ACCT 3210: Review Chapter 8: Inventories - Measurement

Smith Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $690,000. Its inventory as of December 31, 2016, was $758,100 at year-end costs and the cost index was 1.05. What was DVL inventory on December 31, 2016?

$723,600

Smith Company purchases merchandise for $10,000. The payment terms are stated as 2/10, n/30. If the company utilizes the net method to record purchases, the merchandise will be recorded at what amount?

$9,800.

Doris recently started her position at Monro Company. The company uses the dollar-value LIFO inventory method. On her first day at work, Doris was asked to calculate the cost index for a new inventory layer. The company's records reveal that the cost in terms of the base year was $50,000 and the cost in terms of the layer year was $100,000. What is the cost index for the new layer?

2

On December 31, Richard Company purchases 1,000 units of merchandise, f.o.b. destination, from Neumann Corp. and 2,000 units, f.o.b. shipping point from Smith Corp. The goods are shipped on December 31. How many units should Richard include in its ending inventory on December 31 from this purchase?

2,000 units

In a(n) _____ inventory system, cost of goods sold is recorded at the end of the accounting period. (Enter only one word.)

Blank 1: periodic

Which of the following would be included in the journal entry needed to adjust a LIFO reserve for an increase in the difference between LIFO and FIO inventory balances?

Debit Cost of goods sold

Assuming that prices increase, which of the following inventory methods results in lower costs of goods sold?

FIFO

Many companies maintain their internal records using _____ or the average cost method, but use ______ for external reporting and income tax purposes.

FIFO; LIFO

True or false: Goods shipped f.o.b. destination are included in the purchaser's inventory while the goods are in transit.

False

Inventory cost flow assumptions can be used to assign dollar amounts to (Select all that apply.)

ending inventory. goods sold.

The amount of cost of goods sold determined under the average cost method typically

falls between the amounts determined using LIFO and FIFO.

If goods are shipped f.o.b. shipping point, at time of shipment

legal title passes to the buyer.

Which of the following methods are acceptable in accounting for purchase discounts? (Select all that apply.)

net method gross method

In a periodic inventory system, the inventory account is _____ and cost of goods sold is recorded _____.

not adjusted as purchases and sales are made; at the end of the reporting period

Which of the following is a correct interpretation of the information provided by the gross profit margin?

It indicates the percentage of each sales dollar available to cover other expenses.

In which type of inventory costing system are inventory costs on the balance sheet generally out of date?

LIFO

When merchandise is shipped f.o.b. shipping point, who includes the inventory on their balance sheet when the goods are with the common carrier?

The purchaser

Which factors may influence a company's choice of inventory cost flow assumption? (Select all that apply.)

actual physical flow of inventory financial statement effect tax implications of choice

The inventory turnover ratio is computed as cost of goods sold divided by _____.

average inventory

Which inventory costing method assumes that items sold are those that were acquired first?

FIFO

The cost of freight-in paid by the purchaser is commonly included in which of the following?

Inventory cost

Another name for the LIFO reserve account is

LIFO allowance.

The cost of goods sold equation assumes that all inventory not on hand at the end of the period was sold and does not account for damaged or stolen merchandise. This is a disadvantage in which type of inventory system?

Periodic

The average cost method assumes that ending inventory consists of

a mixture of all the goods available for sale.

The dollar-value LIFO (DVL) inventory method

allows a broader range of goods to be included in pools.

The layer year cost index is calculated by dividing the cost in ______ year by the cost in ______ year.

layer; base

High recordkeeping costs and possible LIFO liquidation are disadvantages of

unit LIFO.

Gerhard Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased at least 1,200 units, COGS would have been

$2,000 higher.

Joachim Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased 1,200 units, pretax income would have been

$2,000 lower.

In a perpetual inventory system the inventory account is

continually adjusted.

The _____ ratio indicates the percentage of each sales dollar available to cover expenses other than cost of goods sold and then to provide a profit.

gross profit

The inventory turnover ratio shows

how many times the average inventory balance is sold during the current reporting period.

Items held for sale in the normal course of business are referred to as _____. (Enter only one word.)

inventory

Steiner Company's average days in inventory has decreased during 2016 as compared to the prior year. From this information, we can conclude that Steiner (Select all that apply.)

is selling its inventory faster. has a higher inventory turnover ratio.

What of the following could motivate a company that uses LIFO for external reporting to use another method for internal recordkeeping? (Select all that apply.)

Contractual agreements such as bonus contracts. The high recordkeeping cost of LIFO.

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold?

FIFO

Which inventory costing method assumes that items in ending inventory are the most recently acquired?

FIFO

Match the inventory cost flow assumption with the scenario.

FIFO--Most closely approximates the actual physical flow of inventory LIFO--Provides better matching of current revenues with current inventory cost

If a company uses _____ to measure taxable income, they must use the same method for external financial reporting.

LIFO

True or false: LIFO, FIFO, and the weighted average inventory costing methods are all allowed under U.S. GAAP.

True

True or false: The impact on reported income numbers is an important consideration when choosing an inventory cost flow method.

True

The inventory turnover ratio is computed as _____ divided by average inventory.

cost of goods sold

Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that Pernell's cost of goods sold for the 2016 fiscal year would have been

$50,000 lower if it had used FIFO.

Western Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $715,000. Its inventory as of December 31, 2016, was $815,400 at year-end costs and the cost index was 1.08. What was DVL inventory on December 31, 2016?

$758,200

Rudy Company reports gross sales revenue of $5.2 million, net sales revenue of $5 million, and cost of goods sold of $3 million. Its inventory balance was $250,000 at the beginning of the accounting period and $300,000 at the end of the accounting period. The company's inventory turnover ratio is closest to

11

Parker Company reports gross sales revenue of $7.5 million, net sales revenue of $7 million, and cost of goods sold of $3.5 million. Its inventory balance was $150,000 at the beginning of the accounting period and $200,000 at the end of the accounting period. The company's inventory turnover ratio is closest to

20

Adams Corp., a merchandising company, has 30,000 units in its inventory on December 31. Just before closing for the day, the company ships 2,000 units to a customer. The company also receives a notice from its supplier that an order of 10,000 units has been shipped. The terms for the sale and the purchase were f.o.b. shipping point. How many units of merchandise should be included in Adam's ending inventory?

38,000 units

Which of the following statements is correct?

A company can apply more than one inventory cost flow assumption.

What is required at the end of a reporting period in a periodic inventory system?

A physical count of the period's ending inventory so an adjustment can be made.

Cost flow _____ are made to assign dollar amounts to the physical quantities of goods sold and remaining in ending inventory. (Enter only one word.)

Blank 1: assumptions or assumption

The cost of freight-in paid by the purchaser is most commonly included in the cost of _____. (Enter only one word.)

Blank 1: inventory

A disadvantage to the _____ inventory system is that all inventory quantities not on hand at the end of the period are assumed to have been sold, and damaged or stolen items are not identified. (Enter only one word.)

Blank 1: periodic

The cost of components purchased from another manufacturer that will become part of the finished product are recognized in the _____ _____ account. (Enter one word per blank.)

Blank 1: raw Blank 2: materials or material

If goods are shipped f.o.b. destination, the _____ usually is responsible for shipping. (Enter only one word.)

Blank 1: seller or supplier

In a period of rising prices, LIFO produces a higher cost of goods sold, lower net income and therefore, lower liability. (Enter only one word.)

Blank 1: tax

If a company has a policy of not including shipping charges in cost of goods sold, which of the following must occur?

Both the amount of freight-out charges incurred during the period and the income statement classification of charges must be disclosed.

What account is used to expense product costs?

Cost of goods sold

Suppose that Michale Company operates in an environment of rising prices and utilizes the periodic inventory system. If the company were to use the LIFO inventory method, its cost of goods would be $500,000; if it were to use the FIFO method, its cost of goods sold would be $400,000. Based on this information, which of the following predictions would be correct with respect to the weighted-average cost method?

Cost of goods sold would be between $400,000 and $500,000.

What type of expenditures should be included in the cost of inventory of a manufacturing company? (Select all that apply.)

Expenditures necessary to bring inventory to sales location. Expenditures necessary to acquire inventory.

The goods a wholesale company purchases in finished form are referred to as what?

Merchandise inventory

Which of the following are disadvantages of unit LIFO? (Select all that apply.)

Possibility of LIFO liquidation Significant recordkeeping costs

The cost of components purchased from outside companies that will become part of the finished product are referred to as what?

Raw materials

Where can freight-out charges be found? (Select all that apply.)

Selling expenses Cost of goods sold

Which of the following represent a reason why managers closely monitor inventory levels? (Select all that apply.)

To ensure that sufficient units are available. To minimize costs of ordering and carrying inventory.

The dollar-value LIFO method extends the concept of inventory pools by allowing companies to

combine a large variety of goods in one pool.

A just-in-time (JIT) inventory system (Select all that apply.)

allows companies to maintain relatively low inventory balances. assists managers with inventory management.

A periodic inventory system allocates cost of goods available for sale _____; a perpetual inventory system allocates cost of goods available for sale _____.

at the end of the period; each time goods are sold

Smith Corporation began Year 1 with a difference of $50,000 between inventory valued internally using FIFO and inventory valued using LIFO. At the end of Year 1, this difference increased to $75,000. The journal entry to record this increase would include a

credit to LIFO reserve for $25,000.

At the end of an accounting period, it is important to ensure proper inventory _____ to determine the ownership of goods in transit.

cutoff

When inventory quantities _____ during a period, out-of-date inventory layers are liquidated and cost of goods sold will match noncurrent costs with current selling prices in a LIFO inventory costing system.

decline

When a company returns inventory to the seller, net purchases ______.

decrease

The specific identification method (select all that apply):

matches each unit of inventory with its actual cost would be beneficial to a company that makes fine jewelry

Purchase returns by the buyer lead to a reduction in

net purchases

Companies closely monitor inventories to maintain a sufficient ________ of inventory to meet customer demand, while also controlling the ______ of carrying inventory.

quantity; cost

Consistent with International Financial Reporting Standards, which of the following cost flow assumptions are currently permitted? (Select all that apply.)

weighted-average first in, first out

In a perpetual inventory system the inventory account is adjusted (Select all that apply.)

when inventory is purchased. when inventory is sold.

Which of the following accounts would be found on the balance sheet of a manufacturing company?

work in process

In a perpetual inventory system, when inventory is returned which accounts will the purchaser adjust to reflect the effect of the return? (Select all that apply.)

Accounts payable Inventory

Those costs that are included in inventory are referred to as _____ costs. (Enter only one word.)

Blank 1: product

True or false: A periodic inventory system allows management to determine the amount of goods on hand without having to take a physical count.

False

True or false: The LIFO method of inventory valuation is permitted under U.S. GAAP and IFRS.

False

When prices increase, the ______ inventory method provides the best matching of revenue and expenses.

LIFO

If a company uses LIFO to measure its taxable income, the IRS requires that LIFO also be used to measure income reported to investors and creditors.This is know as the

LIFO conformity rule.

In a LIFO inventory system, inventory amounts shown in the balance sheet may be distorted because they may represent

costs incurred several years earlier.

A periodic inventory system (Select all that apply.)

does not continuously track the quantity of merchandise. does not continuously track the cost of merchandise sold.

The _____ inventory method assumes that the units in ending inventory were the items acquired first.

last-in, first-out

The gross profit ratio is computed as gross profit divided by _____.

net sales

The seller views returns as a reduction of net _____; the buyer views returns as a reduction of net _____.

sales; purchases

LIFO inventory pools

simplify recordkeeping.

A JIT inventory system allows companies to maintain ______ inventory levels.

smaller

Generally, product costs are expensed when the related products are

sold

What method of inventory valuation matches each unit on hand at the end of the period with its actual cost?

specific identification

Daryl Corp. purchases 10,000 units of inventory on account for $50,000. Two days after receiving the inventory, Daryl discovers that 1,000 units are defective and returns the defective units to the vendor. The company utilizes a perpetual inventory system. As a result of this return, (Select all that apply.)

the accounts payable balance decreases. the inventory balance decreases.