Chapter 5 HW Part I

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.

$16,000

Assume that Sparks uses a perpetual specific identification inventory system. Its ending inventory consists of 2 units from beginning inventory, 4 units from the Jan. 5 purchase, and 10 units from the Jan. 29 purchases. Calculate the dollar value of its ending inventory. Jan 1 - Beginning Inventory - 10 @ $12 Jan 5 - Purchase - 10 @ $15 Jan 29 - Purchase - 10 @ $18 Jan 30 - Sale - 14 units

$264

Review the steps below that apply LCM to individual items of inventory. Place them in the correct order of occurrence.

1. List the number of units of each product 2. List the cost of each item 3. List the market price of each item 4. Compute total cost and total market value for each item 5. Compare recorded cost of each inventory item with its replacement cost. List lower of cost or market. 6. Adjust inventory downward when market is less than cost

FIFO - Assumes costs flow in the order incurred LIFO - Assumes costs flow in the reverse order incurred Weighted Average - Assumes costs flow at an average of the costs available Specific Identification - Assumes costs flow can be specifically matched with the physical flow of items

Correct

In year 1, Shell Company understated their ending inventory. What is the effect of this error in year 2? (Check all that apply).

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

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 this error had 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.

Grow 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.

Information about Q-mart's inventory appears in the following table. When LCM is applied to the whole inventory, the Merchandise Inventory account must be adjusted from the $1,700 recorded cost down to the $1,620 market amount. Demonstrate the required adjusting entry by choosing the correct answer below.

Debit Cost of Goods Sold $80.

The FIFO cost flow assumption assumes that the cost of items purchased (earliest/latest) are the costs that will be transferred first to cost of goods sold on the income statement (balance sheet/income statement).

Earliest; Income Statement

Identify the statements below that are correct regarding the advantages of the four inventory methods using a perpetual inventory system. (Check all that apply.)

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

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

Insurance costs Storage costs Invoice cost

Explain what lower of cost or market means in regards to reporting merchandise inventory on the balance sheet.

Inventory should be reported at the current market value of replacing it when lower than cost.

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

Inventory turnover = Cost of goods sold/Average inventory

Identify the ways in which lower of cost or market can be applied to merchandise inventory. (Check all that apply.)

It can be applied to major categories of items. It can be applied to each item individually. It can be applied to the inventory as a whole.

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; and 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.

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.

The June 2 at $15 and the July 4 at $20 are both sold; the June 1 at $10 remains in ending inventory.

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 affects the current year's income statement. (Check all that apply.)

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

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

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

The adjusting entry to decrease merchandise inventory due to LCM computations, includes

a credit to Merchandise Inventory

An advantage of the LIFO method is that it best matches

current costs with revenues

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

expense recognition

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

The formula to compute cost of goods sold is

merchandise available for sale minus ending inventory

Damaged goods which can be sold are reported in inventory at

net realizable value

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

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

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.

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

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.)

Net income Current assets Cost of goods sold

Assume that J-Mart uses a perpetual weighted average inventory system. During the period, it had two sales. Calculate the average cost per unit on hand as of June 8 when it made its first sale.

$13.50/unit

Assume that Wally World uses a perpetual weighted average inventory system. During the period, it had two sales. Calculate the average cost per unit on hand as of June 30 when it made its second sale. Jun 1 - Beginning Inventory - 10 @ $12 Jun 5 - Purchase - 10 @ $15 Jun 8 - Sale - 6 units Jun 28 - Purchase - 10 @ $18 Jun 30 - Sale - 8 units

$15.375/unit

Assume that Sparks uses a perpetual FIFO inventory system. Its ending inventory consists of 9 units. Calculate the dollar value of its ending inventory.

$162

Chocolate Inc. uses a perpetual inventory system and uses the FIFO cost flow assumption. Calculate the cost of goods sold for the sale made on Mar. 20. Mar 1 - Beginning Inventory - 3 @ $12 = $36 Mar 15 - Purchase - 17 @ $15= $255 Mar 20 - Sale - 12 @ $50 each

$171

Assume that Maycces uses a perpetual weighted average inventory system. Its ending inventory consists of 13 units. Calculate the dollar value of its ending inventory assuming the following information.

$195

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

Given the following information, determine the cost of goods sold for the period. Jan 1 - Beginning Inventory - $950 Jan 1-30 - Purchases - $1800 Jan 31 - Ending Inventory - $250

$2,500

Assume that Widgets, Inc. uses a perpetual specific identification inventory system. During the period, it sold 4 units from beginning inventory, 8 units from the Jan. 5 purchase, and 2 units from the Jan. 29 purchases. Calculate the dollar value of its cost of goods sold for the period.

$204

Chocolate Inc. uses the weighted average cost flow assumption in a perpetual inventory system. During the month, it had two sales totaling 15 units. Calculate the cost of goods sold for the first sale made on Mar. 20.

$276

Recall the formula for figuring Days' Sales in Inventory.

(Ending inventory/Cost of goods sold) x 365

Which of the statements below explain why LCM is used? (Check all that apply.)

- Assets are not shown at an inflated value on the balance sheet, but rather at lower of cost or replacement cost. - LCM allows companies to recognize a loss in value of an asset in the period the loss occurs. - Companies cannot report inventory on a balance sheet that is higher than replacement cost.

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.

Demonstrate how inventory costs are treated both as assets and expenses by selecting the correct statement(s) below. (Check all that apply.)

- Inventory items retained at the end of the period are considered part of Merchandise Inventory on the balance sheet. - Inventory items sold are considered part of cost of goods sold on the income statement. - Inventory costs are treated as an expense when they are sold.

Determine which of the following statements are correct regarding the difference between physical flow and the cost flow of inventory. (Check all that apply.)

- Perishable items usually have an actual physical flow of FIFO. - Cost flow is an assumption about which goods/items are sold. - A business may adopt any cost flow assumption when accounting for perishable items. - Physical flow refers to the actual movement of goods.

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.)

- Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold. - Companies using FIFO will report the highest gross profit and net income. - Companies using FIFO will report the smallest cost 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 are correct regarding damaged or obsolete goods. (Check all that apply.)

-If damaged goods can be sold at a reduced price, they are included in inventory. -Damaged goods are included in inventory at their net realizable value. -A loss in value is reported in the period when goods are -damaged or become obsolete. -Damaged goods are not included in inventory if they cannot be sold.

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

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

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

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

The owner of consigned goods is called the ___ and the one who sells goods for the owner is called the ___.

Consignor; Consignee

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

Errors, loss, theft, and damage

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

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

Determine which of the following statements is correct regarding the relationship of ending inventory and beginning inventory.

The ending inventory of the previous period is the beginning inventory of the current period.

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

The inventory turnover ratio assesses whether management is doing a good job controlling the amount of inventory.

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 often viewed as a measure of the buffer against out-of-stock inventory. The ratio is useful in evaluating how quickly inventory is being sold

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

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.

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

Show your understanding of the ownership of goods in transit by completing the following statement. If goods are shipped FOB shipping point, then the (purchaser/seller) is responsible for paying freight charges and the (purchaser/seller) will not include the merchandise in their inventory.

purchaser; seller

When purchase costs are (rising/declining) , FIFO will report the lowest cost of goods sold yielding the highest gross profit and net income.

rising

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

smooths out erratic changes in costs