ACCTG Chapter 05 Smart Book

Damaged goods which can be sold are reported in inventory at

net realizable value

Explain the inventory and cost of goods sold relationship by selecting the correct formula below.

Beginning inventory + Net purchases - Ending inventory = Cost of goods sold.

Why would the physical count of inventory be different than what is shown in perpetual inventory records?

Events such as errors Events such as theft Events such as loss Events such as damage

Recall the formula for figuring a company's inventory turnover ratio.

Inventory turnover = Cost of goods sold/Average inventory

Which of the costs below would be included in the recorded cost of merchandise inventory?

Invoice cost Insurance costs Storage costs

Which of the following summarizes the weighted average cost flow assumption?

Weighted average assumes that costs flow at an average of the costs available.

When purchase costs are (rising/declining) , LIFO will report the lowest cost of goods sold yielding the highest gross profit and net income.

declining

An inventory error not only affects the current year's cost of goods sold, gross profit, net income, current assets and equity, but also the next period's statements because

ending inventory of one period is the beginning inventory of the next period.

The _____ principle states that inventory costs are expensed as cost of goods sold when inventory is sold.

expense recognition

The LIFO cost flow assumption assumes that the cost of items purchased ______ are the costs that will be transferred first to cost of goods sold on the ______ ______.

latest/income statement

The formula to compute cost of goods sold is

merchandise available for sale minus ending inventory

An advantage of the weighted average method under a periodic inventory system is that it:

smooths out erratic changes in costs

Assume that J-Mart uses a periodic weighted average inventory system. During the period, it sold 14 units. Calculate the dollar value of its cost of goods sold for the period. Jan. 1. Beginning Inventory. 15 @ $12 = $180 Jan. 5.Purchase. 5 @ $15 = $75 Jan. 30 Purchase 10 @ $18= $180 Total goods available for sale 30 units $435 Feb. 8 Sale 14 units x $30 each

$ 203 You figured total sales. COGS= $435/30units= $14.5/unit. ($14.5 x 14 units sold= $203).

Assume that Maycces uses a periodic weighted average inventory system. Its ending inventory consists of 13 units. Calculate the dollar value of its ending inventory assuming the following information. Jan. 1 Beginning Inventory 8 @ $12=$96 Jan. 5 Purchase 12 @ $15=$180 Jan. 30 Purchase 10 @ $18= $180 Feb. 8 Sale 17 units x $50 each

$197.60 ($96 + $180+ $180)/30 units = average cost of inventory on hand is $15.20. $15.20x13 units =$197.60

Recall the formula for figuring Days' Sales in Inventory.

(Ending inventory/Cost of goods sold) x 365

Which statement(s) below correctly describe(s) the relationship of cost of goods sold and ending inventory?

Cost of goods available for sale must be allocated between cost of goods sold and ending inventory. Cost of goods sold plus ending inventory will equal the total goods available for sale.

If ending inventory at the end of the year is understated, what is the effect on cost of goods sold and net income?

Cost of goods sold will be overstated and net income will be understated.

Which of the following lists the four methods used to assign costs to inventory and to cost of goods sold?

FIFO, LIFO, weighted average and specific Identification

Recall the four inventory costing methods used to assign costs to inventory and cost of goods sold under the periodic inventory system.

First-in, first-out Last-in, first-out Weighted average Specific identification

Which of the following statements is correct regarding goods in transit?

Goods shipped FOB shipping point will be included in the buyer's inventory.

Which of the following statements correctly explains what the inventory turnover ratio assesses.

The inventory turnover ratio assesses how quickly a company is selling its merchandise, so that it can generate cash to pay debts.

Which statement(s) below is(are) correct regarding the purpose of taking a physical inventory count?

The physical count is used to adjust the Inventory account balance to the actual inventory available. The physical count is used to determine if there has been any theft, loss, damage or errors in inventory.

Review the statements below and select the ones that are correct regarding the days' sales in inventory ratio.

The ratio is often viewed as a measure of the buffer against out-of-stock inventory. The ratio estimates how many days it will take to convert inventory into accounts receivable or cash. The ratio reveals how much inventory is available in terms of the number of days' sales. The ratio is useful in evaluating liquidity of inventory.

Sparky's incorrectly included inventory that was on consignment in its ending inventory count. Consequently, the ending inventory was overstated on the balance sheet. Explain how this error will affect this year's income statement.

This year's cost of goods sold will be too low. This year's net income will be too high.

Q-mart failed to include inventory that was kept in a separate warehouse in its end-of-the-period inventory count. Explain how this error will affect this year's balance sheet.

This year's total assets will be understated. This year's total equity will be understated.

When purchase costs are (rising/declining) _______________, LIFO will report the lowest cost of goods sold yielding the highest gross profit and net income.

declining

Determine which of the following statements is correct regarding consigned goods.

Consigned goods should be included in the consignor's inventory.

Determine which of the following statements are correct regarding damaged or obsolete goods.

If damaged goods can be sold at a reduced price, they are included in inventory. A loss in value is reported in the period when goods are damaged or become obsolete. Damaged goods are not included in inventory if they cannot be sold. Damaged goods are included in inventory at their net realizable value.

All of the following are safeguards for inventory

Having counters confirm the existence, amount, and condition of inventory. Having a manager confirm inventory counts. Taking two inventory counts by different counters.

Demonstrate how inventory costs are treated both as assets and expenses by selecting the correct statement(s) below.

Inventory costs are treated as an expense when they are sold. Inventory items sold are considered part of cost of goods sold on the income statement. Inventory items retained at the end of the period are considered part of Merchandise Inventory on the balance sheet.

Storm Windows Company understated their ending inventory during their first year of operations by $2,000. What is the effect of this error at the end of the year? Select all answers which apply.

$2,000 overstatement of cost of goods sold. $2,000 understatement of net income.

Guns R Us overstated its ending inventory in the current year by $5,000. The company incorrectly reported $100,000 of net income. Explain the consequences of this error on the current period's income statement.

Cost of goods sold will be too low by $5,000.

Determine which of the following statements are correct regarding the difference between physical flow and the cost flow of inventory.

A business may adopt any cost flow assumption when accounting for perishable items. Perishable items should have an actual physical flow of FIFO. Physical flow is focused on the actual movement of goods. Cost flow is an assumption about which goods/items are sold.

In year 1, Shell Company understated their ending inventory. What is the effect of this error in year 2?

Beginning inventory is understated. Cost of goods sold is understated.

The owner of consigned goods is called the _________and the one who sells goods for the owner is called the _______________.

Blank 1: consignor Blank 2: consignee

The FIFO cost flow assumption assumes that the cost of items purchased (earliest/latest) are the costs that will be transferred first to cost of goods sold on the (balance sheet/income statement).

Blank 1: earliest Blank 2: income statement

If goods are shipped FOB shipping point, then the (purchaser/seller) is responsible for paying freight charges and the (purchaser/seller) will not include the merchandise in their inventory.

Blank 1: purchaser Blank 2: seller

Assuming purchase costs are rising in a periodic inventory system, determine which of the statements below are correct regarding the cost of goods sold under FIFO, LIFO and weighted average cost flow methods.

Companies using FIFO will report the smallest cost of goods sold. Companies using FIFO will report the highest gross profit and net income. Companies using FIFO will pay higher taxes than companies using LIFO, assuming all else being equal. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold.

In year 1 ending inventory is overstated by $2,000. Explain the effect on cost of goods sold, gross profit and net income in year 1 and year 2 Select all answers that apply.

Cost of goods sold in the current year, year 1, will be understated. Gross profit in the current year, year 1, will be overstated. Gross profit in the next year, year 2, will be understated. Cost of goods sold in the following year, year 2, will be overstated.

Cake Mart understated its ending inventory in the current year by $5,000. The company incorrectly reported net income of $100,000. Determine the effect of the error on the financial statements.

Cost of goods sold will be too high by $5,000, and this caused net income to be understated by $5,000.

XYZ Company made a mistake in counting its ending inventory. Determine which of the items below will be affected by this error.

Current assets Net income Cost of goods sold

One identical unit is purchased on each of the following three dates and at the respective costs: June 1 at $10 June 2 at $15 July 4 at $20 The company sells two units during the period. Conclude which inventory items are sold first and which unit remains in ending inventory if the company is using the FIFO cost flow assumption.

The June 1 at $10 and the June 2 at $15 are both sold; the July 4 unit remains in ending inventory.

Assume that three identical units are purchased separately on the following three dates and at the respective costs: June 1 at $10 June 2 at $15 July 4 at $20 The company sells two units during the period. Conclude which inventory items are sold first and which unit remains in ending inventory if the company is using the LIFO perpetual cost flow assumption.

The June 2 at $15 and the July 4 at $20 are both sold; the June 1 at $10 remains in ending inventory.

Q-mart failed to include inventory that was kept in a separate warehouse in its 12/31 end-of-the-period inventory count. Consequently, the ending inventory on 12/31 was understated on the balance sheet. Explain how this error will effect the current year's income statement.

The current year's cost of goods sold will be too high. The current year's net income will be too low.

True or false: If Dogs R Us overstates ending inventory on the balance sheet, then total equity on the balance sheet will be overstated as well.

True

Identify the safeguards that companies implements when taking a physical inventory count.

Using prenumbered inventory tickets. Taking a second count by a different counter.

Assuming purchase costs are declining and a periodic inventory system is used, determine the statements below which correctly describe what is happening to cost of goods sold under FIFO, LIFO and weighted average cost flow methods.

Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold. Companies using LIFO will report the smallest cost of goods sold. Companies using LIFO will report the highest ending inventory on their balance sheets, as compared to companies using FIFO or weighted average. Companies using LIFO will pay higher taxes than companies using FIFO, assuming all else being equal.

Identify the statements below that are correct regarding the advantages of the four inventory methods using a periodic inventory system.

Weighted average tends to smooth out erratic changes in costs. FIFO assigns an amount to inventory on the balance sheet that approximates its current cost.

The journal entry for a sale on account under the periodic inventory system includes:

a debit to accounts receivable and a credit to sales

When purchase costs are (rising/declining) , FIFO will report the lowest cost of goods sold yielding the highest gross profit and net income.

rising

When purchase costs are (rising/declining) _______________, FIFO will report the lowest cost of goods sold yielding the highest gross profit and net income.

rising