LS7: Inventory and Cost of Goods Sold

What effect does the inventory costing method have on the income statement? The inventory methods affects the amount of the ______.

Cost of Goods Sold, Gross Profit, Income from Operations, Income

Which inventory costing methods are based on assumptions that accountants make about the flow of inventory costs?

FIFO LIFO

The assumption that a company makes about its inventory cost flow has ______.

an effect on the company's income statement an effect on the company's balance sheet

Inventory is reported on the ______. Later, when the inventory is sold, it becomes ______.

balance sheet as a current asset; Cost of Goods Sold on the income statement

In a perpetual inventory system, Inventory is initially recorded at ______.

cost

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using last-in, first-out, the 3 goods sold are ______.

from the purchases made during the month

An increase in a company's inventory balance from a prior year is ______.

good if the inventory turnover ratio is higher

Inventory costing methods allowed by US GAAP include:1) specific ___________ ;2) ________ average; 3) last in, ___________ out; and 4) first in, ____________ out.

identification weighted first first

As inventory quality increases, its cost usually ___________ .

increases

When costs to purchase inventory are rising, using LIFO leads to reporting a ______ than FIFO.

lower value for Inventory on the balance sheet

Applying the lower of cost or market rule results in inventory being reported at the ______.

market value if lower than cost

Companies generally report their accounting method for inventory in the ______.

notes to the financial statements

The costs of carrying inventory include the costs of ______.

obsolescence theft spoilage storage

On May 1, there were 4 inventory items that cost $30 each. On May 5, 2 items were purchased for $35 each. Given one item from the beginning inventory and one from the May 5 inventory were sold, under the ____________ ______________ inventory method, cost of goods sold would equal $65.

specific identification

Barry, Inc.'s sales equal $30,000 and cost of goods sold equals $10,000. Its beginning inventory was $800 and its ending inventory is $1,200. Barry's inventory turnover ratio equals ______ times.

10

Which statements are true?

A grocery store may or may not use the Last-in, First-out inventory method. The inventory method is an assumed cost flow and does not have to correspond with the actual physical flow of goods.

Which of the following would be considered merchandise inventory?

Purchased finished goods

Which statements are true?

The inventory method is an assumed cost flow and does not have to correspond with the actual physical flow of goods. A grocery store may or may not use the Last-in, First-out inventory method.

Which company will have the higher number of days to sell? Company A whose cost of goods sold equals $1,000 and whose average inventory is $100. Company B whose cost of goods sold equals $2,000 and whose average inventory is $100.

company A

Days to sell measures the average number of ______.

days from the time inventory is purchased to the time it is sold

A ______ inventory turnover ratio may result in a reduction in storage and obsolescence costs as well as reduced borrowing.

higher

What is the inventory costing method that adds together the total cost of all goods available for sale during the period, and then divides that by the number of units available for sale to get a value to assign to all goods sold and all goods remaining in inventory?

Weighted average cost

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using first-in, first-out, the 3 goods sold are assumed to be ______.

from the beginning inventory

FIFO, an inventory costing method, actually describes how to calculate the cost of ______.

goods sold

To find a description of the inventory accounting method used by a company, you need to look at the ______.

notes to the financial statements

___________ inventory consists of products acquired in a finished condition, ready for sale without further processing.

Merchandise

Chicken Little started the month with 5 eggs in its inventory that cost $2 each. During the month, Chicken Little bought 30 more eggs that cost $2.50 each. At the end of the month, Chicken Little counted its inventory and found that 8 eggs remained unsold. If Chicken Little uses FIFO periodic, its Cost of Goods Sold for the month is _____

$65

An understatement of the 2019 ending inventory will affect ______.

2020 Beginning Inventory 2020 Cost of Goods Sold 2019 Cost of Goods Sold

Which statement is true?

Specific identification, weighted average cost, LIFO and FIFO are acceptable GAAP costing methods.

Which statement are true?

Specific identification, weighted average cost, LIFO and FIFO are generally accepted costing methods. The inventory methods apply to both perpetual and periodic inventory systems. The inventory costing methods determine the amount of the debit to Cost of Goods Sold and credit to Inventory.

The company has 1,000 of each of the following items in its inventory: What is the amount of the lower-of-cost-or-market write down, if any?

The write down would be $1,000.

True or false: Specific identification is an inventory method typically used when accounting for expensive and unique inventory items.

True

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10 each. It purchased 3 more at $12 each. What is the weighted average cost per unit?

$11.20

Delta Diamonds had 5 diamonds available for sale this year: June 1 - purchased 1 for $500; July 9 - purchased 2 for $550 each; and on September 23 - purchased 2 for $600 each. On December 24, it sold 1 of the diamonds. Using LIFO periodic, its ending inventory is ______.

$2,200

Delta Diamonds had 5 one-carat diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using a periodic specific identification, its Inventory after the December 24 sale is ______.

$2,250

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10. It purchased 3 more at $12. It sold 4 units during the period. What is the Cost of Goods Sold using the weighted average cost method?

$44.80

King Costume started the month with 8 masks in its beginning inventory that cost $10 each. During the month, King Costume purchased 40 additional masks for $12 each. At the end of the month, King counted its inventory and found that 5 masks remained unsold. If King Costume uses LIFO periodic, its Cost of Goods Sold for the month is ______.

$510

Delta Diamonds had 5 one-carat diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds that was purchased on July 9. Using periodic specific identification, its Cost of Goods Sold is ______.

$550

Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using periodic weighted average cost, its Cost of Goods Sold is ______.

$560

Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500; 2 purchased July 9 for $550 each; and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using LIFO periodic, its Cost of Goods Sold is ______.

$600

Barrry Bees, Inc.'s Cost of Goods Sold equals $10,000. Its beginning inventory was $800, and its ending inventory was $1,200. Barry Bee's days to sell equals ______________days (assume 365 days per year).

37

If Barry Bees, Inc.'s days to sell equals 73 days based on a 365-day year, then its inventory turnover ratio equals ___________ times.

5

Risen, Inc. has beginning inventory of $16 which consists of 2 units at $8 each. It purchased 10 units at $10 each. It sold 5 units for $20 each. Which would result in the higher Gross Profit, FIFO or LIFO and why?

FIFO because the older, less expensive units are assumed to be sold first making Cost of Goods Sold lower and Gross Profit higher than LIFO

True or false: GAAP requires that a business must use an inventory accounting method that is the same as the physical flow of goods in and out of the business.

False

The inventory turnover measures the ______.

the number of times on average the inventory is bought and sold during a period

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10 each. It purchases 3 more at $12 each. It sold 2 units. Using the __________ ___________ cost inventory method, Cost of Goods Sold equals $22.40.

weighted average

Ending inventory errors in 2019 ______.

will affect the 2020 goods available for sale but will not affect the 2020 ending inventory

At year end, CurlZ, Inc.'s inventory consists of 200 bottles of CleanZ at $1 per bottle and 100 boxes of DyeZ at $10 per box. Market values are $1.20 per bottle for CleanZ and $8 per box for DyeZ. CurlZ should report its inventory at ______.

$1,000

Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using FIFO, its Inventory at December 31 is ______.

$2,300

Lux Company started the month with 20 lamps in its beginning inventory that cost $30 each. During the month, Lux purchased 80 additional lamps for $31 each. At the end of the month, Lux counted its inventory and found that 25 lamps remained unsold. If Lux uses periodic weighted average cost, its Cost of Goods Sold for the month is ______.

$2,310

Mountain Made started the month with 3 quilts in its beginning inventory that cost $200 each. During the month, Mountain Made purchased 20 additional quilts for $210 each. At the end of the month, Mountain Made counted its inventory and found that 5 quilts remained unsold. If Mountain Made uses LIFO periodic, its Cost of Goods Sold for the month is ______.

$3,780

Widget Company started the month with 10 gadgets in its Inventory that cost $5 each. During the month, Widget bought 50 more gadgets that cost $6 each. At the end of the month, Widget counted its inventory and found that 8 gadgets remained unsold. If Widget uses FIFO, its Cost of Goods Sold for the month is ______.

$302

Which of the following statements are true?

An increased inventory balance is undesirable if it is a result of an accumulation of unsaleable inventory. An increased inventory balance is desirable if management is building up stock in anticipation of higher sales.

Inventory is reported as a(n) ______.

Current Asset on the Balance Sheet

Which of these might cause the value of inventory to fall below its original cost?

Damage Obsolescence from going out of style Increased competition

When costs are rising, ______ produces a larger Inventory balance (making the balance sheet appear to be stronger) and smaller Cost of Goods Sold (resulting in a larger Gross Profit) which makes the company look more profitable.

FIFO

Which inventory costing method assumes that the inventory's cost flow out in the same order the goods are received?

FIFO

Which of the following income statement line items are affected by the inventory method chosen?

Income before Income Tax Expense Income Tax Expense Net Income Gross Profit Income from Operations

The weighted average cost method uses the weighted average cost to calculate the value of ______.

Inventory Cost of Goods Sold

Which of the following statements concerning inventory is correct?

Inventory is reported as a current asset because it will be converted into cash within a year of the balance sheet date.

If a company assumes that its inventory costs flow out in the opposite order from which the goods were purchased, it uses __________ to value its inventory.

LIFO

Which inventory costing method assumes that inventory costs flow out in the opposite order from which the goods were purchased?

LIFO

Which inventory costing method uses the newest cost for Cost of Goods Sold on the income statement and the oldest cost for Inventory on the balance sheet?

LIFO

How is the lower-of-cost-or-market rule applied when there are more than 2 types of inventory?How is the lower-of-cost-or-market rule applied when there are more than 2 types of inventory?

Only the items that have market values lower than the costs will be written down.

If Vito, Inc. has an inventory turnover ratio of 5 times, then its days to sell must be ______.

73 days

Specific identification is ______.

an inventory method that tracks which item is actually sold and debits Cost of Goods Sold for the actual cost of the item

If a new company calculates the average cost of its inventory by adding together the total cost of all purchases and then dividing it by the number of units purchased during the period, it is using the weighted _________ cost method.

average

Merchandise Inventory ______.

consists of products acquired in a finished condition that are available for sale is reported as a current asset on the balance sheet

A company had beginning inventory of 5 units that cost $10 each. During the month, 15 units were purchased for $11 each. The company sold 12 units during the month and had 8 remaining in ending inventory. If the company uses FIFO to calculate cost of goods sold, then its gross profit will be $5 ___________ than if it had used LIFO.

more

Which of the following may occur with a higher inventory turnover ratio?

Reduction in inventory storage costs Reduction in obsolescence

Which of these inventory accounting methods are acceptable under US GAAP?

Specific identification FIFO Weighted average LIFO