the closest relationship of replacement cost to cost of goods sold on the income statement. In contrast, FIFO provides the closest valuation of inventory on the balance sheet to replacement cost. The specific goods to be sold may come from early purchases or inventory just acquired, so it is not possible to know which cost will become an expense.

LIFO will have the lowest net income. Solution: First-in, first-out (FIFO) considers the oldest inventory to be sold. In contrast, last-in, first-out (LIFO) considers the newest inventory to be sold. Increasing prices for inventory suggest that FIFO sells the oldest and cheapest inventory producing the lowest cost of goods sold, the highest net income and retained earnings, and the highest ending inventory. In contrast, increasing prices for inventory suggest that LIFO sells the newest and most expensive inventory producing the highest cost of goods sold, the lowest net income and retained earnings, and the lowest ending inventory.

A company uses the periodic inventory method. An overstatement of ending inventory in one period results in

an understatement of net income of the next period. Solution: In the periodic inventory system, cost of goods sold is computed at the end of the period (rather than tracked day-by-day as done in a perpetual inventory system). The periodic inventory system uses a formula to compute cost of goods sold: Beginning inventory plus purchased minus ending inventory = cost of goods sold The accuracy of cost of goods sold depends on the accuracy of the beginning and ending physical counts of inventory. Sometimes, a portion of inventory is not counted and inventory is understated. At other times, some inventory may be counted twice resulted in inventory being overstated. Regardless of over- versus under-stating inventory, errors in the amount of inventory results in errors in cost of goods sold. For example, an overstatement of ending inventory becomes an overstatement of beginning inventory in the next period, and an overstatement of beginning inventory in the next period adds too much when computing cost of goods sold, and cost of goods sold (next year) is overstated. The next effect is that too much cost of goods sold is subtracted from revenue to compute gross profit making gross profit understated (and making net income understated). However, Retained Earnings has the correct balance because it was overstated in the prior year due to overstated ending inventory in the prior year, and this year too little income was closed to retained earnings. Recall that an error in ending inventory in one year will have a reverse effect on net income in the next accounting period.

A company uses the periodic inventory method and the beginning inventory is overstated by $4,000 because the ending inventory in the previous period was overstated by $4,000; the ending inventory for this period is correct. The amounts reflected in the current end of the period balance sheet are

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