ACCT 306 (ch8)

Gerhard Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased at least 1,200 units, COGS would have been

$2,000 higher.

Joachim Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased 1,200 units, pretax income would have been

$2,000 lower.

Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that Pernell's pretax income for the 2016 fiscal year would have been

$50,000 higher if it had used FIFO

Smith Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $690,000. Its inventory as of December 31, 2016, was $758,100 at year-end costs and the cost index was 1.05. What was DVL inventory on December 31, 2016?

$723,600

Western Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $715,000. Its inventory as of December 31, 2016, was $815,400 at year-end costs and the cost index was 1.08. What was DVL inventory on December 31, 2016?

$758,200 Reason: $815,400/1.08 = $755,000 giving 2 layers of $715,000 and $40,000. $715,000 x 1.0 = $715,000 $40,000 x 1.08 = $43,200 $715,000 + $43,200 = $758,200

-FIFO -LIFO

-Most closely approximates the actual physical flow of inventory -Provides better matching of current revenues with current inventory cost

Doris recently started her position at Monro Company. The company uses the dollar-value LIFO inventory method. On her first day at work, Doris was asked to calculate the cost index for a new inventory layer. The company's records reveal that the cost in terms of the base year was $50,000 and the cost in terms of the layer year was $100,000. What is the cost index for the new layer?

2 (cost in layer year/cost in base year)

On December 31, Richard Company purchases 1,000 units of merchandise, f.o.b. destination, from Neumann Corp. and 2,000 units, f.o.b. shipping point from Smith Corp. The goods are shipped on December 31. How many units should Richard include in its ending inventory on December 31 from this purchase?

2,000 units

Parker Company reports gross sales revenue of $7.5 million, net sales revenue of $7 million, and cost of goods sold of $3.5 million. Its inventory balance was $150,000 at the beginning of the accounting period and $200,000 at the end of the accounting period. The company's inventory turnover ratio is closest to

20 Reason: $3.5 million/($150,000+$200,000/2)

Chase Company reports gross sales revenue of $7.5 million, net sales revenue of $7 million, and cost of goods sold of $3.5 million. Rounding to the nearest percent, the company's gross profit ratio would be

50% (net sales-cogs/ net sales)

Which of the following statements is correct?

A company can apply more than one inventory cost flow assumption.

What is required at the end of a reporting period in a periodic inventory system?

A physical count of the period's ending inventory so an adjustment can be made.

Terms like 2/10, n/30 represent what?

A purchase discount

In a perpetual inventory system, when inventory is returned which accounts will the purchaser adjust to reflect the effect of the return? (Select all that apply.)

Accounts payable Inventory

Which inventory costing method assumes that cost of goods sold and ending inventory consist of a mixture of all the goods available for sale?

Average cost

In a periodic inventory system, purchase returns are closed to what account at the end of the reporting period?

Cost of goods sold

Which inventory costing method assumes that items in ending inventory are the most recently acquired?

FIFO

Turn Company utilizes the LIFO inventory method to calculate taxable income. Which method is available to Turn for financial reporting purposes?

LIFO only

Orange Co., a computer retailer, shows the following selected assets on its balance sheet. Indicate which account would be properly classified as inventory.

Mouse pads

What is included in the cost of merchandise inventory? (Select all that apply.)

Necessary costs incurred to get the goods in location for sale. The purchase price of the goods.

Advantages of using LIFO inventory pools include which of the following? (Select all that apply.)

Reduce the risk of LIFO layer liquidations Simplify recordkeeping

What of the following could motivate a company that uses LIFO for external reporting to use another method for internal recordkeeping? (Select all that apply.)

The high recordkeeping cost of LIFO. Contractual agreements such as bonus contracts

The average cost method assumes that ending inventory consists of

a mixture of all the goods available for sale.

The dollar-value LIFO method extends the concept of inventory pools by allowing companies to

combine a large variety of goods in one pool.

In a perpetual inventory system the inventory account is

continually adjusted

The inventory turnover ratio is computed as _____ divided by average inventory.

cost of goods sold

In a LIFO inventory system, inventory amounts shown in the balance sheet may be distorted because they may represent

costs incurred several years earlier

At the end of an accounting period, it is important to ensure proper inventory _____ to determine the ownership of goods in transit.

cutoff

LIFO inventory pools

simplify recordkeeping.

Which inventory costing method assumes that items sold are those that were acquired first?

FIFO

Dollar amounts are assigned to goods sold and goods remaining in ending inventory by making an assumption regarding what?

How units of goods and their associated costs flow through the system.

Items a company intends to sell in the normal course of business, has in production for future sale, or uses currently in production, are all examples of what?

Inventory

The cost of freight-in paid by the purchaser is commonly included in which of the following?

Inventory cost

Which of the following is a correct interpretation of the information provided by the gross profit margin?

It indicates the percentage of each sales dollar available to cover other expenses.

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory?

LIFO

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income?

LIFO

In which type of inventory costing system are inventory costs on the balance sheet generally out of date?

LIFO

When prices increase, the ______ inventory method provides the best matching of revenue and expenses.

LIFO

Another name for the LIFO reserve account is

LIFO allowance

If a company uses LIFO to measure its taxable income, the IRS requires that LIFO also be used to measure income reported to investors and creditors.This is know as the

LIFO conformity rule

Which of the following are disadvantages of unit LIFO? (Select all that apply.)

Significant recordkeeping costs Possibility of LIFO liquidation

Which of the following situations would result in a LIFO liquidation for a company that has 200 units in beginning inventory and sales of 1,000 units?

The company purchases 950 units during the year.

Which of the following represent a reason why managers closely monitor inventory levels? (Select all that apply.)

To minimize costs of ordering and carrying inventory. To ensure that sufficient units are available.

The dollar-value LIFO (DVL) inventory method

allows a broader range of goods to be included in pools

A just-in-time (JIT) inventory system (Select all that apply.)

allows companies to maintain relatively low inventory balances. assists managers with inventory management.

In a periodic inventory system, purchase returns

are recorded in a separate contra purchases account

A periodic inventory system allows management to determine the amount of goods on hand without having to take a physical count

false

Ownership of inventory at the end of the accounting period is determined for (Select all that apply.)

goods shipped by suppliers. goods shipped to customers.

Inventory cost flow assumptions can be used to assign dollar amounts to (Select all that apply.)

goods sold. ending inventory

The _____ ratio indicates the percentage of each sales dollar available to cover expenses other than cost of goods sold and then to provide a profit.

gross profit

The inventory turnover ratio shows

how many times the average inventory balance is sold during the current reporting period.

Steiner Company's average days in inventory has decreased during 2016 as compared to the prior year. From this information, we can conclude that Steiner (Select all that apply.)

is selling its inventory faster. has a higher inventory turnover ratio.

The layer year cost index is calculated by dividing the cost in ______ year by the cost in ______ year.

layer; base

If goods are shipped f.o.b. shipping point, at time of shipment

legal title passes to the buyer

Use of LIFO inventory pools reduces the chance of unintentional LIFO layer_____

liquidation

Purchase returns by the buyer lead to a reduction in

net purchases

The dollar-value LIFO (DVL) method (Select all that apply.)

reduces the risk of liquidation of layers. simplifies recordkeeping.

A JIT inventory system allows companies to maintain ______ inventory levels.

smaller

What method of inventory valuation matches each unit on hand at the end of the period with its actual cost?

specific identification

A DVL pool is made up of items

that are likely to have similar cost change pressures

The cost of inventory includes (Select all that apply.)

the cost to bring inventory to its desired location expenditures to acquire the inventory

The LIFO inventory method assumes that the units sold are

the most recent units purchased.

High recordkeeping costs and possible LIFO liquidation are disadvantages of

unit LIFO