Chapter 7

Maxim Corp. has provided the following information about one of its products: Date Transaction Number of Units Cost per Unit 1/1 Beginning Inventory 200 $140 6/5 Purchase 400 $160 11/10 Purchase 100 $200 During the year, Maxim sold 400 units. What is ending inventory using the average cost method? A. $48,000. B. $64,000. C. $50,000. D. $62,000.

A; Average cost = $160 = [(200 × $140) + (400 × $160) + (100 × $200)] ÷ 700 units Ending inventory = $48,000 = Average cost, $160 × 300 units.

A company reported the following information for its most recent year of operation: purchases, $100,000; beginning inventory, $20,000; and cost of goods sold, $110,000. How much was the company's ending inventory? A. $10,000. B. $20,000. C. $15,000. D. $30,000.

A; Beginning inventory + Purchases - Cost of Goods Sold = Ending inventory. $20,000 + $100,000 - X = $10,000; X = $110,000.

Which of the following statements is correct? A. Cost of goods available for sale is allocated between costs of goods sold and inventory at year-end. B. A purchase of inventory on credit increases both cost of goods available for sale and cost of goods sold. C. Purchases of inventory during a period less that period's cost of goods sold equals ending inventory regardless of the beginning inventory amount. D. Cost of goods available for sale equals ending inventory plus purchases.

A; Cost of goods available for sale minus ending inventory equals cost of goods sold.

RJ Corporation has provided the following information about one of its inventory items: Date Transaction Number of Units Cost per Unit 1/1 Beginning Inventory 400 $3,200 6/6 Purchase 800 $3,600 9/10 Purchase 1,200 $4,000 11/15 Purchase 800 $4,200 During the year, RJ sold 3,000 units. What was cost of goods sold using the LIFO cost flow assumption under a periodic inventory system? A. $11,680,000. B. $11,590,000. C. $11,480,000. D. $11,550,000.

A; Cost of goods sold = $11,680,000 = (800 × $4,200) + (1,200 × $4,000) + (800 × $3,600) + (200 × $3,200).

Lauer Corporation uses the periodic inventory system and has provided the following information about one of its laptop computers: Date Transaction Number of Units Cost per Unit 1/1 100 $800 5/5 Purchase 200 $900 8/10 Purchase 300 $1,000 10/15 Purchase 200 $1,100 During the year, Lauer sold 750 laptop computers. What was cost of goods sold using the FIFO cost flow assumption? A. $725,000. B. $740,000. C. $735,000. D. $720,000.

A; Cost of goods sold = $725,000 = (100 × $800) + (200 × $900) + (300 × $1,000) + (150 × $1,100).

Under the LIFO cost flow assumption during a period of rising costs, which of the following is false? A. Cost of goods sold will be lower under LIFO than under FIFO. B. Net income will be lower under LIFO than under FIFO. C. Income tax expense will be lower under LIFO than under FIFO. D. Ending inventory will be lower under LIFO than under FIFO.

A; Cost of goods sold comes from the most recent inventory purchases. Since most recent costs are higher, the cost of goods sold under LIFO is higher than under FIFO.

Lauer Corporation uses the periodic inventory system and has provided the following information about one of its laptop computers: Date Transaction Number of Units Cost per Unit 1/1 100 $800 5/5 Purchase 200 $900 8/10 Purchase 300 $1,000 10/15 Purchase 200 $1,100 During the year, Lauer sold 750 laptop computers. What was ending inventory using the LIFO cost flow assumption? A. $40,000. B. $45,000. C. $55,000. D. $60,000.

A; Ending inventory = $40,000 = ($800 × 50).

RJ Corporation has provided the following information about one of its inventory items: Date Transaction Number of Units Cost per Unit 1/1 Beginning Inventory 400 $3,200 6/6 Purchase 800 $3,600 9/10 Purchase 1,200 $4,000 11/15 Purchase 800 $4,200 During the year, RJ sold 3,000 units. What was ending inventory using the LIFO cost flow assumption under a periodic inventory system? A. $640,000. B. $840,000. C. $770,000. D. $880,000.

A; Ending inventory = $640,000 = ($3,200 × 200).

Which of the following statements is correct when inventory unit costs are decreasing? A. FIFO's cost of goods sold will be the largest among the inventory costing methods. B. LIFO's income tax will be the lowest among the inventory costing methods. C. Ending inventory using the FIFO cost method will be higher than the ending inventory when the LIFO method is used. D. Cost of goods sold using the average cost method will be less than cost of goods sold when the LIFO method is used.

A; FIFO has the largest cost of goods sold during a period of decreasing unit costs.

Barrington Company must write down its inventory from its cost of $260,000 to its net realizable value of $248,000 at December 31, 2016. The inventory will all be sold in the year 2017. Which of the following provides a correct effect of the write-down? A. The 2016 gross profit decreases by $12,000. B. The 2017 cost of goods sold increases by $12,000. C. The 2017 ending inventory increases by $12,000. D. The 2017 gross profit is not affected if the inventory is sold during 2017.

A; In the year of the write-down, 2016, cost of goods sold is increased by the adjustment to net realizable value. An increase in cost of goods sold decreases gross profit. In 2017, the goods are sold and the 2017 cost of goods sold is decreased because the write-down in 2016 reduced the inventory value of those goods. Therefore, since the 2017 cost of goods sold is decreased, the gross profit in 2017 is increased.

Moore Company purchased an item for inventory that cost $20 per unit and was priced to sell at $30. It was determined that the disposal cost is $12 per unit. Using the lower of cost or net realizable value (LCM) rule, what amount should be reported on the balance sheet for inventory? A. $18. B. $20. C. $10. D. $8.

A; Inventory is reported on the balance sheet at net realizable value when that amount is less than cost.

Carp Corporation has provided the following information for its most recent month of operation: sales $16,000; ending inventory $4,000, purchases $8,000 and gross profit $10,000. How much was Carp's beginning inventory? A. $2,000. B. $18,000. C. $6,000. D. $12,000.

A; Sales, $16,000 - Cost of goods sold, $6,000 = Gross profit, $10,000. Beginning inventory, $2,000 + Purchases, $8,000 - Ending inventory, $4,000 = Cost of goods sold, $6,000.

QV-TV, Inc. provided the following items in its notes to the financial statements for the year-end 2016: Cost of goods sold was $22 billion under FIFO costing and the inventory value under FIFO costing was $2.1 billion. The LIFO Reserve for year-end 2015 was $0.6 billion and at year-end 2016 it had increased to $0.8 billion. How much is the 2016 LIFO cost of goods sold? A. $22.2 billion. B. $19.8 billion. C. $22.8 billion. D. $19.2 billion.

A; The change in the LIFO Reserve from the beginning to the end of the reporting year is used to adjust cost of goods sold to either a LIFO or FIFO basis, depending on which method is used in the financial statements. QV-TV uses FIFO in its financial statements. Its LIFO Reserve increased from $0.6 billion to $0.8 billion and the difference is $0.2 billion. Since cost of goods sold is larger on a LIFO basis, FIFO cost of goods sold + the increase in LIFO reserve = $22 billion + $0.2 billion = $22.2 billion LIFO cost of goods sold.

Hollander Company hired some students to help count inventory during their semester break. Unfortunately, the students added incorrectly and the 2016 ending inventory was overstated by $5,000. What would be the effect of this error in ending inventory? A. 2016 net income would be overstated. B. 2016 net income would be understated. C. 2016 ending retained earnings would be understated. D. 2016 cost of goods sold would be overstated.

A; The overstatement of the ending inventory causes cost of goods sold to be understated and net income to be overstated.

At the end of 2016, a $5,000 understatement was discovered in the amount of the 2016 ending inventory as reflected in the inventory records. What were the 2016 effects of the $5,000 inventory error (before correction)? A. Assets were understated by $5,000 and pretax income was understated by $5,000. B. Assets were understated by $5,000 and pretax income was overstated by $5,000. C. Cost of goods sold was understated by $5,000 and pretax income was understated by $5,000. D. Cost of goods sold was overstated by $5,000 and pretax income was overstated by $5,000.

A; The understatement of the 2016 ending inventory causes the 2016 assets to be understated, cost of goods sold to be overstated, and the 2016 pretax income to be understated.

A company using the periodic inventory system correctly recorded a purchase of merchandise, but the merchandise was not included in the physical inventory count at the end of the accounting period. The error caused which of the following? A. An understatement of both net income and inventory. B. An overstatement of inventory, purchases, and accounts payable. C. An understatement of inventory, purchases, and accounts payable. D. An overstatement of net income and inventory.

A; The understatement of the ending inventory causes both net income and assets to be understated.

An understatement of the ending inventory in Year 1, if not corrected, will cause which of the following? A. The year 1 net income to be understated and Year 2 net income to be overstated. B. The year 1 net income to be overstated and Year 2 net income to be overstated. C. The year 1 net income to be overstated and Year 2 net income will be correct. D. The year 1 net income to be overstated and Year 2 net income to be understated.

A; The understatement of the year 1 ending inventory causes the year 1 cost of goods sold to be overstated and the year 1 net income is therefore understated. The year 2 cost of goods sold is understated because beginning inventory is understated, which causes the year 2 net income to be overstated.

Maxim Corp. has provided the following information about one of its products: Date Transaction Number of Units Cost per Unit 1/1 Beginning Inventory 200 $140 6/5 Purchase 400 $160 11/10 Purchase 100 $200 During the year, Maxim sold 400 units. What is cost of goods sold using the average cost method? A. $48,000. B. $64,000. C. $50,000. D. $62,000.

B; Average cost = $160 = [(200 × $140) + (400 × $160) + (100 × $200)] ÷ 700 units Cost of goods sold = $64,000 = Average cost, $160 × 400 units.

Lauer Corporation uses the periodic inventory system and has provided the following information about one of its laptop computers: Date Transaction Number of Units Cost per Unit 1/1 100 $800 5/5 Purchase 200 $900 8/10 Purchase 300 $1,000 10/15 Purchase 200 $1,100 During the year, Lauer sold 750 laptop computers. What was cost of goods sold using the LIFO cost flow assumption? A. $725,000. B. $740,000. C. $735,000. D. $720,000.

B; Cost of goods sold = $740,000 = (200 × $1,100) + (300 × $1,000) + (200 × $900) + (50 × $800).

Which of the following statements is correct regarding either the perpetual or periodic inventory systems? A. In a perpetual inventory system, the inventory account is not changed for each purchase during the accounting period. B. In a perpetual inventory system, cost of goods sold is recorded at the time of each sale during the accounting period. C. In a periodic inventory system, cost of goods sold is developed only from a comparison of beginning inventory and ending inventory. D. In a periodic inventory system, the inventory account is increased for each purchase during the accounting period.

B; Cost of goods sold is debited when inventory is sold when using a perpetual inventory system.

RJ Corporation has provided the following information about one of its inventory items: Date Transaction Number of Units Cost per Unit 1/1 Beginning Inventory 400 $3,200 6/6 Purchase 800 $3,600 9/10 Purchase 1,200 $4,000 11/15 Purchase 800 $4,200 During the year, RJ sold 3,000 units. What was ending inventory using the FIFO cost flow assumption under a periodic inventory system? A. $640,000. B. $840,000. C. $960,000. D. $880,000.

B; Ending inventory = $840,000 = ($4,200 × 200).

Lauer Corporation uses the periodic inventory system and has provided the following information about one of its laptop computers: Date Transaction Number of Units Cost per Unit 1/1 100 $800 5/5 Purchase 200 $900 8/10 Purchase 300 $1,000 10/15 Purchase 200 $1,100 During the year, Lauer sold 750 laptop computers. What was ending inventory using the FIFO cost flow assumption? A. $60,000. B. $55,000. C. $45,000. D. $40,000.

B; Ending inventory, $55,000 = $1,100 × 50.

Which of the following statements is false? A. Companies do not have to use the same inventory method for all items of inventory. B. Companies do not have to consistently use the same inventory costing methods. C. Use of the LIFO inventory method during a period of increasing unit costs may create a conflict of interest between the owners and managers. D. A company choosing to maximize stockholders' equity during a period of increasing unit costs should use the FIFO inventory method.

B; GAAP requires companies to consistently apply their inventory costing methods.

Abel Company must write-down its inventory by $30,000 to the net realizable value of $450,000 at December 31, 2016. What is the effect of this writedown on the year 2016 financial statements? A. Decrease cost of goods sold. B. Decrease ending inventory on the balance sheet. C. Increase pretax income. D. Decrease accounts payable.

B; In the year of the write-down, 2016, ending inventory is decreased in order to reflect the lower value, and cost of goods sold is increased by the adjustment to net realizable value. An increase in cost of goods sold decreases gross profit which decreases pretax income. Accounts payable is not affected by an inventory write-down.

On December 31, 2016, Cruise Company has 10,000 units of an inventory item, which cost $40 per unit when purchased on June 15, 2016. The selling price was $60 per unit. On December 30, 2016 it was determined that disposal cost was $24 per unit. At what amount should the 10,000 units of inventory be reported at on the December 31, 2016 balance sheet? A. $400,000. B. $360,000. C. $160,000. D. $40,000.

B; Inventory is reported on the balance sheet at net realizable value of $36 per unit (selling price $60 less cost of disposal of $24) when that amount is less than cost of $40. The inventory cost of $360,000 equals net realizable value of $36 multiplied by 10,000 units.

Atomic Company did not record a December 2016 purchase of inventory on credit until January 2017. Assume that the December 31, 2016 ending inventory was correctly determined. What is the effect of this error on the financial statements for the year ended December 31, 2017? A. Net income is correct. B. Stockholders' equity is correct. C. Net income is overstated. D. Stockholders' equity is overstated.

B; Inventory related errors including purchase cutoff errors are self-correcting on the balance sheet after two periods.

Iris Company has provided the following information regarding two of its items of inventory at year-end: • There are 100 units of Item A, having a cost of $20 per unit, a selling price of $24 and a cost to sell of $6 per unit. • There are 50 units of Item B, having a cost of $50 per unit, a selling price of $56 and a cost to sell of $4 per unit. How much is the ending inventory using lower of cost or net realizable value on an item-by-item basis? A. $4,100. B. $4,300. C. $4,400. D. $4,500.

B; Item A net realizable value = $24 - $6 = $18 which is lower than cost. Item B net realizable value = $56 - 4 = $52 which is not lower than cost. Ending inventory = $4,300 = (100 × $18) + (50 × $50).

A company provided the following data: sales, $500,000; beginning inventory, $40,000; ending inventory, $45,000; and gross profit, $150,000. What was the amount of inventory purchased during the year? A. $385,000. B. $355,000. C. $345,000. D. $145,000.

B; Sales - Cost of goods sold = Gross profit. $500,000 - Cost of goods sold = $150,000. Cost of goods sold = $350,000. Beginning inventory + Purchases - Ending inventory = Cost of goods sold. $40,000 + Purchases - $45,000 = $350,000. Purchases = $355,000.

Which of the following journal entries is not consistent with the use of a periodic inventory system? A. Purchases xxx Accounts payable xxx B. Inventory xxx Accounts payable xxx C. Accounts payable xxx Cash xxx D. Accounts receivable xxx Sales revenue xxx

B; The inventory account is not debited when there is an inventory purchase using the periodic inventory system.

A $25,000 overstatement of the 2015 ending inventory was discovered after the financial statements for 2015 were prepared. Which of the following describes the effect of the inventory error on the 2016 financial statements? A. Net income and stockholders' equity are both understated. B. Net income is understated and stockholders' equity is correct. C. Net income and stockholders' equity are both overstated. D. Net income and stockholders' equity are both unaffected.

B; The overstatement of the 2015 ending inventory causes the 2015 net income to be overstated and the 2016 net income to be understated. Stockholders' equity at the end of 2016 is correct because inventory errors are counter-balancing.

Which of the following is correct when, in the same year, beginning inventory is overstated by $1,300 and ending inventory is understated by $700? A. Net income is understated by $600. B. Net income is understated by $2,000. C. Net income is overstated by $600. D. Net income is overstated by $2,000.

B; The overstatement of the beginning inventory causes net income to be understated by $1,300 and the understatement of the ending inventory causes net income to be understated by $700. The total understatement is $2,000.

On March 15, 2016, Ryan Company purchased $10,000 of merchandise on credit subject to terms of 2/10, n/30. Ryan Company records its purchases using the gross amount. The periodic inventory system is used. Which of the following journal entries is correct when Ryan Company pays for these goods on March 30, 2016? A. Accounts payable 9,800 Cash 9,800 B. Accounts payable 10,000 Cash 10,000 C. Accounts payable 10,000 Cash 9,800 D. Accounts payable 9,800 Purchase discounts 200 Cash 10,000

B; The payment was after 10 days, so the discount is not available.

Carrie Company sold merchandise with an invoice price of $1,000 to Underwood, Inc., with terms of 2/10, n/30. Which of the following is the correct entry to record the payment by Underwood Inc., within the 10 days if the company uses the periodic inventory system and the gross method to record purchases? A. Cash 980 Sales Discount 20 Accounts receivable 1,000 B. Accounts Payable 1,000 Cash 980 Purchases Discounts 20 C. Accounts Payable 1,000 Cash 1,000 D. Purchases 980 Cash 980

B; The purchase discount is applicable given that payment was within the ten-day period.

Which of the following statements is correct when inventory unit costs are decreasing? A. LIFO will result in lower net income and a higher inventory valuation than will FIFO. B. LIFO will result in higher net income and a higher inventory valuation than will FIFO. C. FIFO will result in higher net income and a higher inventory valuation than will LIFO. D. FIFO will result in higher net income and a lower inventory valuation than will LIFO.

B; When unit costs are decreasing, LIFO reports a higher ending inventory because it includes oldest (higher) costs. This results in a lower cost of goods sold which results in a higher net income.

Wilmington Company reported pretax income of $25,000 during 2015 and $30,000 during 2016. Later it was discovered that the ending inventory for 2015 was understated by $2,000 (and not corrected in 2015). What is the correct pretax income for each year? 2015 2016 A. $23,000 $32,000 B. $27,000 $32,000 C. $27,000 $28,000 D. $23,000 $28,000 A. Option A B. Option B C. Option C D. Option D

C; 2015 Net income ($27,000) = Reported pretax income ($25,000) + Understatement of ending inventory ($2,000). 2016 Net income = $28,000 = Reported pretax income - Understatement of beginning inventory = $30,000 - $2,000.

A $25,000 overstatement of the 2016 ending inventory was discovered after the financial statements for 2016 were prepared. Which of the following describes the effect of the inventory error on the 2016 financial statements? A. Current assets were overstated and net income was understated. B. Current assets were understated and net income was understated. C. Current assets were overstated and net income was overstated. D. Current assets were understated and net income was overstated.

C; An overstatement of ending inventory overstates current assets and understates cost of goods sold and therefore overstates net income.

RJ Corporation has provided the following information about one of its inventory items: Date Transaction Number of Units Cost per Unit 1/1 Beginning Inventory 400 $3,200 6/6 Purchase 800 $3,600 9/10 Purchase 1,200 $4,000 11/15 Purchase 800 $4,200 During the year, RJ sold 3,000 units. What was ending inventory using the average cost flow assumption under a periodic inventory system? A. $640,000. B. $840,000. C. $770,000. D. $880,000.

C; Average unit cost = $3,850 = [{(400 × $3,200) + (800 × $3,600) + (1,200 × $4,000) + (800 × $4,200)} ÷ 3,200 units]. Ending inventory = $770,000 = $3,850 × 200 units.

Coleman Company has provided the following information: beginning inventory, $100,000; cost of goods sold, $450,000; and ending inventory, $80,000. How much were Coleman's inventory purchases? A. $450,000. B. $410,000. C. $430,000. D. $420,000.

C; Beginning inventory + Purchases (X) - Cost of Goods Sold = Ending inventory. $100,000 + X - $450,000 = $80,000. Purchases = X = $430,000.

RJ Corporation has provided the following information about one of its inventory items: Date Transaction Number of Units Cost per Unit 1/1 Beginning Inventory 400 $3,200 6/6 Purchase 800 $3,600 9/10 Purchase 1,200 $4,000 11/15 Purchase 800 $4,200 During the year, RJ sold 3,000 units. What was cost of goods sold using the FIFO cost flow assumption under a periodic inventory system? A. $11,680,000. B. $11,590,000. C. $11,480,000. D. $11,550,000.

C; Cost of goods sold = $11,480,000 = (400 × $3,200) + (800 × $3,600) + (1,200 × $4,000) + (600 × $4,200).

When a company uses the periodic inventory system, which of the following is true? A. Purchases are recorded in the cost of goods sold account. B. The inventory account is updated after each sale. C. Cost of goods sold is computed at the end of the accounting period rather than at each sale date. D. The inventory account is updated throughout the year as purchases are made.

C; Cost of goods sold is recorded periodically, at the end of the accounting period, under a periodic inventory system.

Under the FIFO cost flow assumption during a period of rising costs, which of the following is false? A. Income tax expense will be higher under FIFO than under LIFO. B. Net income will be higher under FIFO than under LIFO. C. Ending inventory will be lower under FIFO than under LIFO. D. Cost of goods sold will be lower under FIFO than under LIFO.

C; Ending inventory comes from the most recent inventory purchases, which are at higher unit costs, and, therefore, ending inventory under FIFO is higher than under LIFO.

Which of the following is correct? A. The raw materials inventory account is used to record inventory purchased by a retailer for resale. B. Work in process is an expense account used by a manufacturing company. C. Finished goods is an asset account used by a manufacturing company to record the cost of inventory ready for sale. D. Retailers use a purchases account to record raw materials inventory.

C; Manufacturers have a final product, which is accounted for in a finished goods inventory account. Retailers do not use raw materials. Work in process is an inventory account and not an expense account.

Which of the following costs will not affect cost of goods sold? A. Inventory inspection costs. B. Inventory preparation costs. C. Inventory-related selling costs. D. Freight charges incurred to bring inventory to the warehouse.

C; Selling costs are operating costs and do not affect cost of goods sold.

Atomic Company did not record a December 2016 purchase of inventory on credit until January 2017. Assume that the December 31, 2016 ending inventory was correctly determined. What is the effect of this error on the financial statements for the year ended December 31, 2016? A. Net income is correct. B. Stockholders' equity is understated. C. Net income is overstated. D. Current assets are understated.

C; The 2016 purchases are understated, which causes cost of goods sold to be understated and net income to be overstated in 2016.

Which of the following statements does not accurately describe the lower of cost or market (LCM or net realizable value) valuation method for inventory? A. The journal entry to write-down inventory decreases gross profit. B. The journal entry to write-down inventory decreases current assets. C. The journal entry to write-down inventory does not affect pretax income. D. The journal entry to write-down inventory increases cost of goods sold.

C; The journal entry increases cost of goods sold and therefore decreases gross profit and pretax income. The journal entry also decreases inventory.

On March 15, 2016, Ryan Company purchased $10,000 of merchandise on credit subject to terms of 2/10, n/30. Ryan Company records its purchases using the gross amount. The periodic inventory system is used. Which of the following journal entries is correct when Ryan Company pays for these goods on March 20, 2016? A. Accounts payable 9,800 Cash 9,800 B. Accounts payable 10,000 Cash 10,000 C. Accounts payable 10,000 Cash 9,800 Purchase discounts 200 D. Accounts payable 9,800 Purchase discounts 200 Cash 10,000

C; The payment was within 10 days, so the 2% discount can be taken.

Which of the following journal entries is not consistent with the use of a perpetual inventory system? A. Inventory xxx Accounts payable xxx B. Cost of goods sold xxx Inventory xxx C. Purchases xxx Accounts payable xxx D. Accounts receivable xxx Sales revenue xxx

C; The purchases account is used with a periodic inventory system.

Which of the following is correct when, in the same year, beginning inventory is understated by $1,300 and ending inventory is understated by $700? A. Net income is understated by $600. B. Net income is understated by $2,000. C. Net income is overstated by $600. D. Net income is overstated by $2,000.

C; The understatement of the beginning inventory causes net income to be overstated by $1,300 and the understatement of the ending inventory causes net income to be understated by $700. The total overstatement is $600

On December 15, 2016, Transport Company accepted delivery of merchandise that it purchased on credit. As of December 31, 2016, the company had neither recorded the transaction nor included the merchandise in its ending inventory amount because the seller's invoice had not been received. The effect of this omission on its balance sheet at December 31, 2016, (end of the accounting period) was that A. inventory and net income were overstated but liabilities were correct. B. net income was the only item affected by the omission. C. inventory and accounts payable were understated but net income was correct. D. assets and stockholders' equity were understated but liabilities were correct.

C; The understatement of the ending inventory causes cost of goods sold to be overstated. However, the understatement of purchases causes cost of goods sold to be understated by the same amount and this nets to a zero effect on cost of goods sold. Therefore, cost of goods sold is correct and net income is correct, but on the balance sheet, inventory (assets) and accounts payable (liabilities) are understated.

Cranchey Company reported a LIFO ending inventory of $670,000 on its balance sheet at December 31, 2016. Cranchey's disclosure notes to the financial statements reported that the LIFO Reserve at December 31, 2015 was $32,000 and the LIFO Reserve at December 31, 2016 was $40,000. Which of the following statements is correct for Cranchey Company for the effect of the LIFO Reserve in 2016 in converting LIFO amounts to FIFO amounts? A. Cost of goods sold would have been higher by $40,000 under FIFO. B. Pretax income would have been higher by $32,000 under FIFO. C. Pretax income would have been higher by $8,000 under FIFO. D. Cost of goods sold would have been higher by $8,000 under FIFO.

C; When LIFO is used for the financial statements, the LIFO Reserve is used to calculate inventory and cost of goods sold on a FIFO basis. When the LIFO Reserve is positive, then FIFO inventory is higher than LIFO. A positive beginning inventory LIFO Reserve increases cost of goods sold and a positive ending inventory LIFO Reserve decreases cost of goods sold of the current year. Beginning LIFO reserve - Ending LIFO Reserve = $32,000 - $40,000 = ($8,000) net effect of LIFO Reserve. The positive ending inventory reserve is larger than the beginning inventory reserve which decreases cost of goods sold on a FIFO basis. This would increase gross profit and pretax income on a FIFO basis by $8,000.

Which of the following statements is correct? A. FIFO reports lower net income amounts than LIFO when unit costs are increasing. B. LIFO reports a higher net income amount than FIFO when unit costs are increasing. C. LIFO reports a higher net income amount than FIFO when unit costs are decreasing. D. LIFO reports the same amount of net income as FIFO when unit costs are increasing.

C; When unit costs are decreasing, LIFO reports a higher ending inventory because it includes oldest (higher) costs. This results in a lower cost of goods sold which results in a higher net income.

T/F: An understatement of ending inventory results in an overstatement of net income

FALSE; An understatement of ending inventory results in an overstatement of cost of goods sold and therefore an understatement of net income.

RJ Corporation has provided the following information about one of its inventory items: Date Transaction Number of Units Cost per Unit 1/1 Beginning Inventory 400 $3,200 6/6 Purchase 800 $3,600 9/10 Purchase 1,200 $4,000 11/15 Purchase 800 $4,200 During the year, RJ sold 3,000 units. What was cost of goods sold using the average cost flow assumption under a periodic inventory system? A. $11,680,000. B. $11,590,000. C. $11,480,000. D. $11,550,000.

D; Average unit cost = $3,850 = [{(400 × $3,200) + (800 × $3,600) + (1,200 × $4,000) + (800 × $4,200)} ÷ 3,200 units]. Cost of goods sold = $11,550,000 = 3,000 × $3,850.

Which of the following statements is incorrect for a manufacturing entity? A. Inventory is transferred from work in process to finished goods. B. Raw materials used are transferred to work in process. C. Finished goods inventory eventually becomes cost of goods sold. D. Cost of goods sold is recognized when the manufacturing process is complete.

D; Cost of goods sold is recognized when the inventory is taken from finished goods and sold to the customer.

Which of the following statements is incorrect? A. Ending inventory exceeds beginning inventory when purchases are greater than cost of goods sold. B. Cost of goods sold exceeds purchases when ending inventory is less than beginning inventory. C. Cost of goods available for sale will always be equal to or greater than cost of goods sold. D. Ending inventory is greater than beginning inventory when purchases are less than cost of goods sold.

D; Ending inventory exceeds beginning inventory when purchases are greater than cost of goods sold.

Which of the following statements is incorrect when inventory unit costs are increasing? A. LIFO's cost of goods sold will be the largest among the inventory costing methods. B. LIFO's income tax will be the lowest among the inventory costing methods. C. Ending inventory using the average cost method will be larger than the ending inventory when the LIFO method is used. D. Cost of goods sold using the average cost method will be less than cost of goods sold when the FIFO method is used.

D; FIFO has the lowest cost of goods sold during a period of increasing unit costs.

Which of the following costs is not included as inventory on the balance sheet? A. Raw materials to be used in the manufacturing process. B. Work in process. C. Finished goods. D. Freight-out costs for finished goods sent to retailers.

D; Freight-in costs for delivery to the warehouse are included in inventory. Freight-out costs for delivery to retailers are not included in inventory. Freight-out costs are a component of operating expenses. Conversely, raw materials, work in process, and finished goods are inventory categories.

Which of the following statements does not accurately describe the effects of a write-down of inventory on December 31, 2016 using the lower of cost or market (LCM) valuation method? A. The 2016 gross profit decreases. B. The 2017 cost of goods sold is effectively decreased if the inventory is sold during 2017. C. The 2016 ending inventory is decreased. D. The 2017 gross profit is not affected if the inventory is sold during 2017.

D; In the year of the write-down, 2016, cost of goods sold is increased by the adjustment to net realizable value. If the goods are sold in the next year, 2017, the 2017 cost of goods sold is decreased because of the lower value of inventory sold as a result of the write-down of the inventory during the prior year (2016). Therefore, the gross profit in 2017 is affected if the goods are sold in 2017.

Which of the following would not be a component of the year-end inventory balance? A. Freight-in costs. B. Inventory inspection costs. C. Inventory preparation costs. D. Inventory-related selling costs.

D; Inventory selling costs are considered to be selling, general and administrative expenses.

Which of the following costs does not become a part of inventory of a manufacturer? A. The cost of raw materials used. B. The cost of factory overhead. C. The cost of rent on the factory building. D. Rent on corporate headquarters.

D; Rent on corporate headquarters is not a factory cost and is therefore not part of any inventory of a manufacturer

Cassie Corporation has provided the following information for its most recent month of operation: sales $32,000, beginning inventory $8,000, purchases $16,000 and gross profit $20,000. How much was Cassie's ending inventory? A. $4,000. B. $8,000. C. $6,000. D. $12,000.

D; Sales, $32,000 - Cost of goods sold, $12,000 = Gross profit, $20,000. Beginning inventory, $8,000 + Purchases, $16,000 - Ending inventory, $12,000 = Cost of goods sold, $12,000.

Carr Corporation has provided the following information for its most recent month of operation: sales $8,000; beginning inventory $1,000; ending inventory $2,000 and gross profit $5,000. How much were Carr's inventory purchases during the period? A. $9,000. B. $5,000. C. $6,000. D. $4,000.

D; Sales, $8,000 - Cost of goods sold, $3,000 = Gross profit, $5,000. Beginning inventory, $1,000 + Purchases, $4,000 - Ending inventory, $2,000 = Cost of goods sold, $3,000.

QV-TV, Inc. provided the following items in its notes to the financial statements for the year-end 2016: Cost of goods sold was $22 billion under FIFO costing and the inventory value under FIFO costing was $2.1 billion. The LIFO Reserve for year-end 2015 was $0.6 billion and at year-end 2016 it had increased to $0.8 billion. What is the LIFO inventory value at year-end 2016? A. $1.9 billion. B. $2.9 billion. C. $2.3 billion. D. $1.3 billion.

D; The LIFO Reserve at the end of the year is used to adjust inventory either to LIFO or to FIFO, depending on which method is used in the financial statements. QV-TV uses FIFO in its financial statements. Therefore, the LIFO Reserve would be subtracted from the FIFO inventory to find the lower amount of LIFO inventory. FIFO inventory - LIFO reserve = $2.1 billion - $0.8 billion = $1.3 billion LIFO inventory.

If two companies each use different inventory accounting methods, the companies can be made comparable from information reported in the financial statements by A. converting the FIFO Reserve to a LIFO inventory. B. converting inventory at cost to inventory at lower of cost or market (net realizable value). C. converting cost of goods sold to lower of cost or market (net realizable value). D. converting inventory on a LIFO basis to a FIFO basis using the LIFO Reserve.

D; The LIFO Reserve is disclosed in notes to the financial statements and can be use to convert inventory reported on a LIFO basis to what inventory would have been using a FIFO basis. Then if one company reports using FIFO and one company reports using LIFO, after conversion, the companies can be analyzed on a comparable basis.

Which of the following statements is incorrect? A. A year-end purchase of inventory increases the LIFO cost of goods sold when unit costs are increasing. B. A year-end purchase of inventory increases the FIFO ending inventory when unit costs are increasing. C. The choice of an inventory costing method is dependent on the actual flow of goods when inventory is sold. D. A year-end purchase of inventory does not affect the weighted-average ending inventory when unit costs are increasing.

D; The actual flow of goods is irrelevant when choosing an inventory costing method.

During the audit of Montane Company's 2016 financial statements, the auditors discovered that the 2016 ending inventory had been overstated by $8,000 and that the 2016 beginning inventory was overstated by $5,000. Before the effect of these errors, 2016 pretax income had been computed as $100,000. What should be reported as the correct 2016 pretax income before taxes? A. $113,000. B. $87,000. C. $105,000. D. $97,000.

D; The overstatement of the beginning inventory causes cost of goods sold to be overstated by $5,000; the overstatement of the ending inventory causes cost of goods sold to be understated by $8,000. Therefore, cost of goods sold is understated by a net of $3,000 and net income is overstated by $3,000.

Which of the following statements is correct? A. The choice of an inventory costing method is dependent upon the actual physical flow of the goods in inventory. B. LIFO should be used during a period of increasing unit costs when the objective is to maximize the ending inventory value on the balance sheet. C. FIFO should be used during a period of decreasing unit costs when the objective is to maximize the gross profit reported on the balance sheet. D. The average cost method will result in an ending inventory balance which is somewhere between LIFO and FIFO when inventory unit costs are changing.

D; Use of the average cost method results in cost of goods sold and ending inventory being reported at amounts between the LIFO and FIFO extremes.

Which of the following statements is correct when inventory unit costs are increasing? A. LIFO will result in lower net income and a higher inventory valuation than will FIFO. B. LIFO will result in higher net income and lower inventory valuation than will FIFO. C. FIFO will result in lower net income and a lower inventory valuation than will LIFO. D. FIFO will result in higher net income and a higher inventory valuation than will LIFO.

D; When unit costs are increasing, FIFO reports a higher ending inventory because it includes newest (higher) costs. This results in a lower cost of goods sold which results in a higher net income.

T/F: A decrease in the merchandise inventory account occurs when units of inventory purchased are greater than units of goods sold.

FALSE; An increase in the merchandise inventory account occurs when inventory purchases are greater than goods sold.

T/F: During periods of increasing unit costs, the LIFO inventory method will result in a higher inventory amount on the balance sheet and a lower net income than will the FIFO inventory method.

FALSE; During periods of increasing unit costs, LIFO cost of goods sold is at newest, i.e., higher, unit costs which results in a lower net income. However, LIFO ending inventory consists of the older purchases, which were at lower unit costs. Therefore during periods of increasing unit costs, LIFO will result in a lower ending inventory than FIFO for the balance sheet.

T/F: The FIFO inventory method allocates the earliest inventory purchase costs to ending inventory.

FALSE; FIFO ending inventory consists of the newest inventory acquisitions.

T/F: Inventory inspection costs are reported as operating expenses on the income statement.

FALSE; Inspection costs are recorded as a component of the cost of the inventory.

T/F: The LIFO inventory method allocates the oldest inventory purchase costs to cost of goods sold.

FALSE; LIFO cost of goods sold consists of the newest inventory costs.

T/F: In a period of increasing costs, the LIFO Reserve would be deducted from the ending inventory under LIFO costing to convert it to ending inventory under FIFO costing.

FALSE; LIFO ending inventory is less than FIFO ending inventory when unit costs are increasing. Therefore, the LIFO Reserve would be added to the FIFO ending inventory.

T/F: The LIFO inventory method will result in the lowest gross profit in comparison with the FIFO method when unit costs are decreasing

FALSE; LIFO reports the lowest cost of goods sold because the newest units are sold at the lower unit cost. Therefore, LIFO has the highest gross profit during periods of decreasing unit costs.

T/F: The use of raw materials in the manufacturing process is reported as an operating expense on the income statement.

FALSE; Raw materials become part of work in process inventory.

T/F: A company can use the LIFO inventory method for income tax purposes and the FIFO inventory method for financial reporting purposes during a given year.

FALSE; The LIFO conformity rule requires the use of LIFO for financial statement preparation if LIFO is used for tax purposes.

T/F: The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a decrease in both ending inventory and cost of goods sold.

FALSE; The journal entry to write-down inventory has a debit to cost of goods sold and a credit to inventory. A debit to cost of goods sold increases cost of goods sold and a credit to inventory reduces inventory.

T/F: An overstatement of the 2015 ending inventory results in an overstatement of stockholders' equity as of the end of 2016.

FALSE; The overstatement of the 2015 ending inventory causes the 2015 net income to be overstated, the 2016 beginning inventory to be overstated, and the 2016 net income will be understated. Stockholders' equity as of the end of 2016 is correct because the 2015 net income overstatement is counter-balanced by the understatement of the 2016 net income.

T/F: A grocery store probably would use the specific identification inventory costing method for most of the items in its inventory.

FALSE; The specific identification method is used when expensive unique items are sold.

T/F: The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a credit to cost of goods sold and a debit to inventory.

FALSE; When inventory is written down, the journal entry credits inventory to reduce that amount, and offsets the entry with a debit to cost of goods sold.

T/F: The LIFO Reserve represents the excess of FIFO inventory costs over LIFO inventory costs.

TRUE; The LIFO Reserve is reported in the notes to the financial statements and is also referred to as "Excess of FIFO over LIFO." It represents the difference in cost of goods sold had the company used the FIFO inventory method because under FIFO, inventory costing would be higher and cost of goods sold would be lower.

T/F: An overstatement of the 2015 ending inventory results in an understatement of net income during 2016.

TRUE; An overstatement of 2015 ending inventory causes the 2016 beginning inventory to be overstated and 2016 cost of goods sold to be overstated, and, therefore, 2016 net income will be understated.

T/F: In the year of an overstatement of ending inventory, cost of goods sold will be understated and net income will be overstated.

TRUE; An overstatement of ending inventory results in an understatement of cost of goods sold and therefore an overstatement of net income.

T/F: Goods available for sale are allocated to both ending inventory and cost of goods sold.

TRUE; Cost of goods available for sale minus ending inventory equals cost of goods sold.

T/F: During periods of decreasing unit costs, use of the FIFO inventory method results in lower gross profit than would use of the LIFO method.

TRUE; FIFO cost of goods sold is higher than LIFO when unit costs are decreasing. A higher cost of goods sold results in a lower gross profit.

T/F: The FIFO inventory method will result in the lowest net income in comparison with the LIFO method when costs are decreasing.

TRUE; FIFO reports the highest cost of goods sold because higher-cost units are sold first. Therefore, FIFO has the lowest net income during periods of decreasing unit costs.

T/F: The lower of cost or market (LCM) rule is used due to the conservatism constraint, and therefore an inventory calculation may result in a departure from the historical cost principle.

TRUE; GAAP requires inventories to be valued at the lower of cost or market in order to avoid overstated assets and net income.

T/F: Manufactured goods transferred out of work in process are reported as finished goods on the balance sheet.

TRUE; Items transferred from work in process inventory become finished goods inventory.

T/F: During periods of increasing unit costs, the LIFO inventory method results in lower income taxes.

TRUE; LIFO cost of goods sold reports a lower taxable income and therefore, lower income taxes.

T/F: During periods of decreasing unit costs, use of the LIFO inventory method will result in a higher amount of ending inventory than will the use of the FIFO inventory method.

TRUE; LIFO ending inventory consists of the older inventory purchases, which were at higher unit costs.

T/F: LIFO liquidation results when a company has a lower level of inventory at the end of the year than it had at the beginning of the year.

TRUE; LIFO liquidation will occur when a company sells more units than it buys or manufactures.

T/F: An overstatement of the 2015 ending inventory results in an overstatement of stockholders' equity as of the end of 2015.

TRUE; The overstatement of the 2015 ending inventory causes the 2015 net income to be overstated. Net income closes to retained earnings and therefore stockholders' equity as of the end of 2015 is overstated.

T/F: The journal entry to write-down inventory under the lower of cost or market (LCM) rule results in a debit to cost of goods sold and a credit to inventory.

TRUE; When inventory is written down, the journal entry credits inventory to reduce that amount, and offsets the entry with a debit to cost of goods sold.

T/F: Direct material costs are a component of the cost of the work-in process inventory.

TRUE; Work in process inventory includes direct materials, direct labor, and factory overhead.