Chapter 8 Learnsmart

Smith Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $690,000. Its inventory as of December 31, 2016, was $758,100 at year-end costs and the cost index was 1.05. What was DVL inventory on December 31, 2016?

$723,600 Reason: $758,100/1.05 = $722,000 giving 2 layers of $690,000 and $32,000. $690,000 x 1.0 = $690,000 $32,000 x 1.05 = $33,600 $690,000 + $33,600 = $723,600

Western Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $715,000. Its inventory as of December 31, 2016, was $815,400 at year-end costs and the cost index was 1.08. What was DVL inventory on December 31, 2016?

$758,200 Reason: $815,400/1.08 = $755,000 giving 2 layers of $715,000 and $40,000. $715,000 x 1.0 = $715,000 $40,000 x 1.08 = $43,200 $715,000 + $43,200 = $758,200

Parker Company reports gross sales revenue of $7.5 million, net sales revenue of $7 million, and cost of goods sold of $3.5 million. Its inventory balance was $150,000 at the beginning of the accounting period and $200,000 at the end of the accounting period. The company's inventory turnover ratio is closest to

20 Reason: $3.5 million/($150,000+$200,000/2)

Which inventory costing method assumes that items sold are those that were acquired first?

FIFO

Assuming that prices rise over time, which inventory cost flow assumption will result in the highest cost of goods sold?

LIFO

When prices increase, the ______ inventory method provides the best matching of revenue and expenses.

LIFO

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income?

LIFO Reason: In a period of rising prices, LIFO results in goods with the highest cost being sold first resulting in higher cost of goods sold and lower income.

If a company uses LIFO to measure its taxable income, the IRS requires that LIFO also be used to measure income reported to investors and creditors.This is know as the

LIFO conformity rule.

Which of the following are disadvantages of unit LIFO? (Select all that apply.)

Possibility of LIFO liquidation Significant recordkeeping costs

Which of the following situations would result in a LIFO liquidation for a company that has 200 units in beginning inventory and sales of 1,000 units?

The company purchases 950 units during the year.

The dollar-value LIFO (DVL) inventory method

allows a broader range of goods to be included in pools.

In a LIFO inventory system, inventory amounts shown in the balance sheet may be distorted because they may represent

costs incurred several years earlier.

The cost of inventory includes (Select all that apply.)

expenditures to acquire the inventory the cost to bring inventory to its desired location

The FIFO method assumes that units sold are the _________ units acquired and that units remaining in ending inventory are the ________ units purchased.

first; last

Ownership of inventory at the end of the accounting period is determined for (Select all that apply.)

goods shipped to customers. goods shipped by suppliers.

The gross profit ratio is computed as _____ divided by net sales.

gross profit

The layer year cost index is calculated by dividing the cost in ______ year by the cost in ______ year.

layer; base

Finished goods is a type of inventory found on a _____ company's balance sheet.

manufacturing

The gross profit ratio is computed as gross profit divided by _____.

net sales

Joachim Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased 1,200 units, pretax income would have been

$2,000 lower. Reason: Currently cost of goods sold ($22,000) is computed using the 1,000 units at $20 plus 200 units at $10 ((1,000 x $20) + (200 x $10))so the units from beginning inventory are liquidated. If they had purchased at least 1,200 units, cost of goods sold would have been $24,000 (1,200 x $20); $2,000 higher; resulting in lower pretax income of $2,000.

Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that Pernell's cost of goods sold for the 2016 fiscal year would have been

$50,000 lower if it had used FIFO.

At the end of an accounting period, it is important to ensure proper inventory _____ to determine the ownership of goods in transit.

Cutoff

Which inventory costing method assumes that items in ending inventory are the most recently acquired?

FIFO

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory?

LIFO

In which type of inventory costing system are inventory costs on the balance sheet generally out of date?

LIFO

Which inventory costing method assumes that the units sold are the most recent units purchased?

LIFO

The average cost method assumes that cost of goods sold consists of

a mixture of all the goods available for sale.

When inventory quantities _____ during a period, out-of-date inventory layers are liquidated and cost of goods sold will match noncurrent costs with current selling prices in a LIFO inventory costing system.

decline

A LIFO liquidation occurs when inventory quantities ______.

decrease

Items held for sale in the normal course of business are referred to as

inventory

The _____ inventory method assumes that the units in ending inventory were the items acquired first.

last-in, first-out

A _____ company resells goods while a _____ company produces goods.

merchandising; manufacturing

Which inventory system allocates cost of goods available for sale only at the end of each reporting period?

periodic inventory system

A(n) __________ inventory system adjusts for each change caused by a purchase, a sale, or a return of merchandise

perpetual

A _____ inventory system recognizes cost of goods sold each time a sale occurs; a _____ inventory system decreases inventory each time a sale occurs.

perpetual; perpetual

The dollar-value LIFO (DVL) method (Select all that apply.)

simplifies recordkeeping. reduces the risk of liquidation of layers.

LIFO inventory pools

simplify recordkeeping.

What method of inventory valuation matches each unit on hand at the end of the period with its actual cost?

specific identification

The LIFO inventory method assumes that the units sold are

the most recent units purchased.

High recordkeeping costs and possible LIFO liquidation are disadvantages of

unit LIFO.

True or false: Dollar-value LIFO allows a company to combine a large variety of goods into one pool.

True

Chase Company reports gross sales revenue of $7.5 million, net sales revenue of $7 million, and cost of goods sold of $3.5 million. Rounding to the nearest percent, the company's gross profit ratio would be

50%. Reason: Gross profit ratio is computed as gross profit/NET SALES. Be sure to use the net sales number, not gross sales. ($7 million -$3.5 million)/$7 million

Dollar amounts are assigned to goods sold and goods remaining in ending inventory by making an assumption regarding what?

How units of goods and their associated costs flow through the system.

Determining ownership of goods that are in transit at the end of the accounting period is important to

assure proper inventory cutoff.

A periodic inventory system allocates cost of goods available for sale _____; a perpetual inventory system allocates cost of goods available for sale _____.

at the end of the period; each time goods are sold