ACC chap 5

Explain the inventory and cost of goods sold relationship by selecting the correct formula below.

Beginning inventory + Net purchases - Ending inventory = Cost of goods sold.

Assume that three identical units are purchased separately on the following three dates and at the respective costs: June 1 at $10 June 2 at $15 July 4 at $20 The company sells two units during the period. Conclude which inventory items are sold first and which unit remains in ending inventory if the company is using the LIFO perpetual cost flow assumption.

LIFO assumes that the last items purchased are sold first, so the June 2 and the July 4 are sold first The June 2 at $15 and the July 4 at $20 are both sold; the June 1 at $10 remains in ending inventory.

An advantage of the LIFO method is that it best matches

current costs with revenues

When purchase cost are ____ LIFO will report the lowest cost of good sold yielding the highest gross profit and net income

declining

The FIFO cost flow assumption assumes that the cost of items purchased _______are the costs that will be transferred first to cost of goods sold on the ______ Correct Answer

earliest income statement

An inventory error not only affects the current year's cost of goods sold, gross profit, net income, current assets and equity, but also the next period's statements because

ending inventory of one period is the beginning inventory of the next period.

The LIFO cost flow assumption assumes that the cost of items purchased ______ are the costs that will be transferred first to cost of goods sold on the ______ ______.

latest/income statement

All of the following are safeguards for inventory except:

preventing risk

An advantage of the weighted average method under a periodic inventory system is that it:

smooths out erratic changes in costs

Storm Windows Company understated their ending inventory during their first year of operations by $2,000. What is the effect of this error at the end of the year? Select all answers which apply.

$2,000 understatement of net income. $2,000 overstatement of cost of goods sold.

Storm Windows Company understated their ending inventory during their first year of operations by $2,000. What is the effect of this error at the end of the year? Select all answers which apply.

1. $2,000 overstatement of cost of goods sold. 2. $2,000 understatement of net income.

If goods are shipped FOB shipping point then the ___________ is responsible for paying freight charges and the ________ will not include the merchandise in their inventory

1. PURCHASER 2. SELLER

If goods are shipped FOB shipping point, then the _______ is responsible for paying freight charges and the _______ will not include the merchandise in their inventory.

1. PURCHASER 2. SELLER

Identify the safeguards that companies implement to protect their inventory. (Check all that apply.)

1. implement security measures such as cameras 2. restrict access to inventory 3. match inventory received with purchase orders 4. control access to inventory records

Q-mart failed to include inventory that was kept in a separate warehouse in its 12/31 end-of-the-period inventory count. Consequently, the ending inventory on 12/31 was understated on the balance sheet. Explain how this error will effect the current year's income statement. (Check all that apply.)

1. the current years cost of goods sold will be to high 2. the current years net income will be to low

1.FIFO, 2.LIFO, 3.Weighted Average 4. SPECIFIC IDENTIFICATION

1.Assumes costs flow in the order incurred 2.Assumes costs flow in the reverse order incurred 3.Assumes costs flow at an average of the costs available 4.Assumes costs flow can be specifically matched with the physical flow of items

Which statement(s) below is(are) correct regarding the purpose of taking a physical inventory count? (Check all that apply.)

1.The physical count is used to adjust the Inventory account balance to the actual inventory available. 2.The physical count is used to determine if there has been any theft, loss, damage or errors in inventory.

Determine cost of goods sold for X-mart, assuming that beginning inventory was $5,000. Net purchases were $20,000 and ending inventory was $9,000.

16000, I added the beginning inventory and net purchases and subtracted the ending

The owner of consigned goods is called the _____________ and the one who sells goods for the owner is called the ______________

CONSIGNOR, CONSIGNEE

Assuming purchase costs are rising in a periodic inventory system, determine which of the statements below are correct regarding the cost of goods sold under FIFO, LIFO and weighted average cost flow methods. (Check all that apply.

Companies using FIFO will report the highest gross profit and net income. Companies using FIFO will report the smallest cost of goods sold. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold. Companies using FIFO will pay higher taxes than companies using LIFO, assuming all else being equal.

Determine which of the following statements is correct regarding consigned goods.

Consigned goods should be included in the consignor's inventory.

XYZ Company made a mistake in counting its ending inventory. Determine which of the items below will be affected by this error. (Check all that apply.)

Cost of goods sold Current assets Net income

In year 1 ending inventory is overstated by $2,000. Explain the effect on cost of goods sold, gross profit and net income in year 1 and year 2 Select all answers that apply.

Cost of goods sold in the current year, year 1, will be understated. Cost of goods sold in the following year, year 2, will be overstated. Gross profit in the current year, year 1, will be overstated. Gross profit in the next year, year 2, will be understated.

In year 1, Shell Company understated their ending inventory. What is the effect of this error in year 2?

Cost of goods sold is understated. Beginning inventory is understated.

Which statement(s) below correctly describe(s) the relationship of cost of goods sold and ending inventory? (Check all that apply.)

Cost of goods sold plus ending inventory will equal the total goods available for sale. Cost of goods available for sale must be allocated between cost of goods sold and ending inventory.

If ending inventory at the end of the year is understated, what is the effect on cost of goods sold and net income?

Cost of goods sold will be overstated and net income will be understated.

Cake Mart understated its ending inventory in the current year by $5,000. The company incorrectly reported net income of $100,000. Determine the effect of the error on the financial statements.

Cost of goods sold will be too high by $5,000, and this caused net income to be understated by $5,000.

Guns R Us overstated its ending inventory in the current year by $5,000. The company incorrectly reported $100,000 of net income. Explain the consequences of this error on the current period's income statement.

Cost of goods sold will be too low by $5,000.

The FIFO cost flow assumption assumes that the cost of items purchased __________ are the costs that will be transferred first to cost of goods sold on the ________

EARLIEST, INCOME STATEMENT

The _____ principle states that inventory costs are expensed as cost of goods sold when inventory is sold.

EXPENSE RECOGNITION

Why would the physical count of inventory be different than what is shown in perpetual inventory records? (Check all that apply.)

Events such as theft, Events such as damage,Events such as loss,Events such as errors

Which of the following lists the four methods used to assign costs to inventory and to cost of goods sold?

FIFO, LIFO, weighted average and specific Identification

Which of the following statements is correct regarding goods in transit?

Goods shipped FOB shipping point will be included in the buyer's inventory.

Recall the formula for figuring a company's inventory turnover ratio.

Inventory turnover = Cost of goods sold/Average inventory

Recount the methods used to assign costs to inventory and cost of goods sold under both a perpetual and a periodic system. (Check all that apply.)

Last-in, first-out Specific identification First-in, first-out Weighted average

When purchase cost are _______ FIFO will report the lowest cost of goods sold yielding the highest gross profit and net income

RISING

Which of the costs below would be included in the recorded cost of merchandise inventory? (Check all that apply.)

Storage costs Insurance costs Invoice cost

Which of the costs below would be included in the recorded cost of merchandise inventory?

Storage costs Invoice cost Insurance costs

True or false: If Dogs R Us overstates ending inventory on the balance sheet, then total equity on the balance sheet will be overstated as well.

TRUE

One identical unit is purchased on each of the following three dates and at the respective costs: June 1 at $10 June 2 at $15 July 4 at $20 The company sells two units during the period. Conclude which inventory items are sold first and which unit remains in ending inventory if the company is using the FIFO cost flow assumption.

The June 1 at $10 and the June 2 at $15 are both sold; the July 4 unit remains in ending inventory.

Which of the following statements correctly explains what the inventory turnover ratio assesses.

The inventory turnover ratio assesses how quickly a company is selling its merchandise, so that it can generate cash to pay debts.

Review the statements below and select the ones that are correct regarding the days' sales in inventory ratio. (Check all that apply.)

The ratio estimates how many days it will take to convert inventory into accounts receivable or cash. The ratio reveals how much inventory is available in terms of the number of days' sales. The ratio is useful in evaluating liquidity of inventory. The ratio is often viewed as a measure of the buffer against out-of-stock inventory.

Sparky's incorrectly included inventory that was on consignment in its ending inventory count. Consequently, the ending inventory was overstated on the balance sheet. Explain how this error will affect this year's income statement. (Check all that apply.)

This year's cost of goods sold will be too low. This year's net income will be too high.

Q-mart failed to include inventory that was kept in a separate warehouse in its end-of-the-period inventory count. Explain how this error will affect this year's balance sheet. (Check all that apply.)

This year's total equity will be understated. This year's total assets will be understated.

Which of the following summarizes the weighted average cost flow assumption?

Weighted average assumes that costs flow at an average of the costs available.

Assuming purchase costs are declining and a periodic inventory system is used, determine the statements below which correctly describe what is happening to cost of goods sold under FIFO, LIFO and weighted average cost flow methods

Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold. Companies using LIFO will report the smallest cost of goods sold. Companies using LIFO will pay higher taxes than companies using FIFO, assuming all else being equal. Companies using LIFO will report the highest ending inventory on their balance sheets, as compared to companies using FIFO or weighted average.

There are advantages to using each of the four inventory costing methods. Identify the statements below that are correct regarding these advantages.

Weighted average tends to smooth out erratic changes in costs. FIFO assigns an amount to inventory on the balance sheet that approximates its current cost.

The kind of business that would use the specific identification method of inventory costing includes:

a car dealership