Chapter 6 Dynamic study module

The Smith Manufacturing Company had inventory turnover of 9 for the current year. What is the days' sales in inventory for the current year?

365 days / 9 = 40.56 days.

Data for Shelby Company for the current year is as follows: Sales Revenue $10,000 Cost of Goods Sold: Beginning Merchandise Inventory $3,000 Net Cost of Purchases 7,000 Cost of Goods Available for Sale 10,000 Less: Ending Merchandise Inventory 2,000 Cost of Goods Sold 8,000 Gross Profit $2,000 Assume that the ending Merchandise Inventory was accidentally understated by $300. What are the correct amounts for Cost of Goods Sold and Gross Profit?

Cost of Goods Sold = $7,700 Gross Profit = $2,300 If Merchandise Inventory is understated, then Cost of Goods Sold is overstated by $300 (need to subtract $300 from Cost of Goods Sold). This makes Net Income understated by $300 or needs to be $300 more at $2,300.

Data for Shelby Company for the current year is as follows: Sales Revenue $10,000 Cost of Goods Sold: Beginning Merchandise Inventory $3,000 Net Cost of Purchases 7,000 Cost of Goods Available for Sale 10,000 Less: Ending Merchandise Inventory 2,000 Cost of Goods Sold 8,000 Gross Profit $2,000 Assume that the ending Merchandise Inventory was accidentally overstated by $500. What are the correct amounts for Cost of Goods Sold and Gross Profit?

Cost of Goods Sold = $8,500 Gross Profit = $1,500 If Merchandise Inventory is overstated, then Cost of Goods Sold is understated by $500 (need to add another $500 to Cost of Goods Sold). This makes Net Income overstated by $500 or needs to be $500 less at $1,500.

Which principle holds that a business's financial statements must report enough information for outsiders to make a knowledgeable decision about the company?

Disclosure Principle

Which of the following costing method results in the highest net income during a period of increasing inventory costs?

FIFO

Assume Baxter Manufacturing begins March with 25 units of inventory that cost $20 each. During March, the following purchases and goods sold were: March 15 Purchased 10 units at $22 30 Sold 30 units Using the FIFO inventory costing method and the perpetual system, what is the ending Merchandise Inventory on March 30?

If Baxter Manufacturing is using FIFO, Cost of Goods Sold would be the (25 units * $20) + (5 units * $22) and Merchandise Inventory would have the remaining 5 units at $22 = $110.

Assume Baxter Manufacturing begins March with 25 units of inventory that cost $20 each. During March, the following purchases and goods sold were: March 15 Purchased 10 units at $22 30 Sold 30 units Using the LIFO inventory costing method and the perpetual system, what is the ending Merchandise Inventory on March 30?

If Baxter Manufacturing is using LIFO, Cost of Goods Sold would be the (10 units * $22) + (20 units * $20) and Merchandise Inventory would have the remaining 5 units at $20 = $100.

Assume Jones Manufacturing begins March with 20 units of inventory that cost $15 each. During March, the following purchases and goods sold were: March 15 Purchased 25 units at $18 30 Sold 30 units Using the FIFO inventory costing method and the perpetual system, what is the ending Merchandise Inventory on March 30?

If Jones Manufacturing is using FIFO, Cost of Goods Sold would be the (20 units * $15) + (10 units * $18) and Merchandise Inventory would have the remaining 15 units at $18 = $270. previous

Assume Jones Manufacturing begins March with 20 units of inventory that cost $15 each. During March, the following purchases and goods sold were: March 15 Purchased 25 units at $18 30 Sold 30 units Using the LIFO inventory costing method and the perpetual system, what is the ending Merchandise Inventory on March 30?

If Jones Manufacturing is using LIFO, Cost of Goods Sold would be the (25 units * $18) + (5 units * $15) and Merchandise Inventory would have the remaining 15 units at $15 = $225

When inventory costs are rising, a company may prefer to use the __________ method in the perpetual system in order to pay the lowest amount of taxes.

LIFO

Which inventory costing method results in a higher Cost of Goods Sold to be reported on the Income Statement when inventory costs are rising?

LIFO

On December 31 of the current year, Aztec Company understated ending Merchandise Inventory by $10,000. How does this error affect the Cost of Goods Sold and the Net Income for the current year?

Overstates Cost of Goods Sold and understates Net Income.

Assume Baxter Manufacturing begins January with 11 units of inventory that cost $12 each. During January, the following purchases and goods sold were: Jan 5 Purchased 8 units at $14 7 Sold 12 units 15 Purchased 6 units at $16 30 Sold 15 units Using the FIFO inventory costing method and the perpetual system, how much is Costs of Goods Sold for the sale of January 7?

Since the company is using FIFO, the 11 units in beginning inventory at $12 each would be moved to Cost of Goods Sold first and you would need 1 more unit (for the total sale of 12 units) from the next purchase of $14 per unit. As a result, Cost of Goods Sold for the sale on January 7 is (11 units * $12) + (1 unit * $14) = $146.

The Tampa Manufacturing Company had the following financial data for December 31, the end of the current year: Cost of Goods Sold $500,000 Beginning Merchandise Inventory 55,000 Ending Merchandise Inventory 45,000 What is the inventory turnover for the year?

So, inventory turnover is $500,000 / (($55,000 + $45,000)/2) = 10 times per year.

Assume the following beginning inventory, purchases, and sales during the month of April: April 1 Beginning Merchandise Inventory, 10 units @ $15 each 3 7 units sold 10 Purchased 9 units at $16 23 4 units sold Determine the Cost of Goods Sold using the FIFO inventory costing method and the periodic inventory system on April 30.

Take the first 10 units purchased at $15, then take 1 unit * $16 (the next purchase down for a total of 11 units): (10 * $15) + (1 * $16) = $166 Use $16 as in FIFO the last units purchased at $16 would be the units remaining in merchandise inventory. You have 8 units in merchandise inventory (10 beginning inventory + 9 purchases - 7 sold - 4 sold = 8 units)

Assume the following beginning inventory, purchases, and sales during the month of April: April 1 Beginning Merchandise Inventory, 10 units @ $20 each 3 8 units sold 10 Purchased 9 units at $21 23 4 units sold Determine the Cost of Goods Sold using the FIFO inventory costing method and the periodic inventory system on April 30.

Take the first 10 units purchased at $20, then take 2 units * $21 (the next purchase down for a total of 11 units): (10 * $20) + (2 * $21) = $242

Assume the following beginning inventory, purchases, and sales during the month of April: April 1 Beginning Merchandise Inventory, 10 units @ $15 each 3 7 units sold 10 Purchased 9 units at $16 23 4 units sold Determine the Cost of Goods Sold using the LIFO inventory costing method and the periodic inventory system on April 30.

Take the last 9 units purchased at $16 , then take 2 units * $15 (the next level up for a total of 11 units): (9 * $16) + (2 * $15) = $174 Use $15 as in LIFO the first units purchased at $15 would be the units remaining in merchandise inventory. You have 8 units in merchandise inventory (10 beginning inventory + 9 purchases - 7 sold - 4 sold = 8 units).

Ace Manufacturing purchased merchandise inventory for $8,000. At the end of the accounting period it has a market value of $7,800. Using the lower-of-cost-or-market rule, what is the journal entry to record the adjustment?

The Merchandise Inventory account has gone down in value by $200 ($8,000 - $7,800). Therefore you have to credit Merchandise Inventory for $200 to reduce the value, and debit Cost of Goods Sold.

Assume Jones Manufacturing begins January with 10 units of inventory that cost $10 each. During January, the following purchases and goods sold were: Jan 5 Purchased 8 units at $11 7 Sold 11 units What is the weighted average cost per unit in the perpetual system at the time the 11 units are sold on January 7?

The weighted average cost per unit at the time of the January 7 sale would be $10.44 per unit, calculated as [(10 units * $10) + (8 units * $11)] / 18 total units = $10.44.

Bates Manufacturing purchased merchandise inventory for $10,000. At the end of the accounting period it has a market value of $8,700. Using the lower-of-cost-or-market rule, what is the amount to report on the Balance Sheet as Merchandise Inventory?

Using the lower-of-cost-or-market, the lower of the cost or market value is reported on the Balance Sheet. The market value is lower at $8,700

The following statement is true regarding inventory errors (overstating or understating ending Merchandise Inventory):

an inventory error cancels out after two periods.

Inventory turnover measures

how rapidly merchandise inventory is sold

Assume Baxter Manufacturing begins January with 11 units of inventory that cost $12 each. During January, the following purchases and goods sold were: Jan 5 Purchased 8 units at $14 7 Sold 12 units 15 Purchased 6 units at $16 30 Sold 15 units Using the LIFO inventory costing method and the perpetual system, how much is Costs of Goods Sold for the sale of January 7?

the 8 units purchased on January 5 at $14 each would be moved to Cost of Goods Sold first and you would need 4 more units (for the total sale of 12 units) from the beginning inventory of $12 per unit. As a result, Cost of Goods Sold for the sale on January 7 is (8 units * $14) + (4 units * $12) = $160.