Acct. Chap. 5 Adaptive Study Prep

ABC Co. valued its inventory using LIFO at $100,000. The replacement cost of this inventory was valued at $150,000. At what amount should ABC value inventory?

$100,000 Under LCM, the $100,000 cost is lower than the replacement value. Report inventory at its cost of $100,000.

Sylvan Corp. purchased inventory for $100,000. The cost to ship the inventory to Sylvan's corporate office is $560. In addition to shipping charges, Sylvan purchased insurance on the inventory to cover any accidental damage or loss during transit for $200. What is the cost of the inventory?

$100,760 The purchase price, freight in, and insurance for goods in transit are all included in the cost of inventory. $100,000 + $560 + $200 = $100,760

ABC Co. had $200,000 in net income for the year. Inventory increased by $50,000. ABC purchases Inventory with cash and there are no other current assets or liabilities on the balance sheet.What amount is net cash provided from operating activities on the Statement of Cash Flows?

$150,000 An increase in inventory, an asset, indicates a use of cash. Net income plus the change in inventory, in this case, a decrease in cash, is net cash provided by operations: $200,000 - $50,000 = $150,000.

Tracks Bikes uses the perpetual moving-average inventory method to account for inventory costs. On August 1, the company's records showed beginning Inventory of 100 bikes on hand with a total cost of $18,000. On August 5, 52 additional bikes were purchased at $200 each. What is the average cost per unit after the August 5 purchase?

$186.84 New moving average cost = Total unit cost in dollars / Total units; (18,000 + ($200 x 52)) / (100 + 52) = $186.84

Civik Co. valued its inventory using LIFO at $100,000. The replacement cost of this inventory was valued at $90,000. At what amount should Civik value inventory?

$90,000

Civik Co. is Dutch company that uses IFRS. Inventory previously valued at $100,000 was written down to replacement cost to $90,000. Prices have risen and the cost to replace the inventory is $95,000. At what amount should Civik value inventory?

$95,000 Unlike GAAP, under IFRS, previously written down inventory may be written up to market value. Civic should report inventory at market, or replacement cost at $95,000

Jonas Co. has a merchandise inventory turnover ratio of 15.2 for the year. What is the average number of days for Jonas to sell its inventory?

24 days Number of days' sales in inventory ratio= # of days in period / inventory turnover ratio: 365 / 15.2 (or 360 / 15.2) = 24 days

The Cost of Goods Sold for Dalton Company for the year was $1,750,000. Inventory at the beginning of the year was $250,000 and inventory at the end of the year was $150,000. The inventory turnover for the year was

8.75 Inventory turnover = $1,750,000 / ($250,000 + $150,000)/2) = 8.75

Which of the following occurrences causes a LIFO inventory liquidation? a. A LIFO inventory liquidation occurs when a company that uses the LIFO inventory method cannot determine the ending inventory because it has been destroyed or stolen. b. A LIFO inventory liquidation occurs when a company that uses the LIFO inventory method buys more merchandise during the accounting period than it sells. c. A LIFO inventory liquidation occurs when a company that uses the LIFO inventory method changes its inventory method from FIFO to LIFO. d. A LIFO inventory liquidation occurs when a company that uses the LIFO inventory method sells more merchandise during the accounting period than it has purchased.

A LIFO inventory liquidation occurs when a company that uses the LIFO inventory method sells more merchandise during the accounting period than it has purchased.

Which type of inventory system updates the Inventory account at the time of each sale?

A Perpetual System

What is meant by the term 'Sales allowance'?

A refund to a customer for spoiled or damaged merchandise as an alternative to returning the merchandise

ABC Co. has an inventory turnover ratio of 8. Industry and competitor standards have an inventory turnover ratio of 10. How does ABC compare to its competitors? What would be the course of action that management should take?

ABC's ratio is not as good as the ratio of its competitors, ABC should investigate ways to increase its ratio.

For which of the following products is a company most likely to use the specific identification method? a. Car batteries at an auto parts store b. Automobiles at a car dealer c. Boxes of soap in a grocery store d. The specific identification method cannot be used by any companies.

Automobiles at a car dealer

Why is it important that the proper amount be assigned to inventory?

Because the amount assigned to inventory will affect the amount eventually recorded as cost of goods sold.

In the previous year, ending inventory is miscounted and understated by $20,000. Assume the current year inventory is counted correctly. What effect does this error have on the current year?

Beginning inventory is understated by $20,000

How is the cost of goods available for sale computed?

Beginning inventory plus purchases

The use of the lower-of-cost-or-market rule to value inventory is justified on the basis of what principle?

Conservatism

The LCM rule is an exception to which accounting principle?

Cost

A company erroneously omits one section of its warehouse in the year-end inventory. Assume the correction is made in the following year. What is the effect of the inventory error?

Cost of goods sold is overstated for the current year and understated for the following year.

Atlas Company has $900,000 for cost of goods available for sale. The accountant caught an error for the amount assigned to inventory in the current year. The correct amount of inventory should have been $400,000 but the account was reported as $475,000. If the error is not corrected, what affect will this have on current year cost of goods sold?

Cost of goods sold will be understated by $75,000.

What is the journal entry to record cost of goods sold under a perpetual inventory system?

Debit Cost of goods sold; Credit Inventory

What is the journal entry to record an inventory purchase under a perpetual inventory system?

Debit Inventory; Credit Cash

The inventory of a retailer is limited to a single type of inventory. What are the types of inventory of a manufacturer?

Direct materials, work in process, and finished goods

An inventory error is made and as a result, retained earnings is overstated by $50,000. What may be the cause of the error?

Ending inventory is overstated by $50,000

For which inventory method does the dollar amount of inventory on hand at the end of the period not differ regardless of whether a company uses a periodic or a perpetual inventory system?

FIFO

Which inventory method assigns the most recent costs to ending inventory?

FIFO

Which type of inventory costing system is going to have a higher ending inventory when costs are rising?

FIFO

Which type of inventory of a manufacturer is similar to merchandise inventory of a retailer?

Finished goods

Which of the following companies would have direct materials as a component of inventory? a. Macy's b. Walmart c. General Motors d. Best Buy

General Motors

How is the gross profit ratio computed?

Gross profit divided by net sales

Which ratio measures the relationship between sales and inventory and provides a measure of how long it takes to sell inventory?

Inventory turnover ratio

Which ratio measures the relationship between sales and inventory and provides a measure of how long it takes to sell inventory? a.Spoilage ratio

Inventory turnover ratio

What is the impact on the financial statements with the write down of inventory to its market value?

Inventory, an asset, is decreased; Loss on Decline in Value of Inventory, an expense, is increased

Which inventory method results in the least amount of income before taxes, assuming a period of rising prices?

LIFO

Select the definition for the term 'moving average' with regard to inventory costing. a. Moving average is an average cost method used with a periodic inventory system. b. Moving average is the specific identification method used with a perpetual inventory system. c. Moving average is a combination of FIFO and weighted average costing. d. Moving average is an average cost method used with a perpetual inventory system.

Moving average is an average cost method used with a perpetual inventory system.

An inventory error is made and as a result, net income is overstated in the current year. What effect does this have on net income in the following year?

Net income is understated in the following year.

How is gross profit computed?

Net sales less cost of goods sold

A ratio based on inventory turnover is the number of days' sales in inventory. What is the calculation for the number of days' sales in inventory?

Number of days in the period / inventory turnover

The purchase of inventory is shown in which section of the statement of cash flows?

Operating activities

What is the effect of understating ending inventory when the company uses a periodic inventory system?

Profit is understated

Which of the following should not be included in the cost of inventory? a. Insurance for inventory in transit b. Freight costs to bring purchases in to the place of business c. Repair costs incurred because of buyer mishandling of the inventory d. Cost to store inventory before it is ready to be sold

Repair costs incurred because of buyer mishandling of the inventory

Let's assume that a company has $900,000 for cost of goods available for sale. The accountant caught an error for the amount assigned to inventory in the previous year. The correct amount of inventory should have been $400,000 but the account was reported as $475,000. The books are closed for the previous year. Inventory is corrected in the current year. What affect does this error have on retained earnings at the end of the current year?

Retained earnings is correctly stated.

How is a decrease in inventory shown on a statement of cash flows prepared using the indirect method?

The amount is added to net income in the operating activities section.

A company's change in accounts payable was added back to net income on the statement of cash flows prepared using the indirect method. What does this indicate about the amount owed to suppliers?

The amount owed to suppliers increased.

What does the gross profit ratio or gross margin tell you about a company's ability to earn a profit?

The gross profit ratio is the percent of sales available to cover operating costs and profit.

What is the effect on current period profit when beginning and ending inventory are understated by $5,000 when the company uses a periodic inventory system?

There is no effect on profit

Which statement is not true of a perpetual inventory system? a. Under a perpetual inventory system, Cost of goods sold and Inventory accounts are updated with every sale. b. Under a perpetual inventory system, inventory purchases update Inventory directly and bypass a Purchases account. c. Under a perpetual inventory system, ending inventory is counted at the end of the period and the amount is deducted from Cost of goods available for sale to determine Cost of goods sold. d. Under a perpetual inventory system, returns update Inventory when received into stock.

Under a perpetual inventory system, ending inventory is counted at the end of the period and the amount is deducted from Cost of goods available for sale to determine Cost of goods sold.

What is the LIFO conformity rule?

Under the LIFO conformity rule, if a company uses LIFO on its tax return, it must use LIFO in reporting income to stockholders.