MC #8
Average Days inventory
365/ Inventory Turnover
Texas Petrochemical reported the following April activity for its VC-30 lubricant, which had a balance of 300 qts. @ $2.40 on April 1. Purchases Sales Apr 10 [email protected] Ap 3 200 Apr14 400 @ 2.60 Apr 12 500 Apr 20 400 @2.65 Apr 26 300 The ending inventory assuming LIFO and a perpetual inventory system is:
A. $1,545.
Bond Company adopted the dollar-value LIFO inventory method on January 1, 2011. In applying the LIFO method, Bond uses internal cost indexes and the multiple-pools approach. The following data were available for Inventory Pool No. 3 for the two years following the adoption of LIFO: Yr Cost Base yr cost index 1/1/11 300k 300k 1.00 12/31/11 345600 320k 1.08 12/31/12 420k 350k 1.2 Under the dollar-value LIFO method the inventory at December 31, 2012, should be
A. $357,600.
Inventory records for Herb's Chemicals revealed the following: March 1, 2011, inventory: 1,000 gallons @ $7.20 = $7,200 Purchases Sales Mar 10 [email protected] Mar 5 400 Mar 16 800 @ 7.30 Mar 14 700 Mar 23 600 @7.35 Mar 20 500 Mar 26 700 Ending inventory assuming LIFO in a periodic inventory system would be:
A. $5,040.
Inventory records for Herb's Chemicals revealed the following: March 1, 2011, inventory: 1,000 gallons @ $7.20 = $7,200 Purchases Sales Mar 10 [email protected] Mar 5 400 Mar 16 800 @ 7.30 Mar 14 700 Mar 23 600 @7.35 Mar 20 500 Mar 26 700 The ending inventory under a periodic inventory system assuming average cost (rounding unit cost to three decimal places) is:
A. $5,087.
Inventory records for Herb's Chemicals revealed the following: March 1, 2011, inventory: 1,000 gallons @ $7.20 = $7,200 Purchases Sales Mar 10 [email protected] Mar 5 400 Mar 16 800 @ 7.30 Mar 14 700 Mar 23 600 @7.35 Mar 20 500 Mar 26 700 The ending inventory assuming FIFO is:
A. $5,140.
Linguini Inc. adopted dollar-value LIFO (DVL) as of January 1, 2011, when it had an inventory of $800,000. Its inventory as of December 31, 2011, was $811,200 at year-end costs and the cost index was 1.04. What was DVL inventory on December 31, 2011?
A. $780,000
In a perpetual average cost system:
A. A new weighted-average unit cost is calculated each time additional units are purchased.
The inventory method that will always produce the same amount for cost of goods sold in a periodic inventory system as in a perpetual inventory system would be:
A. FIFO.
Using the gross method, purchase discounts lost are:
A. Included in purchases.
In a periodic inventory system, the cost of purchases is debited to:
A. Purchases.
Dollar-value LIFO:
A. Starts with ending inventory measured at current costs and recreates LIFO layers for measuring inventory costs.
. If a company uses LIFO, a LIFO liquidation is problematic for a company's income taxes:
A. When inventory purchase costs are rising.
Fulbright Corp. uses the periodic inventory system. During its first year of operations, Fulbright made the following purchases (listed in chronological order of acquisition): • 40 units at $100 • 70 units at $80 • 170 units at $60 Sales for the year totaled 270 units, leaving 10 units on hand at the end of the year. Ending inventory using the LIFO method is:
B. $1,000.
Northwest Fur Co. started 2011 with $94,000 of merchandise inventory on hand. During 2011, $400,000 in merchandise was purchased on account with credit terms of 1/15, n/45. All discounts were taken. Purchases were all made f.o.b. shipping point. Northwest paid freight charges of $7,500. Merchandise with an invoice amount of $5,000 was returned for credit. Cost of goods sold for the year was $380,000. Northwest uses a perpetual inventory system. What is ending inventory assuming Northwest uses the gross method to record purchases?
B. $112,550.
On January 1, 2011, Badger Inc. adopted the dollar-value LIFO method. The inventory cost on this date was $100,000. The 2011 ending inventory, valued at year-end costs, was $126,000. The relative cost index for this inventory in 2011 was 1.05. What inventory balance should Badger report on its 12/31/11 balance sheet?
B. $121,000
On January 1, 2011, Badger Inc. adopted the dollar-value LIFO method. The inventory cost on this date was $100,000. The 2011 ending inventory, valued at year-end costs, was $126,000. The relative cost index for this inventory in 2011 was 1.05. Suppose that Badger's 2013 ending inventory, valued at year-end costs, was $153,600 and that the relative cost index for this inventory in 2013 was 1.20. What inventory balance would Badger report on its 12/31/13 balance sheet?
B. $129,800
Nu Company reported the following pretax data for its first year of operations. Net Sales 2,800 COGS 2,500 Op. Exp 880 Effective tax rate 40% Ending inventory (LIFO: 820) Ending inventory (FIFO: 1,060) What is Nu's net income if it elects LIFO?
B. $144.
Nueva Company reported the following pretax data for its first year of operations. Net Sales 7,340 COGS 5,790 Op. Exp 1,728 Effective tax rate 40% Ending inventory (LIFO: 618) Ending inventory (FIFO: 798) What is Nueva's net income if it elects LIFO?
B. $264.
Nu Company reported the following pretax data for its first year of operations. Net Sales 2,800 COGS 2,500 Op. Exp 880 Effective tax rate 40% Ending inventory (LIFO: 820) Ending inventory (FIFO: 1,060) What is Nu's net income if it elects FIFO?
B. $288.
Inventory records for Herb's Chemicals revealed the following: March 1, 2011, inventory: 1,000 gallons @ $7.20 = $7,200 Purchases Sales Mar 10 [email protected] Mar 5 400 Mar 16 800 @ 7.30 Mar 14 700 Mar 23 600 @7.35 Mar 20 500 Mar 26 700 Ending inventory assuming LIFO in a perpetual inventory system would be:
B. $5,060.
Alison's dress shop buys dresses from McGuire Manufacturing. Alison purchased dresses from McGuire on July 17, and received an invoice with a list price amount of $6,000 and payment terms of 2/10, n/30. Alison uses the net method to record purchases. Alison should record the purchase at:
B. $5,880.
Ramen Inc. adopted dollar-value LIFO (DVL) as of January 1, 2011, when it had a cost inventory of $600,000. Its inventory as of December 31, 2011, was $667,800 at year-end costs and the cost index was 1.06. What was DVL inventory on December 31, 2011?
B. $631,800.
Nueva Company reported the following pretax data for its first year of operations. Net Sales 7,340 COGS 5,790 Op. Exp 1,728 Effective tax rate 40% Ending inventory (LIFO: 618) Ending inventory (FIFO: 798) What is Nueva's gross profit ratio (rounded) if it elects FIFO?
B. 32%.
Thompson TV and Appliance reported the following in its 2011 financial statements: Sales 420,000 COGS Inventory 1/1 82,000 Net Purchases 340,000 Goods Avail for Sale 422,000 Inventory 12/31 86,00 COGS 336,000 Gross Profit 84,000 Thompson's 2011 inventory turnover ratio is
B. 4.00.
The largest expense on a retailer's income statement is typically:
B. Cost of goods sold.
When reported in financial statements, a LIFO allowance account usually:
B. Is added to LIFO cost to indicate what the inventory would cost on a FIFO basis.
The primary reason for the popularity of LIFO is that it:
B. Saves income taxes currently.
The LIFO Conformity Rule states that if LIFO is used for:
B. Tax purposes, it must be used for financial reporting.
Cinnamon Buns Co. (CBC) started 2011 with $52,000 of merchandise on hand. During 2011, $280,000 in merchandise was purchased on account with credit terms of 2/10 n/30. All discounts were taken. Purchases were all made f.o.b. shipping point. CBC paid freight charges of $9,000. Merchandise with an invoice amount of $4,000 was returned for credit. Cost of goods sold for the year was $316,000. CBC uses a perpetual inventory system. Assuming CBC uses the gross method to record purchases, ending inventory would be:
C. $15,480.
Cinnamon Buns Co. (CBC) started 2011 with $52,000 of merchandise on hand. During 2011, $280,000 in merchandise was purchased on account with credit terms of 2/10 n/30. All discounts were taken. Purchases were all made f.o.b. shipping point. CBC paid freight charges of $9,000. Merchandise with an invoice amount of $4,000 was returned for credit. Cost of goods sold for the year was $316,000. CBC uses a perpetual inventory system. What is cost of goods available for sale, assuming CBC uses the gross method?
C. $331,480.
The Mateo Corporation's inventory at December 31, 2011, was $325,000 based on a physical count priced at cost, and before any necessary adjustment for the following: ▪ Merchandise costing $30,000, shipped F.o.b. shipping point from a vendor on December 30, 2011, was received on January 5, 2012. ▪ Merchandise costing $22,000, shipped F.o.b. destination from a vendor on December 28, 2011, was received on January 3, 2012. ▪ Merchandise costing $38,000 was shipped to a customer F.o.b. destination on December 28, arrived at the customer's location on January 6, 2012. ▪ Merchandise costing $12,000 was being held on consignment by Traynor Company. What amount should Mateo Corporation report as inventory in its December 31, 2011, balance sheet?
C. $405,000.
Buckeye Corporation adopted dollar-value LIFO on January 1, 2011, when the inventory value was $500,000 and the cost index was 1.0. On December 31, 2011, the inventory value at year-end costs was $535,000 and the cost index was 1.06. Buckeye would report a LIFO inventory of:
C. $505,000.
Fulbright Corp. uses the periodic inventory system. During its first year of operations, Fulbright made the following purchases (listed in chronological order of acquisition): • 40 units at $100 • 70 units at $80 • 170 units at $60 Sales for the year totaled 270 units, leaving 10 units on hand at the end of the year. Ending inventory using the average cost method (rounded) is:
C. $707.
Udon Inc. adopted dollar-value LIFO (DVL) as of January 1, 2011, when it had an inventory of $700,000. Its inventory as of December 31, 2011, was $777, 000 at year-end costs and the cost index was 1.05. What was DVL inventory on December 31, 2011?
C. $742,000.
Thompson TV and Appliance reported the following in its 2011 financial statements: Sales 420,000 COGS Inventory 1/1 82,000 Net Purchases 340,000 Goods Avail for Sale 422,000 Inventory 12/31 86,00 COGS 336,000 Gross Profit 84,000 Thompson's 2011 gross profit ratio is:
C. 20%.
Nu Company reported the following pretax data for its first year of operations. Net Sales 2,800 COGS 2,500 Op. Exp 880 Effective tax rate 40% Ending inventory (LIFO: 820) Ending inventory (FIFO: 1,060) What is Nu's gross profit ratio if it elects LIFO?
C. 40%.
On January 1, 2011, Badger Inc. adopted the dollar-value LIFO method. The inventory cost on this date was $100,000. The 2011 ending inventory, valued at year-end costs, was $126,000. The relative cost index for this inventory in 2011 was 1.05. Suppose that Badger's 2012 ending inventory, valued at year-end costs, was $143,000 and that the relative cost index for this inventory in 2012 was 1.10. In determining the inventory balance should Badger report in its 12/31/12 balance sheet:
C. An additional layer of $11,000 is added to the 1/1/12 balance.
In a perpetual inventory system, the cost of inventory sold is:
C. Debited to cost of goods sold.
Inventory does not include:
C. Equipment used in the manufacturing of assets for sale.
In a period when costs are rising and inventory quantities are stable, the inventory method that would result in the highest ending inventory is:
C. FIFO.
Under the net method, purchase discounts lost are:
C. Included in interest expense.
In a perpetual inventory system, the cost of purchases is debited to:
C. Inventory.
Ending inventory is equal to the cost of items on hand plus:
C. Items in transit sold f.o.b. destination.
GG Inc. uses LIFO. GG disclosed that if FIFO had been used, inventory at the end of 2011 would have been $15 million higher than the difference between LIFO and FIFO at the end of 2010. Assuming GG has a 40% income tax rate:
C. Its reported net income for 2011 would have been $9 million higher if it had used FIFO rather than LIFO for its financial statements.
A company that prepares its financial statements according to International Financial Reporting Standards can use each of the following inventory valuation methods except:
C. LIFO.
During periods when costs are rising and inventory quantities are stable, cost of goods sold will be:
C. Lower under average cost than LIFO.
Compared to dollar-value LIFO, unit LIFO is:
C. More costly to implement.
Company A is identical to Company B in every regard except that Company A uses FIFO and Company B uses LIFO. In an extended period of rising inventory costs, Company A's gross profit and inventory turnover ratio, compared to Company B's, would be:
C. Option C (Gross Profit: higher / Inventory turnover: Lower)
Purchases equal the invoice amount:
C. Plus freight-in, less purchase discounts.
The use of LIFO during a long inflationary period can result in:
C. Significant cash flow advantages over FIFO.
The use of LIFO in accounting for a firm's inventory:
C. Usually provides a better match of expenses with revenues.
Inventory Turnover
COGS/ Avg Inventory
Texas Petrochemical reported the following April activity for its VC-30 lubricant, which had a balance of 300 qts. @ $2.40 on April 1. Purchases Sales Apr 10 [email protected] Ap 3 200 Apr14 400 @ 2.60 Apr 12 500 Apr 20 400 @2.65 Apr 26 300 The ending inventory assuming LIFO and a periodic inventory system is:
D. $1,470.
Robertson Corporation's inventory balance was $22,000 at the beginning of the year and $20,000 at the end. The inventory turnover ratio for the year was 6.0 and the gross profit ratio 40%. What were net sales for the year?
D. $210,000
Nueva Company reported the following pretax data for its first year of operations. Net Sales 7,340 COGS 5,790 Op. Exp 1,728 Effective tax rate 40% Ending inventory (LIFO: 618) Ending inventory (FIFO: 798) What is Nueva's net income if it elects FIFO?
D. $372.
Tiger Inc. adopted dollar-value LIFO on January 1, 2011, when the inventory value was $360,000 and the cost index was 1.25. On December 31, 2011, the inventory was valued at year-end cost of $395,000 and the cost index was 1.30. Tiger would report a LIFO inventory of:
D. $380,600.
Northwest Fur Co. started 2011 with $94,000 of merchandise inventory on hand. During 2011, $400,000 in merchandise was purchased on account with credit terms of 1/15, n/45. All discounts were taken. Purchases were all made f.o.b. shipping point. Northwest paid freight charges of $7,500. Merchandise with an invoice amount of $5,000 was returned for credit. Cost of goods sold for the year was $380,000. Northwest uses a perpetual inventory system. Assuming Northwest uses the gross method to record purchases, what is the cost of goods available for sale?
D. $492,550.
Fulbright Corp. uses the periodic inventory system. During its first year of operations, Fulbright made the following purchases (listed in chronological order of acquisition): • 40 units at $100 • 70 units at $80 • 170 units at $60 Sales for the year totaled 270 units, leaving 10 units on hand at the end of the year. Ending inventory using the FIFO method is:
D. $600.
Under the gross method, purchase discounts taken are:
D. Deducted from purchases.
In periods when costs are rising, LIFO liquidations:
D. Distort the net income.
In a period when costs are falling and inventory quantities are stable, the lowest taxable income would be reported by using the inventory method of:
D. FIFO.
During periods when costs are rising and inventory quantities are stable, ending inventory will be:
D. Higher under FIFO than LIFO.
During 2011, WW Inc. reduced its LIFO eligible inventory quantities due to a problem with its major supplier. The effect of this liquidation was to increase its cost of goods sold by approximately $50 million. WW has a 40% income tax rate. If WW had not experienced these supplier problems and the resulting liquidation,
D. Its 2011 net income would have been $30 million higher because inventory purchase prices were declining.
HH Company uses LIFO. HH disclosed that if FIFO had been used, inventory at the end of 2011 would have been $20 million lower than the difference between LIFO and FIFO at the end of 2010. Assuming HH has a 30% income tax rate:
D. Its reported cost of goods sold for 2011 would have been $20 million higher if it had used FIFO rather than LIFO for its financial statements.
Cost of goods sold is given by:
D. Net Purchases + beginning inventory - ending inventory.
In a periodic inventory system, the cost of inventories sold is:
D. Not recorded at the time of sale.
Company C is identical to Company D in every respect except that Company C uses LIFO and Company D uses average costs. In an extended period of rising inventory costs, Company C's gross profit and inventory turnover ratio, compared to Company D's, would be:
D. Option d (Gross Profit: lower/ Inventory turnover: higher)
Gross Profit Ratio
Gross Profit / Sales
Gross Profit
total Revenue - COGS