AC 210 LearnSmart Chapter 7

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, Cost of Goods Sold equals ______.

$33

Alpha Company bought 75 units of inventory for $4 each and 25 units of inventory for $5 each. Alpha's weighted average cost per unit is ______.

$4.25 ((75 x $4) + (25 x $5))/100=$4.25

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 Cost of Goods Sold for the year ended is ______.

$500

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 (($500 + (2 x $550) + (2 x $600))/(1 + 2 + 2)=$560 per unit)

LIFO uses the ______ unit costs for Cost of Goods Sold on the income statement and the ______ unit costs for Inventory on the balance sheet.

newest; oldest

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

notes to the financial statements

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

notes to the financial statements

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 ((2*10)+(3*12))/5

Which of these might cause the value of inventory to fall below its original cost? (Check all that apply.)

- Damage - Increased competition - Obsolescence from going out of style

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 BLANK days (assume 365 days per year).

36.5 or 17 ITR = cost of goods sold/average inventory = $10,000/$1,000 = 10 Days to Sell = 365/ITR = 365/10

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

5

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

73 days

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 BLANK cost method. (Enter one word per blank.)

AVERAGE

Your most challenging concepts:

Apply the specific identification method Calculate weighted average cost Describe the lower-of-cost or net realizable value concept

Days to Sell

Average number of days from purchase to sale; a higher number means a longer time to sell

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 A = 365/(1,000/100) = 36.5 B = 365/(2,000/100) = 18.25

365/inventory turnover ratio

Days to Sell Formula

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

FIFO

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

Which of the following is merchandise inventory?

Goods held for sale in the normal course of business

cost of goods sold/average inventory

Inventory Turnover Ratio Formula

Inventory costing methods allowed by US GAAP include :1) specific BLANK; 2) BLANK average; 3) last in, BLANK out; and 4) first in, BLANK out. (Enter one word per blank.)

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

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.

Which of the following would be considered merchandise inventory?

Purchased finished goods

Which inventory method is typically used when accounting for expensive and unique inventory items?

Specific Identification

Which statement is true?

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

FIFO, LIFO, and weighted average inventory costing methods are based on ______.

assumptions that accountants make about the flow of inventory costs

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

cost

Inventory is reported as a(n) ______.

current asset on the balance sheet

Days to sell measures the average number of ______.

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

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

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

good if the inventory turnover ratio is higher

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

goods sold

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

higher

When costs to purchase inventory are rising, using LIFO leads to reporting ______ cost of goods sold and ______ net income than FIFO.

higher; lower

The assumption that a company makes about its inventory cost flow can affect cost of goods sold on its ______ and inventory on its ______.

income statement; balance sheet

A company had beginning inventory of 3 units that cost $5 each. During the month, 17 units were purchased for $6 each. The company sold 15 units during the month and had 5 remaining in ending inventory. If the company uses FIFO instead of LIFO to calculate cost of goods sold, then cost of goods sold will be ______.

lower using FIFO, leading to higher gross profit and higher income taxes (FIFO cost of goods sold includes the older units purchased at lower prices. Lower cost means higher profit and higher taxes.)

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

market value if lower than cost

Inventory Turnover Ratio

the number of times inventory turns over during the period; a higher ratio means a faster turnover

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

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

true

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 ((10 gadgets x $5) + (42 gadgets x $6))

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 The lower-of-cost-or-market rule requires the DyeZ boxes be recorded at the lower market value of $8 instead of the higher cost of $10. Thus, Inventory equals =(200 bottles x $1) + (100 boxes x $8)).

Mountain Made started the month with 3 quilts in its beginning inventory that cost $200 each. During the month, Mountain Made purchased 7 additional quilts for $210 each. At the end of the month, Mountain Made counted its inventory and found that 2 quilts remained unsold. If Mountain Made uses periodic weighted average cost, its Cost of Goods Sold for the month is ______.

$1,656 (the weighted average cost per quilt equals ((3 x $200) + (7 x $210))/10 which is then multiplied the 8 quilts sold to get cost of goods sold.)

Which of the following statements are true? (Check all that apply.)

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

Which inventory costing methods are based on assumptions that accountants make about the flow of inventory costs? (Check all that apply.)

- FIFO - LIFO

Which financial statements are needed to calculate the inventory turnover ratio? (Check all that apply.)

- Income Statement - Balance Sheet

The weighted average cost method uses the weighted average cost to calculate the value of ______. (Check all that apply.)

- Inventory - Cost of Goods Sold

Which of the following may occur with a higher inventory turnover ratio? (Check all that apply.)

- Reduction in obsolescence - Reduction in inventory storage costs

The goals of inventory managers include ______. (Check all that apply.)

- keeping the costs of buying and storing inventory as low as possible - having enough inventory on hand to meet customer demand - making sure that inventory quality meets customer expectations

The costs of carrying inventory include the costs of ______. (Check all that apply.)

- theft - storage - obsolescence - spoilage (The cost of delivering goods to customers is a selling expense.)

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

LIFO

When using the specific identification inventory method, cost of goods sold equals the ______.

cost of the actual item sold

Assuming sales remain unchanged, if Cost of Goods Sold increases then Gross Profit BLANK. (Enter one word per blank.)

decreases