Chapter 6 Terms

Using the data below, determine the ending inventory amount assuming the weighted average method under a periodic inventory system. Beginning inventory 10 units Purchases 20 units Total cost of units available for sale $3,000 Ending inventory 12 units $3,000 $1,200 $100 None of these choices are correct.

$1200 10 + 20 = 30 3,000/30 = 100 100 x 12 = $1,200

Jacobs Company had inventory of 15 units at a cost of $12 each on June 1. On June 5, Jacobs purchased 10 units at $13 per unit. On June 12, it purchased 20 units at $14 per unit. On June 17, it sold 30 units. Using FIFO, what is the value of the inventory at June 17 after the sale? $140 $160 $210 $380

$210

Why would management prefer to use LIFO over FIFO in periods of rising prices? A. Income shown on the company's tax return would be lower if LIFO rather than FIFO is used. B. Income shown on the company's tax return would be higher if LIFO rather than FIFO is used. C. Cost of goods sold shown on the company's income statement would be lower if LIFO rather than FIFO is used. D. Dividends shown on the company's financial statements would be higher if LIFO rather than FIFO is used.

A. Income shown on the company's tax return would be lower if LIFO rather than FIFO is used.

Which cost flow assumption assumes that the last units purchased are the first units sold? A. LIFO B. FIFO C. Specific identification D. Weighted average cost

A. LIFO

Which inventory method results in the highest net income during periods of falling prices? A. LIFO B. Weighted average C. FIFO D. Specific identification

A. LIFO

With a perpetual inventory system, when should a physical count of inventory be taken? A. Near year-end B. Mid-year C. Never; a physical count is not needed with a perpetual inventory system D. None of these choices are correct.

A. Near year-end

On the balance sheet, if ending inventory is overstated, then total assets will be __________ and stockholders' equity will be __________. A. overstated; overstated B. understated; understated C. overstated; understated D. understated; overstated

A. overstated; overstated

On the income statement, if beginning inventory is understated, then gross profit will be __________ and net income will be __________. A. overstated; overstated B. understated; understated C. overstated; understated D. understated; overstated

A. overstated; overstated

Which cost flow assumption assumes that the first units purchased are the first units sold? A. LIFO B. FIFO C. Specific identification D. Weighted average cost

B. FIFO

Why does the specific identification inventory method work well for business such as automobile dealerships? A. The inventory keeps track of the automobiles that are first-in first-out. B. This method works because each automobile has a unique serial number. C. It best shows the current cash flow at all times. D. It's the easiest method to factor the perpetual inventory costs.

B. This method works because each automobile has a unique serial number.

Which statement applies to the specific identification inventory method? A. This method is also known as the average cash flow method. B. The ending inventory is made up of the most recent purchases. C. Each unit sold is identified with a specific purchase. D. This is closely related to a perpetual inventory system.

C. Each unit sold is identified with a specific purchase.

Which inventory method results in the highest net income during periods of rising prices? A. LIFO B. Weighted average C. FIFO D. Specific identification

C. FIFO

The lower-of-cost-or-market method can be applied to A. each item of inventory. B. each major class or category of inventory. C. total inventory as a whole. D. All of these choices are correct.

D. All of these choices are correct.

Which of the following documents is often used for inventory control? A. Vendor's invoice B. Receiving report C. Purchase order D. All of these choices are correct.

D. All of these choices are correct.

When the weighted average cost method is used in a perpetual inventory system, a weighted average unit cost for each item is computed A. each time a sale is made. B. at the end of the year. C. at the beginning of each month. D. each time a purchase is made.

D. each time a purchase is made.

Lower-of-Cost-or-Market Method On the basis of the following data: Item Inventory Quantity Cost per Unit Market Value per Unit (Net Realizable Value) JFW1 6,330 $10 $11 SAW9 1,140 $36 $34 Determine the value of the inventory at the lower-of-cost-or-market by applying lower-of-cost-or-market to each inventory item, as shown in Exhibit 9. $102,060

JFW1 = 6,330 x $10 = $63,300 6,330 x $11 = $69,630 SAW9 = 1,140 x $36 = $41,040 1,140 x $34 = $38,760 (Add lowest #'s) --> $63,300 + $38,760 = $102,060

Sales-Related and Purchase-Related Transactions Using Perpetual Inventory System The following were selected from among the transactions completed by Babcock Company during November of the current year: Nov. 3. Purchased merchandise on account from Moonlight Co., list price $86,000, trade discount 20%, terms FOB destination, 2/10, n/30. 4. Sold merchandise for cash, $36,650. The cost of the goods sold was $23,200. 5. Purchased merchandise on account from Papoose Creek Co., $46,950, terms FOB shipping point, 2/10, n/30, with prepaid freight of $880 added to the invoice. 6. Returned $13,600 ($17,000 list price less trade discount of 20%) of merchandise purchased on November 3 from Moonlight Co. 8. Sold merchandise on account to Quinn Co., $14,910 with terms n/15. The cost of the merchandise sold was $10,270. 13. Paid Moonlight Co. on account for purchase of November 3, less return of November 6. 14. Sold merchandise on VISA, $254,020. The cost of the goods sold was $127,340. 15. Paid Papoose Creek Co. on account for purchase of November 5. 23. Received cash on account from sale of November 8 to Quinn Co. 24. Sold merchandise on account to Rabel Co., $54,500, terms 1/10, n/30. The cost of the goods sold was $36,190. 28. Paid VISA service fee of $3,380. 30. Paid Quinn Co. a cash refund of $5,920 for returned merchandise from sale of November 8. The cost of the returned merchandise was $3,420. Required: Journalize the transactions.

Nov 3. Debit: Inventory Credit: Accounts Payable $86,000 x .20 = $17,200 $86,000 - $17,200 = $68,800 $68,800 x .02 = $1,376 $68,800 - $1,376 = $67,424 Nov 4. Sale: Debit: Cash $36,650 Credit: Sales $36,650 Nov. 4 Cost: Debit: Cost of goods sold $23,200 Credit: Inventory $23,200 Nov. 5 Debit: Inventory $46,891 Credit: Accounts Payable-Papoose Creek Co $46,891 $46,950 x .02 = $939 $46,950 - $939 = $46,011 $46,011 + $880 = $46, 891 Nov. 6 Debit: Accounts Payable-Moonlight Co $13,328 Credit: Inventory $13,328 $13,600 x .02 = $272 $13,600 - $272 = $13,328 Nov. 8 Debit: Accounts Receivable - Quinn Co $14,910 Credit: Sales $14,910 Nov. 8 Debit: Cost of goods sold $10,270 Credit: Inventory $10,270 Nov. 13 Debit: Accounts Payable-Moonlight Co. Credit: Cash Nov. 3 = $67,424 - Nov. 6 = $13,328 = $54,096 Nov. 15 Debit: Accounts Payable-Papoose Creek Co. $46,891 Credit: Cash $46,891 $46,950 x .02 = $939 $46,950 - $939 = $46,011 $46,011 + $880 = $46,891 Nov. 23 Debit: Cash $14,910 Credit: Accounts Receivable $14,910 Nov. 24 Sale: Debit: Accounts Receivable-Rabel Co. $53,955 Credit: Sales $53,955 $54,500 x 0.01 = $545 $54,500 - $545 = $53,955 Nov. 24 Cost: Debit: Cost of goods sold $36,190 Credit: Inventory $36,190 Nov. 28 Debit: Credit Card Expense $3,380 Credit: Cash $3,380 Nov. 30 Refund: Debit: $5,920 Credit: $5,920 Nov. 30 Cost: Debit: Inventory $3,420 Credit: Estimated Returns Inventory $3,420

Perpetual Inventory Using FIFO Beginning inventory, purchases, and sales for Item Zeta9 are as follows: Oct. 1 Inventory 175 units at $30 7 Sale 155 units 15 Purchase 200 units at $33 24 Sale 140 units Assuming a perpetual inventory system and using the first-in, first-out (FIFO) method, determine (a) the cost of goods sold on October 24 and (b) the inventory on October 31. a. Cost of goods sold on October 24 $4,560 b. Inventory on October 31 $2,640

a. 175-155 = 20 x $30 = $600 140 - 20 = 120 x $33 = $3,960 $3,960 + $600 = $4,560 b. 200-120 = 80 x $33 = $2,640

Periodic Inventory Using FIFO, LIFO, and Weighted Average Cost Method. The units of an item available for sale during the year were as follows: Jan. 1 Inventory 20 units at $360 $7,200 Aug. 13 Purchase 260 units at $342 88,920 Nov. 30 Purchase 40 units at $357 14,280 Available for sale 320 units $110,400 There are 57 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost using the (a) the first-in, first-out (FIFO) method; (b) the last-in, first-out (LIFO) method; and (c) the weighted average cost method. a. First-in, first-out (FIFO) method $20,094 b. Last-in, first-out (LIFO) method $19,854 c. Weighted average cost method $19,665

a. 40 x $357 = $14, 280 17 x $342 = $5,814 $14,280 + $5,814 =$20,094 b. 20 x $360 = $7,200 57 - 20 = 37 x $342 = $12,654 $7,200 + $12, 654 = $19,854 c. $110, 400 / 320 = 345 345 x 57 = $19,665

Perpetual Inventory Using LIFO Beginning inventory, purchases, and sales for Item 88-HX are as follows: July 1 Inventory 90 units at $54 8 Sale 75 units 15 Purchase 125 units at $60 27 Sale 80 units Assuming a perpetual inventory system and using the last-in, first-out (LIFO) method, determine (a) the cost of goods sold on July 27 and (b) the inventory on July 31. a. Cost of goods sold on July 27 $4,800 b. Inventory on July 31 $3,510

a. 80 units x $60 = $4,800 b. 90-75 = 15 x $54 = 810 125-80 = 45 x $60 = 2700 2700 + 810 = $3,510

Average cost

costs of all items are averaged, so an average cost is used both for computing the cost of goods sold and the inventory remaining on the balance sheet.

Last-in, first-out (LIFO)

the most recent purchases are the first to be sold (recorded as cost of goods sold), so the oldest costs remain on the balance sheet as inventory

First-in, first-out (FIFO)

the oldest purchases are the first to be sold (recorded as cost of goods sold), so the most recent costs remain on the balance sheet as inventory.

Specific identification method

used for low volume, high cost products where the specific cost of each item is identified on the balance sheet when owned and then moved to cost of goods sold when sold.