FAR 07

FAR 7 ABC Trading Co. commenced operations during the year as a large importer and exporter of sundries. The imports were all from one country overseas. The export sales were conducted as drop shipments. ABC never actually took possession of the goods, which were merely transshipped at Houston. ABC Trading reported the following data: Purchases during the year $15.0 million Shipping costs from overseas $1.5 million Shipping costs to export customers $1.0 million Inventory at year end $3.0 million What amount of shipping costs should be included in ABC Trading's year-end inventory valuation? a. $0 b. $200,000 c. $300,000 d. $500,000

C. $300,000 The shipping costs from overseas are included in inventory costs, but the shipping costs to export customers are selling costs that are recognized as expense in the period incurred. Since the $3,000,000 in inventory at year end represents 20% of the $15,000,000 purchased during the year, 20% of the $1,500,000 in shipping costs, or $300,000, will be included in inventory cost.

A flash flood swept through Hat, Inc.'s warehouse on May 1. After the flood, Hat's accounting records showed the following: Inventory, January 1 $35,000 Purchase, January 1 through May 1 $200,000 Sales, January 1 through May 1 $250,000 Inventory not damaged by flood $30,000 Gross profit percentage on sales 40% What amount of inventory was lost in the flood? a. $55,000 b. $85,000 c. $120,000 d. $150,000

a. $55,000 Note: when doing this problem COGS = 250,000 x .6

Which of the following statements regarding inventory accounting systems is true? a. A disadvantage of the perpetual inventory system is that the inventory dollar amounts used for interim reporting purposes are estimated amounts. b. A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages. c. An advantage of the perpetual inventory system is that the record keeping required to maintain the system is relatively simple. d. An advantage of the periodic inventory system is that it provides a continuous record of the inventory balance.

b. A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.

Seafood Trading Co. commenced operations during the year as a large importer and exporter of seafood. The imports were all from one country overseas. The export sales were conducted as drop shipments and were merely transshipped at Seattle. Seafood Trading reported the following data: Purchases during the year $12.0 million Shipping costs from overseas $1.5 million Shipping costs to export customers $1.0 million Inventory at year end $3.0 million What amount of shipping costs should be included in Seafood Trading's year-end inventory valuation? Your Answer: a. $0 b. $250,000 c. $375,000 d. $625,000

c. $375,000 The shipping costs from overseas are inventory costs. Three quarters of the inventory was sold while one quarter remains; thus three quarters of the shipping costs from overseas have already been included in Cost of Goods Sold while one quarter, $375,000, remains in ending inventory ((1/4) X 1.5 million = 375,000). The shipping costs to export customers are selling costs and are not included in inventory.

Landry Co. purchased $15,000 in inventory on April 1 under terms of 1/10, net 30. Landry missed the prompt payment deadline and still holds all the inventory. Under the gross method and the net method, at what amount is the inventory carried on Landry's balance sheet? a.Gross Method$15,000 Net Method$15,000 b.Gross Method$15,150 Net Method$15,150 c.Gross Method$15,000 Net Method$14,850 d.Gross Method$14,850 Net Method$15,000

c.Gross Method$15,000 Net Method$14,850 Under the gross method, inventory is recorded at the invoice price and only discounts taken are recognized. As a result, inventory would be $15,000 under the gross method. Under the net method, it is assumed that all discounts will be taken and any forfeited discounts are recognized as expense. As a result, inventory would be $15,000 - $150 or $14,850 under the net approach.

Hutch, Inc. uses the conventional retail inventory method to account for inventory. The following information relates to 20X1 operations: Average Cost Retail Beginning inventory and purchases $600,000 $920,000 Net markups $40,000 Net markdowns $60,000 Sales $780,000 What amount should be reported as cost of sales for 20X1? Your Answer: a. $480,000 b. $487,500 c. $520,000 d. $525,000

d. $525,000 Under the conventional retail method, beginning inventory at cost of $600,000 is compared to beginning inventory at retail including the retail price of purchases and markups for a total of $960,000. The result is a cost to retail percentage of 62.5%. Ending inventory at retail will be $960,000 reduced by sales of $780,000 and markdowns of $60,000 for a net amount of $120,000. This will be multiplied by the cost to retail percentage to give ending inventory at the approximate lower of cost or market of $75,000. Based on purchases of $600,000, cost of goods sold must be the difference of $525,000.