ACC 301 Chapter 8 Questions
The net income for Tina's Company for the current year was $255,000, while the total assets reported were $3,200,000. At the beginning of that year, the inventory was understated by $69,000, and at the end of the year it was understated by $30,000. The correct amount for total assets and net income for the year is
$3,230,000 and $216,000
The Yano Corporation uses the perpetual inventory method. On September 1, it purchased $30,000 of inventory, with terms 2/10, n/30. On September 3, the Yano Corporation returned goods that cost $3,000. On September 9, Yanos paid the supplier. On September 9, which of the following should Yanos credit?
$540 Accounts Payable
Rose Industries had 400 units of Product AB in their inventory, costing $12 each. 600 more units of Product AB were purchased for $18 each. Rose Industries eventually sold 700 units for $30 each. By what amount did the LIFO liquidation overstate normal gross profit?
$600
Coralyn is looking over the balance sheet for the manufacturing company where she works. The amount recorded for work-in-process is $207,800, the total for other assets was $78,900, and the amount for finished goods were equal to $456,000. The total amount of inventories reported should be
$663,800
When the Rotund Company decided to adopt the dollar-value LIFO it had a January 1 inventory of $180,000. The purchases for that year amounted to $1,080,000 with sales totaling $1,800,000. The price index was 110 and the December 31 inventory at year end prices was $227,700. The gross profit for this company is
$749,700
Double Extension Method
A method for computing a specific internal price index, when a relevant external price index is not readily available, by determining current costs with reference to the actual cost of the goods most recently purchased. The price measure provides a measure of the change in the price or cost levels between the base year and the current year. The company then computes the index for each year after the base year.
Net Method
A method in which a company considers purchase discounts lost as a financial expense and reports it in the "Other expenses and losses" section of the income statement.
Net of the cash Discounts
A method in which a company records the failure to take a purchase discount within the discount period in a Purchase Discounts Lost account.
Gross Method
A method in which a company reports purchase discounts as a deduction from purchases on the income statement.
Specific goods pooled LIFO approach
A method used to alleviate LIFO liquidation problems and to simplify LIFO accounting, by grouping goods into pools of similar items. Thus, instead of tracking specific inventory units, a company combines, and accounts for together, a number of similar units or products, which usually results in fewer LIFO liquidations.
Modified Perpetual Inventory System
A system that provides detailed inventory records of increases and decreases in quantities only, not dollar amounts.
Purchase Discounts
An account in a periodic inventory system that indicates the company is recording its purchases and accounts payable at the gross amount.
Perpetual Inventory System
An inventory system in which a company continuously tracks changes in the Inventory account. The company records all purchases and sales (issues) of goods directly in the Inventory account as they occur. The accounting records continuously show the balances in both the Inventory account and the Cost of Goods Sold account. A computerized recordkeeping system records nearly instantaneously any additions to and issuances from inventory.
What is the result of failing to record a purchase of merchandise on account even though the goods are properly included in the physical inventory?
An understatement of liabilities and an overstatement of owners' equity
Inventories
Asset items that a company holds for sale in the ordinary course of business, or goods that it will use or consume in the production of goods to be sold. The investment in inventories is frequently the largest current asset of merchandising (retail) and manufacturing businesses.
FIFO and LIFO are both examples of cost flow ______
Assumptions
The net income for the current year for the Morton Company is $240,000. Their reported total assets for the year are $1,800,000. After some calculations, it is determined that at the beginning of the year the inventory was overstated by $18,000, which was never corrected. The corrected amount for total assets and net income for the year is
$1,800,000 and $258,000
At Delia's company, the purchases are recorded at net amounts. On August 5, $40,000 worth of merchandise was purchased on account for terms of 2/10, n/30. $3,000 of this merchandise was returned, and the account was credited. As of August 31, the balance still had not been paid. What amount will be recorded as the purchase return?
$2,940
Goods in transit being shipped to Company X under terms f.o.b destination should
Be excluded from the Company X balance sheet.
Product Costs
Costs that "attach" to the inventory and are directly connected with bringing the goods to the buyer's place of business and converting such goods to a salable condition. Such costs include direct materials, direct labor, and manufacturing overhead costs (indirect materials, indirect labor, and various costs incurred in the manufacturing process such as depreciation, taxes, insurance, and heat and electricity). Companies record product costs as part of the inventory cost.
Period Costs
Costs that attach to a specific accounting period. Examples are officers' salaries and other administrative expenses. Companies charge off such period costs in the immediate period even though benefits associated with these costs may occur in the future. Period costs are not included as part of inventory cost; instead, they are recorded in same period as the related revenue of a specific time period and expensed as incurred.
Invoices of $6,000 are paid after discount period (Net Method)
Debit Accounts Payable 5,880 Debit Purchase Discounts Lost 120 Credit Cash 6,000
Invoices of $6,000 are paid after discount period (Gross Method)
Debit Accounts Payable 6,000 Credit Cash 6,000
Dollar-Value LIFO
Determines and measures any increases and decreases in a pool in terms of total dollar value, not the physical quantity of the goods in the inventory pool
The Roan Company's inventory on its balance sheet was lower using first-in, first-out than it would have been using last-in, first-out. Assuming no beginning inventory, the direction the cost of purchases moved during the period was
Down
LIFO Liquidation
Erosion of the LIFO inventory under a specific-goods (unit LIFO) approach. Such erosion matches costs from preceding periods against sales revenues reported in current dollars, which in times of rising prices, often distorts net income and leads to substantial tax payments.
The method of inventory pricing that best approximates specific identification of the actual flow of costs and units in most manufacturing situations, is
FIFO
The cost assigned to unsold units left on hand is reported as finished goods inventory by merchandising concerns. (True/False)
False
Merchandising Inventory
For a merchandising business, the cost assigned to unsold units left on hand, but ready for sale. Only one inventory account, Inventory, appears in a merchandiser's financial statements.
F.O.B destination
Freight term indicating that shipped goods are placed free on board ("f.o.b.") to the buyer's place of business and the seller pays the freight costs; the goods belong to the seller while in transit and title passes to the buyer when the buyer receives the goods from the shipping carrier.
F.O.B shipping point
Freight term indicating that shipped goods are placed free on board ("f.o.b.") to the shipping carrier by the seller and the buyer pays the freight costs; the goods belong to the buyer while in transit.
Consigned Goods
Inventory held by one party (the consignee) who acts as the agent for the owner of the goods (the consignor) in selling the goods. The consignee accepts and holds the consigned goods without any liability, except to exercise due care and reasonable protection from loss or damage until it sells the goods to a third party. When the consignee sells the goods, it remits the revenue to the consignor, less a selling commission and expenses incurred in accomplishing the sale.
Periodic Inventory System
Inventory system in which a company uses a Purchases account to record purchases of inventory during the period. The Inventory account represents the beginning inventory amount throughout the period; at the end of the accounting period, the company adjusts the Inventory account by closing out the beginning inventory amount and recording the ending inventory amount, which is determined by a physical count of the items on hand, valued at cost or at the lower-of-cost-or-market.
Specific Identification
Inventory-costing method in which companies identify and cost each item sold and each item in inventory. Retailers use this method only when handling a relatively small number of costly, easily distinguishable items, such as fur coats, automobiles, some furniture; manufacturers use it for special orders and many products manufactured under a job cost system.
FIFO Method
Inventory-costing method that assumes that a company uses goods in the order in which it purchases them. Thus, the costs of the earliest goods purchased are the first to be allocated to cost of goods sold. FIFO often approximates the physical flow of goods, prevents manipulation of income, and prices ending inventory close to current cost, but it fails to match current costs against current revenues on the income statement, possibly distorting gross profit and net income.
LIFO Method
Inventory-costing method that assumes that a company uses the latest goods purchased before it uses the earlier goods purchased. Thus, the costs of the latest goods purchased are the first to be allocated to cost of goods sold. LIFO provides a good matching of recent costs against current revenues and tax benefits, but generally reports lower earnings, which some managers see as a disadvantage.
Average-Cost Method
Inventory-costing method that prices items in the inventory on the basis of the average cost of all similar goods available during the period. Companies that use the periodic inventory method use weighted averages and those that use the perpetual method use moving averages.
Moving-Average Method
Inventory-costing method, used by companies that use the perpetual inventory method. In this method, a company computes a new average unit cost (a "moving average") each time it makes a purchase.
Weighted-Average Method
Inventory-costing method, used in the periodic inventory method, that prices items in the inventory on the basis of the average cost of all similar goods available during the period. The method calculates the total cost of inventories of similar goods, divides the total cost by the number of inventory units, and applies the weighted-average cost per unit to the items in ending inventory.
A company with a high rate of return on sales should consider inventory sold when
It can reasonably estimate the amount of returns.
The use of a Purchase Discounts Lost account implies that the recorded cost of a purchased inventory item is which of the following?
Its invoice price less the purchase discount allowable whether taken or not
A store has a number of items left over that have not been sold. The cost of these unsold items will be reported as _______ inventory.
Merchandise
What are cost assigned to unsold units left of hand reported as?
Merchandise Inventory
For Richter Company, the impact on net income of including goods in transit f.o.b. shipping point in the purchases account, but not as ending inventory when Richter uses the periodic inventory system is that
Richter's net income will be understated
The arrangement that is also referred to as "parking transactions" is
Sale with a buyback agreement
Cost Flow Assumptions
Several systematic assumptions about the flow of inventory, used by companies to value their inventory. The main cost flow assumptions are specific identification, average-cost, FIFO, and LIFO. The actual physical movement of goods need not match the cost flow assumption a company adopts, but the company must use its selected cost flow assumption consistently from one period to the next. The objective should be to choose a cost flow assumption that most clearly reflects periodic income.
LIFO Effect
The change in the allowance balance from one period to the next
Raw Materials Inventory
The cost assigned to goods and materials on hand but not yet placed into production. Raw materials can be traced directly to the end product. This category of inventory appears on the balance sheets of manufacturing companies.
The specific identification method may be considered ideal for assigning costs to inventory and cost of goods sold, because
The cost flow matches the physical flow.
Work in Process Inventory
The cost of partially processed units in a continuous production process, consisting of the raw material for these unfinished units, plus the direct labor cost applied specifically to this material and a ratable share of manufacturing overhead costs. This category of inventory appears on the balance sheets of manufacturing companies.
Finished Goods Inventory
The costs identified with the completed but unsold units on hand at the end of the fiscal period. This category of inventory appears on the balance sheets of manufacturing companies.
LIFO Reserve
The difference between the inventory method used for internal reporting purposes and LIFO
Cost of Goods Sold
The difference of (1) the cost of goods available for sale during the period, and (2) the cost of goods on hand at the end of the period.
Kate's Company received merchandise on consignment. The company recorded the transaction as a purchase and included the goods in inventory, as of October 31. What would the effect of this be on the financial statements for October 31?
The net income would be correct and current assets and current liabilities would be overstated.
The Preston Company received merchandise on consignment. Preston included the goods in inventory as of April 30, but did not record the transaction. What would the effect of this be on its financial statements for April 30?
The net income, current assets, and retained earnings would all be overstated.
Under specific identification the cost flow matches
The physical flow of the goods
Cost of Goods Available for Sale or Use
The sum of (1) the cost of the goods on hand at the beginning of the period, and (2) the cost of the goods acquired or produced during the period.
Which of the following is true of goods on consignment?
They are included in the consignor's inventory
Which of the following is true of goods in transit which are shipped f.o.b. destination?
They should be included in the inventory of the seller.
Which of the following methods of inventory valuation requires that the pricing of issues from inventory must be deferred until the end of the accounting period?
Weighted-average