ACCOUNT 341, Intermediate Accounting I, Chapters 8 and 9

At the Preston Company, 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 and recorded for $40,000. $3,000 of this merchandise was returned, and the account was credited for $3,000. To reflect the net amount, accounts payable should be adjusted by a. $740. b. $800. c. $0. d. $860.

$40,000 - $3,000 = $37,000. => $37,000 X .02 = $740. a. $740

The Brighton Corporation included the following information in their inventory account at December 31, 2020: Goods held on consignment by Brighton $7,000 Merchandise out on consignment, at sales price, including 30% mark-up on selling price 12,000 Goods purchased, in transit, shipped f.o.b. shipping point 9,000 How much should Brighton's inventory be reduced at December 31, 2020? a. $28,000 b. $16,000 c. $12,600 d. $10,600

(12,000 x .30 = 3600)--> (3600+7,000=10,600) => d. $10,600

Goods Included in Inventory

- A company recognizes inventory and accounts payable at the time it controls the asset. - Passage of title is often used to determine control because the rights and obligations are established legally. - Examples of when control is not immediately obvious: 1. Goods in transit 2. Consigned goods 3. Special sales agreements

Retail Inventory Method

- A method used by retailers, to value inventory without a physical count, by converting retail prices to cost. - Requires retailers to keep: 1. Total cost and retail value of goods purchased. 2. Total cost and retail value of the goods available for sale. 3. Sales for the period.

Based on the Inventory systems, Periodic:

- Do not keep detailed records of the inventory on hand - COGS recorded: at end of period based on inventory count (AJE)

Special Items Relating to Retail Method

- Freight costs - Purchase returns - Purchase discounts and allowances - Transfers-in - Normal shortages - Abnormal shortages - Employee discounts - Sales discounts

A Special Problem

- Generally seller retains title to merchandise - Buyer recognizes no asset or liability - If material, buyer should disclose contract details in note in the financial statements - If contract price is greater than market price, and buyer expects losses will occur when purchase is effected, buyer should recognize losses in period when such declines in market prices take place

Dollar-Value LIFO

- Increases and decreases in a pool are measured in terms of total dollar value, not physical quantity of goods. - Advantages: • Broader range of goods in pool • Permits replacement of goods that are similar • Helps protect LIFO layers from erosion - Many companies use the general price-level index that the federal government publishes each month. • Most popular is Consumer Price Index for Urban Consumers (CPI-U) • Companies also use more-specific external price indexes • Company may compute its own specific internal price index

Based on the Inventory systems, Perpetual:

- Maintain detailed records of the cost of each inventory purchase and sale - Records continuously show inventory that should be on hand -COGS recorded: each time a sale occurs (JE)

LIFO Reserve

- Many companies use - LIFO for tax and external financial reporting purposes - FIFO, average cost, or standard cost system for internal reporting purposes - Reasons: •(1) Pricing decisions, (2) Recordkeeping easier, (3) Profit-sharing or bonus arrangements, (4) L I F O troublesome for interim periods.

Advantages of LIFO

- Matching - Tax benefits / Improved cash flow - Future earnings hedge

LIFO Liquidation

- Older, low cost inventory is sold resulting in a lower cost of goods sold, higher net income, and higher taxes. - The specific-goods approach to costing L I F O inventories is often unrealistic for two reasons: 1. Cost of tracking each inventory item is expensive. 2. Erosion of the L I F O inventory can easily occur (L I F O liquidation) which often distorts net income and leads to substantial tax payments.

Disadvantages of LIFO

- Reduced earnings - Inventory Understated - Physical Flow - Involuntary Liquidation / Poor Buying Habits

Comparison of LIFO approaches

- Specific-goods L I F O - costing goods on a unit basis is expensive and time consuming - Specific-goods pooled LIFO approach • Reduces record keeping and clerical costs • More difficult to erode layers • Using quantities as measurement basis can lead to untimely LIFO liquidations - Dollar-value L I F O is used by most companies

Inventories are:

- asset items held for sale in ordinary course of business, or - goods to be used in production of goods to be sold

Permitted by GAAP under the following conditions:

1) A controlled market with a quoted price applicable to all quantities, and 2) no significant costs of disposal or 3) too difficult to obtain cost figures.

Before all transactions were factored in, the accounts payable balance for the Bern Company was $1,400,000. Then the following transactions were considered: - Goods were in transit from a vendor to Bern on December 31, 2020. The invoice price was $70,000, and the goods were shipped f.o.b. shipping point on December 29, 2020. The goods were received on January 4, 2021. - Goods shipped to Bern, f.o.b. shipping point on December 20, 2020, from a vendor were lost in transit. The invoice price was $50,000. On January 5, 2021, Bern filed a $50,000 claim against the common carrier. What should the reported amount for accounts payable on the December 31, 2020 balance sheet be? a. $1,450,000 b. $1,520,000 c. $1,470,000 d. $1,400,000

1,400,000 + 50,000 + 70,000 = 1,520,000 b. $1,520,000

Accounting standards require disclosure of:

1. Composition of the inventory, inventory financing arrangements, and the inventory costing methods employed. 2. Consistent application of costing methods from one period to another. 3. Inventory composition either in the balance sheet or in a separate schedule in the notes. 4. Significant or unusual financing arrangements relating to inventories. 5. Inventories pledged as collateral for a loan in the current asset section rather than as an offset to the liability. 6. Basis on which it states inventory amounts (lower of-cost-or-market) and the method used in determining cost (L I F O, F I F O, average cost, etc.).

Conceptual deficiencies

1. Expense recorded when loss in utility occurs. Recognize increases in the value of the asset only at point of sale. 2. Inventory valued at cost in one year and at market in next year. 3. Net income in year of loss is lower. Net income in subsequent period may be higher than normal if expected reductions in sales price do not materialize. 4. Application of these rules uses a "normal profit" in determining inventory values, which is a subjective measure.

Additional Valuation Issues

1. Lower-of-cost-or- - net realizable value, or - market 2. Valuation at net realizable value 3. Valuation using relative sales value 4. Purchase commitments 5. Gross profit method 6. Retail inventory method

Four basic accounting issues:

1. Recognition and Derecognition (when or if?) 2. Measurement (how much?) - Initial Measurement (upon recognition) - Subsequent Measurement (after recognition) 3. Disclosure (what gets reported?) 4. Presentation (how does it get reported?)

Information from the 2020 accounting records for the Dolton Company is as follows: Dolton's Central Warehouse; Dolton's Goods Held by Consignees Beginning inventory $130,000; $14,000 Purchases 525,000; 70,000 Freight-in 10,000; ? Transportation to consignees ?; 5,000 Freight-out 30,000; 8,000 Ending inventory 145,000; 20,000 What was the cost of sales for the Dolton Corporation in 2020? a. $589,000 b. $550,000 c. $520,000 d. $584,000

130,000 + 14,000 + 525,000 + 70,000 + 10,000 + 5,000 - 145,000 - 20,000 = 589,000 a. $589,000

Two years ago Angle Company starting using dollar-value LIFO for costing its inventory. The first year the ending inventory in end-of-year dollars was $180,000 with a price index of 1.0. The second year the inventory was $270,000 and the index was 1.2. The current inventory at end of year prices is $387,000 and the price index is 1.25. Given this information, the ending inventory using dollar-value LIFO is a. $335,520. b. $339,750. c. $319,500. d. $342,000.

1st year: 180,000 x 1 = 180,000 + 2nd year: 180,000 x 1 = 180,000 + 45,000 x 1.2 = 54,000 = 234,000 3rd year: 180,000 x 1 = 180,000 + 45,000 x 1.2 = 54,000 + 84,000 x 1.25 = 105,750 = 339,750 => b. $339,750.

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 current year inventory is correct. The corrected amount for total assets and net income for the year is a. $1,800,000 and $258,000. b. $1,782,000 and $222,000. c. $1,818,000 and $258,000. d. $1,800,000 and $240,000.

240,000 + 18,000 = 258,000 a. $1,800,000 and $258,000.

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 should be a. $3,170,000 and $294,000. b. $3,230,000 and $216,000. c. $3,200,000 and $255,000 d. $3,230,000 and $285,000.

3,200,000 + 30,000 = 3,230,000 Cost of goods sold = beginning inventory + purchases - ending inventory Cost of goods sold = -69,000 + purchases - (-30,000) Cost of goods sold = -39,000 Subtract cost of goods sold that is understated 39,000 by 255,000. Net income = $216,000 b. $3,230,000 and $216,000.

The Corton Company uses a periodic inventory system. For the month of October, the beginning inventory consisted of 4,800 units that cost $12 each. Two purchases were made in October, one for 2,000 units at $13 each, and one for 8,000 units at $13.50 each. Additionally, Corton sold 8,600 units during the month. If the FIFO method is used, the ending inventory is a. $74,400. b. $75,800. c. $80,292. d. $83,700.

4,800 x 13.50 = 64,800 (2,000 - (8,600 - 8,000)) x 13.50 => (2,000 - 600) x 13.50 = 18,900 => 64,800 + 18,900 = 83,700 => d. $83,700.

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Costs incurred to advertise goods held for resale.

Advertising Expense; Income Statement

The Morton Company uses the periodic inventory system. During the month of September, the beginning inventory consisted of 4,800 units that cost $12 each. Two purchases were also made by the company that month. The first was for 2,000 units at $13 each, and the second for 8,000 units at $13.50 each. Additionally, Morton sold 8,600 units during the month. If the average cost method is used (rounding unit costs to the nearest cent), the amount of cost of goods sold will be a. $115,800. b. $107,900. c. $111,800. d. $111,370.

As a result, we have Unit cost = (2,000 x 13 + 8,000 x 13.50 +4,800 x 12) / (2,000+8,000+4,800) = $12.946 per unit Thus, Cost of good sold of 8,600 units is 12.946 x 8,600 = $111,335.60. => d. $111,370.

Herc Co.'s inventory on December 31, 2005 was $1,500,000, based on a physical count priced at cost, and before any necessary adjustment for the following: - Merchandise costing $90,000, shipped FOB shipping point from a vendor on December 30, 2005, was received and recorded on January 5, 2006. - Goods in the shipping area were excluded from inventory although shipment was not made until January 4, 2006. The goods, billed to the customer FOB shipping point on December 30, 2005, had a cost of $120,000. What amount should Herc report as inventory in its December 31, 2005, balance sheet? a. $1,500,000 b. $1,590,000 c. $1,710,000 d. $1,620,000

Before adjustment, the inventory based on a physical count was $1,500,000. The $90,000 of merchandise shipped FOB shipping point by a vendor on 12/30/Y2 should also be included in Herc's 12/31/Y2 inventory because Herc, the buyer, owns the goods while in transit under these terms. The goods in the shipping area (cost, $120,000) are also owned by Herc because they were not shipped until year 3 and Herc still retains the risks of ownership until that point. Therefore, 12/31/Y2 inventory is $1,710,000 ($1,500,000 + $90,000 + $120,000). => c. $1,710,000

Goods out on consignment should be included in the inventory of the:

Consignor

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Goods sold f.o.b. shipping point that are in transit at December 31.

Cost of Goods Sold; Income Statement

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Goods sold on an installment basis (bad debts can reasonably be estimated).

Cost of Goods Sold; Income Statement

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Goods sold where large returns are predictable.

Cost of Goods Sold; Income Statement

Product Costs

Costs directly connected with bringing the goods to the buyer's place of business and converting such goods to a salable condition.

When the Rotund Company decided to adopt the dollar-value LIFO method 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. What would the gross profit for this company be a. $747,000. b. $767,700. c. $1,590,300. d. $749,700.

December 31 inventory at base year prices = $227700/ 110% = $207,000 Changes in inventory from beginning = $207000 - 180000 = $27,000 December 31 inventory at dollar value LIFO = $180000*100% + $27000 * 110% = $209,700 Now, Cost of goods sold = beginning inventory + purchases - ending inventory $180,000 + $1,080,000 - $209,700 = $1,050,300 Gross profit = sales - cost of goods sold = $1,800,000 - $1,050,300 = $749,700 => d. $749,700

Periodic Costs

Generally selling, general, and administrative expenses.

Delar Co. completed its year-end physical count of inventory. The inventory was valued at first-in, first-out (FIFO) costs and totaled $500,000. Delar subsequently noted the following two items: 1.) 1,000 units of inventory with a FIFO cost of $10 each were shipped and billed to a customer, f.o.b. destination and are in transit at year end. These items were included in the physical count. 2.) 6,000 units at a FIFO cost of $5 each were held on consignment for one of its suppliers, but were excluded from the physical count. What amount should Delar report as inventory at year end? a. $520,000 b. $500,000 c. $530,000 d. $490,000

Goods on consignment are excluded from ending inventory and goods shipped f.o.b. destination are included. There is no adjustment need to the $500,000 inventory value. b. $500,000

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Interest costs incurred for inventories that are routinely manufactured.

Interest Expenses; Income Statement

Using the following information, what is the inventory turnover ratio for Kipling's Outfitters for 2020? The 2020 financial statements report a beginning inventory of $350,000, an ending inventory of $450,000, and cost of goods sold of $1,000,000 for the year. a. 10.0 times b. 2.5 times c. 2.2 times d. 1.3 times

Inventory Turnover Ratio = Cost of Goods Sold/ (beginning inventory + ending inventory) / 2 => 1,000,000/ ((350,000 + 450,000)/2) => 1,000,000/ 400,000 = 2.5 b. 2.5 times

Sales with repurchase agreements ("parking transactions")

Inventory should be included in the inventory of the: Seller

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Costs identified with units completed by a manufacturing firm but not yet sold.

Inventory; Balance Sheet

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Factory supplies.

Inventory; Balance Sheet

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Freight charges on goods purchased.

Inventory; Balance Sheet

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Goods out on consignment at another company's store.

Inventory; Balance Sheet

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Goods purchased f.o.b. shipping point that are in transit at December 31.

Inventory; Balance Sheet

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Goods sold f.o.b. destination that are in transit at December 31.

Inventory; Balance Sheet

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Goods sold to another company, for which our company has signed an agreement to repurchase at a set price that covers all costs related to inventory.

Inventory; Balance Sheet

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Materials on hand not yet placed into production by a manufacturing firm.

Inventory; Balance Sheet

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Raw materials on which a manufacturing firm has started production but which are not completely processed.

Inventory; Balance Sheet

Matlock Company's beginning inventory consists of 50 units that cost $34 each. During June, the company purchased 150 units at $34 each, returned 6 units for credit, and sold 125 units at $50 each. Instructions: a. Journalize the June transactions assuming Matlock uses a perpetual inventory system. b. Journalize the June transactions assuming Matlock uses a periodic inventory system.

Journal entry : Perpetual inventory system: 1.) Dr. Merchandise inventory (150*34) 5100 Cr. Account payable 5100 2.) Dr. Account payable (6*34) 204 Cr. Merchandise inventory 204 3.) Dr. Account receivable (125*50) 6250 Cr. Sales return 6250 Dr. Cost of goods sold (125*34) 4250 Cr. Merchandise inventory 4250 Journal entry : Periodic inventory system 1.) Dr. Purchase (150*34) 5100 Cr. Account payable 5100 2.) Dr. Account payable (6*34) 204 Cr. Purchase return and allowance 204 3.) Dr. Account receivable (125*50) 6250 Cr. Sales return 6250

At Hawkeye Security the basic professional grade security system has a cost of $812, a replacement cost of $775, a net realizable value of $800, and a normal profit margin of $50. Hawkeye Security would record ________ as the inventory value for this product using the lower-of-cost-or-market rule. a. $812 b. $800 c. $775 d. $762

Lower of Cost or Market Rule: Step 1: Cost = $812 Step 2: Net Realizable value - Normal profit margin = 800 - 50 = $750 Step 3: Market = Higher of Replacement cost or Step 2 = Higher of 775 or 750 = $775 Step 4: Inventory Valuation = Lower of Cost or Market = Lower of Step 1 or Step 3 = Lower of 812 or 775 = $775 => c. $775

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Goods held on consignment from another company.

Not reported in Financial Statements

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Goods purchased f.o.b. destination that are in transit at December 31.

Not reported in Financial Statements

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Office supplies.

Office Supplies; Balance Statement

Sales with high rates of return

Seller should: Record sales at the: amount expected Record inventory at: returns expected

Presented below is a list of items that may or may not be reported as inventory in Rose Company's December 31 balance sheet. Instructions: Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements. Short-term investments in stocks and bonds that will be resold in the near future.

Short-term Investments; Balance Sheet

Units; Unit cost; Total cost; Units on hand Balance on 1/1: 2,000; $1; 2,000; 2,000 Purchased on 1/8: 1,200; 3; 3,600; 3,200 Sold on 1/23: 1,800; 0; 0; 1,400 Purchased on 1/28: 800; 5; 4,000; 2,200 Nest uses the LIFO method to cost inventory. What amount should Nest report as inventory on January 31 under each of the following methods of recording inventory? a. Perpetual: $5,400; Periodic: $2,600 b. Perpetual: $5,400; Periodic: $5,400 c. Perpetual: $2,600; Periodic: $2,600 d. Perpetual: $2,600; Periodic: $5,400

The inventory valuations are calculated as follows: Valuations of ending inventory under LIFO perpetual 1,400 units at $1.00 = $1,400 800 units at $5.00 = $4,000 Total = $5,400 Value of ending inventory under LIFO periodic 2,000 units at $1.00 = $2,000 200 units at $3.00 = $600 Total = $2,600 => a. Perpetual: $5,400; Periodic: $2,600

True or False. Dollar-value LIFO techniques help protect LIFO layers from erosion.

True

Arizona Mining sells its product, a rare metal, in a controlled market with a quoted price applicable to all quantities. The total cost of 5,000 pounds of the metal now held in inventory is $210,000. The total selling price is $560,000, and estimated costs of disposal are $10,000. At what amount could the inventory of 5,000 pounds be reported on the balance sheet, if not at cost? a. $550,000 b. $210,000 c. $560,000 d. $350,000

Under these circumstances net realizable value which is the selling price less disposal costs could be reported as the inventory value. $560,000 - $10,000 = $550,000 => a. $550,000

Within a perpetual inventory system which of the following is true? a. Cost of goods sold is recorded with each sale. b. Inventory records are not kept for every item. c. Cost of goods sold is determined as the amount of purchases less the change in inventory. d. Inventory purchases are debited to a Purchases account.

a. Cost of goods sold is recorded with each sale.

Why are markdowns commonly ignored in the computation of the cost to retail ratio under the conventional retail inventory method? a. It results in a better approximation of the lower of cost or market. b. Some years may not have markdowns. c. This results in the showing of a normal profit margin in a period when no markdown goods have been sold. d. Markups are also ignored.

a. It results in a better approximation of the lower of cost or market.

Which of the following inventory accounts is not normally held by manufacturers? a. Purchase Orders b. Finished Goods c. Raw Materials d. Work-in-Process

a. Purchase Orders

Which of the following is a product cost as it relates to inventory? a. Raw materials. b. Interest costs. c. Abnormal spoilage. d. Selling costs.

a. Raw materials.

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? a. The net income, current assets, and retained earnings would all be overstated. b. The net income and current assets would be overstated and current liabilities would be understated. c. The net income would be correct and the current assets would be understated. d. The net income, current assets, and retained earnings would all be understated.

a. The net income, current assets, and retained earnings would all be overstated.

Which of the following must be known in order to use the gross profit method? a. beginning inventory at cost b. ending inventory at cost c. current inventory at cost d. average inventory at cost

a. beginning inventory at cost

Which of the following costs are not inventoriable? a. selling costs of a sales department b. costs directly connected with the bringing of goods to the place of business of the buyer c. buying costs of a purchasing department d. costs that are directly connected with the converting of goods to a salable condition

a. selling costs of a sales department

On March 15, 2020, Hat Trick Manufacturing signed a contract with a supplier to purchase raw materials in 2021 for $700,000. Prior to the December 31, 2020 balance sheet date, the market price for these materials dropped to $510,000. On December 31, 2020 Hat Trick prepares a journal entry to reflect this situation. On the December 31, 2020 balance sheet, where would the credit be reported? a. under current liabilities b. as an appropriation of retained earnings c. in a valuation account to Inventory on the balance sheet d. on the income statement

a. under current liabilities

The LIFO effect represents adjustments in accounting records that must be made within a given a. year. b. month. c. quarter. d. period.

a. year

Cost consists of:

all expenditures necessary to acquire an asset and make it ready for its intended use.

What is the consequence of using the gross profit method to provide an estimate of inventory amount? a. It requires special bookkeeping procedures and experienced accountants. b. It is only appropriate for interim reports or verifying perpetual inventory records. c. It can only be used by a company that has been in business more than one calendar year or operating cycle. d. It cannot be used when inventory has been lost or destroyed.

b. It is only appropriate for interim reports or verifying perpetual inventory records.

Which of the following statements about the retail inventory method is correct? a. It may not be used by auditors. b. It permits the estimation of inventory without a physical count. c. It may not be used to estimate inventories for interim statements. d. It may not be used to estimate inventories for annual statements.

b. It permits the estimation of inventory without a physical count.

Which of the following statements is true? a. The cost of financing is a product cost. b. Manufacturing overhead costs are product costs. c. Selling costs are product costs. d. Interest costs for routine inventories are product costs.

b. Manufacturing overhead costs are product costs.

What type of industry would benefit from using the relative sales value method? a. One where advance purchase commitments are normal business practice. b. One where one raw material makes many different products. c. One where a variety of raw materials are used to make one product. d. One where there is a controlled market with the same price for various quantities purchased.

b. One where one raw material makes many different products.

What will happen when the cost-of-goods-sold method is used to record inventory at NRV? a. There is a direct reduction in product selling price results in a loss being recorded on the income statement prior to the sale. b. The ending inventory market value figure is substituted for cost and the loss is included in cost of goods sold. c. A loss is recorded directly in the inventory account by crediting inventory and debiting loss on inventory decline. d. The only portion of the loss attributable to inventory sold during the period is recorded in the financial statements.

b. The ending inventory market value figure is substituted for cost and the loss is included in cost of goods sold.

Under the periodic inventory system, which of the following would generally not be separately accounted for in the computation of cost of goods sold? a. Purchase returns and allowances of merchandise during the period. b. Trade discounts available to purchasers during the period. c. Cost of freight-in for merchandise purchased during the period. d. Cash (purchase) discounts taken during the period.

b. Trade discounts available to purchasers during the period.

Used when buying varying units in a single lump-sum purchase, also called a:

basket purchase

At Hawkeye Security the basic security system for home use has a cost of $160, a replacement cost of $150, a net realizable value of $145, and a normal profit margin of $20. Hawkeye Security would record _________ as the inventory value for this product using the lower-of-cost-or-market rule. a. $160 b. $150 c. $145 d. $125

c. $145

In 2021, Capricorn Corporation purchased raw materials for $1.5 million when the raw materials were only worth $1.2 million because they had a long term non-cancellable purchase contract that was signed in early 2020. Assuming that Capricorn recorded any necessary adjustments at the end of 2020, when the raw materials had a market price of $1.2 million, what is the journal entry to record the purchase? a. Debit Inventory for $1,200,000, debit Unrealized Holding Gain or Loss for $300,000, and credit Cash for $1,500,000. b. Debit Inventory for $1,500,000, and credit Cash for $1,500,000. c. Debit Inventory for $1,200,000, debit Estimated Liability on Purchase Commitments for $300,000 and credit Cash for $1,500,000. d. Debit Inventory for $1,200,000, and credit Cash for $1,200,000.

c. Debit Inventory for $1,200,000, debit Estimated Liability on Purchase Commitments for $300,000 and credit Cash for $1,500,000.

What is the goal of inventory management? a. Inventory levels are allowed to self-regulate to reflect the most current market conditions. b. Inventory levels are increased to provide the greatest customer selection. c. Inventory levels are targeted to a level that maximizes customer selection while minimizing carrying costs. d. Inventory levels are lowered to reduce carrying costs.

c. Inventory levels are targeted to a level that maximizes customer selection while minimizing carrying costs.

Which one of the following is an accurate statement about minimum limitation? a. Minimum limitation is equal to the market value of damaged inventories. b. Minimum limitation is equal to the net realizable value of damaged inventories. c. It is not less than net realizable value reduced by an allowance for a normal profit margin. d. It is not to exceed net realizable value and prevents overstatement of value of damaged inventories.

c. It is not less than net realizable value reduced by an allowance for a normal profit margin.

Which of the following is true of the use of LIFO under a perpetual inventory system (units and costs)? a. It can never yield the same inventory valuation as LIFO under a periodic inventory system. b. It may yield a higher inventory valuation than LIFO under a periodic inventory system when prices are steadily falling. c. It may yield a higher inventory valuation than LIFO under a periodic inventory system when prices are steadily rising. d. It always yields the same inventory valuation as LIFO under a periodic inventory system.

c. It may yield a higher inventory valuation than LIFO under a periodic inventory system when prices are steadily rising.

Which of the following is the maximum value of "market" when using the lower-of-cost-or-market rule? a. The estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal, an allowance for an approximately normal profit margin, and an adequate reserve for possible future losses. b. The estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal and an allowance for an approximately normal profit margin. c. The estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. d. The estimated selling price in the ordinary course of business.

c. The estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.

What is the consequence of using the same dollar amount of gross profit when computing the gross profit percentage based on selling price or based on cost? a. The gross profit percentage based on selling price will always be the same as the related percentage based on cost. b. The gross profit percentage based on selling price will always be more than the related percentage based on cost. c. The gross profit percentage based on selling price will always be less than the related percentage based on cost. d. The gross profit percentage based on selling price will always be unrelated to the percentage based on cost.

c. The gross profit percentage based on selling price will always be less than the related percentage based on cost.

Rebe and Sid are discussing switching to LIFO. Rebe thinks it is a great idea but Sid is concerned. The stock price at the company has been falling lately, and Sid thinks this will contribute to a further decline. Do Sid's concerns have merit in this case? a. Yes, the understated inventory could make the company look as though it is in financial trouble, causing investors to sell stock before the company goes under. b. No, the higher profits that can come as a result of switching to LIFO will cause investors to want to buy more stock. c. Yes, the lower profits that can come as a result of switching to LIFO could make investors nervous, thus causing stock prices to decline even further. d. No, the decrease in taxes caused by switching to LIFO could make investors excited about purchasing new stock.

c. Yes, the lower profits that can come as a result of switching to LIFO could make investors nervous, thus causing stock prices to decline even further.

Which of the following is considered the final inventory value? a. none of them b. the selling price $74,000 c. cost of $58,000 d. net realizable value of $68,000

c. cost of $58,000

Why must companies report inventory composition? a. so that changes in costing methods between types of inventory may be clearly seen b. to prevent changes to net income when costing methods are changed c. to better illustrate the liquidity of the inventory d. to better illustrate the value of the inventory as collateral

c. to better illustrate the liquidity of the inventory

What kind of business will be more successful than others in an industry? a. A company that can maintain a lower turnover with a higher inventory level. b. A company that can maintain a lower turnover with a lower inventory level. c. A company that can maintain a higher turnover with a higher inventory level. d. A company that can maintain a higher turnover with a lower inventory level.

d. A company that can maintain a higher turnover with a lower inventory level.

Which of the following would be a reason the net realizable value would decrease? a. Disposal costs decrease. b. Profit margin decreases. c. Profit margin increases. d. Disposal costs increase.

d. Disposal costs increase.

Jones Wholesalers stocks a changing variety of products. Which inventory costing method will be most likely to give Jones the lowest ending inventory when its product lines are subject to specific price increases? a. Weighted-average. b. Specific identification. c. FIFO periodic. d. Dollar-value LIFO.

d. Dollar-value LIFO.

Why is the gross profit method not appropriate for annual reports? a. It requires knowing the gross profit rate. b. It should only be used in the event of an emergency like a fire. c. It is too labor intensive to be done each year. d. It only provides an estimate.

d. It only provides an estimate.

What is the expected result of a markup cancellation? a. The retail price contains an additional increase over the original markup. b. The merchandise is being sold at cost. c. The merchandise is priced below invoice. d. The retail price is being reduced from an increase over the original retail price.

d. The retail price is being reduced from an increase over the original retail price.

When using the gross profit method, what is the expected result of applying a blanket gross profit rate to merchandise with varying profit rates? a. an actual inventory value that is not an estimate b. a more accurate estimate c. a resulting estimate that will not change in terms of accuracy d. a less accurate estimate

d. a less accurate estimate

Which of the following is not a sales situation in which specific identification is traditional? a. antique jewelry sales b. art dealers c. automobile sales d. department stores

d. department stores

When using the retail inventory method, which of the following is deducted from the retail column in the same way as sales? a. transfers-in b. abnormal shortages c. purchase returns d. employee discounts

d. employee discounts

When using the cost-of-goods-sold method, any loss resulting from a decline in inventory is ________ in the Cost of Goods Sold account. a. highlighted b. mitigated c. offset d. hidden

d. hidden

Flooring

deters understatement of inventory and overstatement of loss in current period

Ceiling

prevents overstatement of the value of obsolete, damaged, or shopworn inventories

To accurately value each unit, the common and most logical practice is to allocate the total among the various units on the basis of their:

relative sales value

Net Realizable Value is

the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

LIFO Reserve is the difference between:

the inventory method used for internal reporting purposes and LIFO.