acg ch 6

Ray's Sounds has accumulated the following cost and market data on March 31: Cost Data Market Data iPods $24,000 $20,400 Cell phones $18,000 $19,000 DVDs $28,000 $25,600 Using the lower-of-cost-or-market, how much is the value of the ending inventory?

$64,000 -Cost is compared to market for each inventory category as follows: iPods $20,400 + cell phones $18,000 + DVDs $25,600 = $64,000.

Which one of the following statements is true?

A manufacturing company will normally have raw materials, work in process, and finished goods as inventory account classifications.

What accounting concept is employed when using the lower-of-cost-or-market valuation?

Conservatism

Which of the following should not be included in the physical inventory of a company?

Goods held on consignment from another company

In periods of inflation, what will LIFO produce?

Lower total assets than FIFO

Which of the following is a legitimate business reason for taking a physical inventory?

To check the accuracy of the perpetual inventory records To determine cost of goods sold To determine if any inventory has been lost from waste, shoplifting, or employee theft

In a period of rising prices which inventory method will result in the greatest amount of income tax expense?

fifo

Lance Company has the following inventory units and costs: Units Unit Cost Inventory, Jan. 1 7,000 $11 Purchase, June 19 12,000 12 Purchase, Nov. 8 4,000 13 If 10,000 units are on hand at December 31, what is the cost of the ending inventory under LIFO using a periodic inventory system?

113000 -Ending inventory under LIFO uses the oldest (i.e., earliest) costs of inventory to compute ending inventory. Ending inventory = (7,000 x $11) + (3,000 x $12) = $113,000

Carlos Company had beginning inventory of $80,000, ending inventory of $110,000, cost of goods sold of $285,000, and sales revenue of $475,000. What is Carlos' days in inventory?

121.7 days -Days in inventory equals 365 days ÷ inventory turnover (cost of goods sold ÷ average inventory) = 365 ÷ ($285,000 ÷ [($80,000 + $110,000) ÷ 2]) = 121.7 days

Which of the following is true of the FIFO inventory method?

It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold.

If there is an error in the ending inventory affecting the net income of the current period, what will happen to the net income of the next accounting period?

It will have the reverse effect on the net income during the next accounting period.

In periods of rising prices, what will LIFO produce?

Lower total assets than FIFO

Fran Company's ending inventory is understated by $4,000. What are the effects of this error on the current year's cost of goods sold and net income, respectively?

Overstated and understated -If ending inventory is understated by $4,000, the amount subtracted from goods available for sale is understated. This causes cost of goods sold to be overstated, which in turn causes net income to be understated.

what is the company's after tax net income using LIFO?

Sales revenue = 100 x $75 = $7,500 Cost of goods sold = (55 x $44) + [(100 - 55) x $43] = $2,420 + 1,935 = $4,355 Gross profit = Sales revenue - cost of goods sold = $7,500 - 4,355 = $3,145 Net income before taxes = 7,500 - 4,355 - 1,000 = 2,145 Net income = 2,145 x (100% - 20%) = 1,716

Which of the following statements is true?

Specific identification method inventory valuation requires the physical flow of goods to be representative of the cost flow.

Jerry gives goods on consignment to Cecil who agrees to try to sell them for a 25% commission. At the end of the accounting period, the goods have not been sold. Which of the following parties includes in its inventory the consigned goods?

jerry

In a period of falling prices, which of the following methods will give the largest net income?

lifo

Reporting which one of the following allows analysts to make adjustments to compare companies using different cost flow methods?

lifo reserve

Howe Industries had the following inventory transactions occur during the current year: Units Cost/unit Feb. 1 Purchase 40 $42 Mar. 14 Purchase 60 $43 May 1 Purchase 55 $44 The company sold 100 units at $75 each and has a tax rate of 20%. Assuming that a periodic inventory system is used and operating expenses are $1,000, what is the company's after tax net income using LIFO?

$1,716 -Sales revenue = 100 x $75 = $7,500 Cost of goods sold = (55 x $44) + [(100 - 55) x $43] =$2,420 + 1,935 = $4,355 Gross profit = Sales revenue - cost of goods sold = $7,500 - 4,355 = $3,145 Net income before taxes = 7,500 - 4,355 - 1,000 = 2,145 Net income = 2,145 x (100% - 20%) = 1,716

Cost of goods purchased is $620,000, beginning inventory is $60,000, and cost of goods sold is $550,000. How much is ending inventory?

$130,000 -Beginning inventory + Purchases - Ending inventory = Cost of goods sold 60,000 + 620,000 - Ending inventory = 550,000 Ending inventory = 60,000 + 620,000 - 550,000 = 130,000

Irwin Industries had the following inventory transactions occur during the current year: Units Cost/unit Feb. 1 Purchase 40 $42 Mar. 14 Purchase 60 $43 May 1 Purchase 45 $44 The company sold 100 units at $80 each and has a tax rate of 25%. Assuming that a periodic inventory system is used and operating expenses are $1,000, what is the company's gross profit using LIFO? (rounded to whole dollars)

$3,655 -Sales revenue = 100 x $80 = $8,000 Cost of goods sold = (45 x $44) + [(100 - 45) x $43] = $1,980 + 2,365 = $4,345 Gross profit = Sales revenue - cost of goods sold = $8,000 - 4,345 = $3,655

Big Time Widgets has the following inventory data: December 1 Beginning inventory of 15 units at $6.00 per unit December 7 Purchases 60 units at $6.75 per unit December 12 Sold 35 units December 20 Purchased 30 units at $7.75 per unit December 29 Sold 10 units Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for December? What if a periodic inventory system had been used instead of perpetual?

$313.75 using perpetual, and $333.75 using periodic -Cost of goods sold = (35 x $6.75) + (10 x $7.75) = 236.25 + 77.50 = $313.75 -Cost of goods sold is based on the last 45 units of inventory acquired = (30 x $7.75) + (15 x $6.75) = 232.50 + 101.25 = $333.75

A company uses LIFO. At the beginning of the current year its inventory was $300,000, and at the end of the current year its inventory is $340,000. At the start of the year its LIFO reserve was $10,000 and at the end of the year its LIFO reserve is $15,000. The company operates in an inflationary environment. If the company used FIFO instead of LIFO, its ending inventory would be

$355,000 -FIFO ending inventory = LIFO ending inventory + LIFO reserve = $340,000 + 15,000 = $355,000

At December 31, Moore Company's inventory records indicated a balance of $400,000. Upon further investigation it was determined that this amount included the following: (1) $56,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB shipping point, but not due to be received until January 3. (2) $23,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB destination, but not due to be received until January 2. (3) $6,000 in goods sold by Moore with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6. (4) $8,000 in goods sold by Moore with terms FOB shipping point on December 27. The goods are not expected to reach their destination until January 4. (5) $13,000 of goods received on consignment from Dollywood Company. What is Moore's correct ending inventory balance at December 31?

$356,000 -Do not include the following in inventory: --FOB destination purchases not yet received (i.e., $23,000) --FOB shipping point goods sold and shipped (i.e., $8,000) --Goods held on consignment (i.e., $13,000) Ending inventory = $400,000 - 23,000 - 8,000 - 13,000 = $356,000

Big Time Widgets has the following inventory data: December 1 Beginning inventory of 15 units at $6.00 per unit December 7 Purchased 60 units at $6.25 per unit December 12 Sold 25 units December 20 Purchased 30 units at $7.75 per unit December 29 Sold 10 units Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis for December? What if a periodic inventory system had been used instead of perpetual?

$463.75 using perpetual, and $433.75 using periodic -Ending inventory = (15 x $6.00) + (35 x $6.25) + (20 x $7.75) = 90 + 218.75 + 155 = $463.75 - ending inventory includes the oldest 70 units of inventory = (15 x $6.00) + (55 x $6.25) = 90 + 343.75 = $433.75

At December 31, Sunrise Company's inventory records indicated a balance of $723,000. Upon further investigation it was determined that this amount included the following: (1) $5,000 of inventory held by Sunrise on consignment from another company. (2) $125,000 of inventory purchased by Sunrise under the terms FOB destination, and this inventory did not arrive until January 2. (3) $86,000 of inventory sold and shipped by Sunrise on December 29 under the terms FOB destination, and this inventory did not reach the buyer until January 3. What is Sunrise's correct ending inventory balance at December 31?

$593,000 -The corrected inventory balance = $723,000 - $125,000 - $5,000 = $593,000.

At December 31, Sunrise Company's inventory records indicated a balance of $752,000. Upon further investigation it was determined that this amount included the following: (1) $112,000 of inventory purchased by Sunrise under the terms FOB destination, and this inventory did not arrive until January 2, (2) $74,000 of inventory sold and shipped by Sunrise on December 27 under the terms FOB destination, and this inventory was received by the buyer on January 6. (3) $6,000 of inventory held by Sunrise on consignment from another company. What is Sunrise's correct ending inventory balance at December 31?

$634,000 -The corrected inventory balance = $752,000 - $112,000 - $6,000 = $634,000.

Freehan Company's accounting records has the following information about its inventory: Units Unit Cost Inventory, Jan. 1: 5,000 $ 8 Purchase, April 2 15,000 10 Purchase, Aug. 28 20,000 12 If the company has 7,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?

$75,250 -the average cost per unit equals the total cost of all inventory amounts divided by the number of inventory units. Average cost per unit = [(5,000 x $8) + (15,000 x $10) + (20,000 x $12)] ÷ (5,000 + 15,000 + 20,000) = $430,000 ÷ 40,000 units = $10.75 per unit. Ending inventory = $10.75 x 7,000 units = $75,250. Ending inventory cost equals the average cost per unit times the number of units of inventory in ending inventory.

Freehan Company's accounting records has the following information about its inventory: Units Unit Cost Inventory, Jan. 1 6,000 $ 8 Purchase, April 2 18,000 10 Purchase, Aug. 28 16,000 12 If the company has 8,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?

$84,000 -Average cost per unit = [(6,000 x $8) + (18,000 x $10) + (16,000 x $12)] ÷ (6,000 + 18,000 + 16,000) = $420,000 ÷ 40,000 units = $10.5 per unit. Ending inventory = $10.5 x 8,000 units = $84,000.

Parrish Company has the following inventory units and costs: Units Unit Cost Inventory, Jan. 1 8,000 $11 Purchase, June 19 13,000 12 Purchase, Nov. 8 5,000 13 If 9,000 units are on hand at December 31, what is the cost of the ending inventory under FIFO using a periodic inventory system?

113000 -Ending inventory under FIFO uses the most recent costs of inventory to compute ending inventory. Ending inventory = (5,000 x $13) + (4,000 x $12) = $113,000.

A company uses the periodic inventory method. An error in the physical count of goods on hand at the end of a period resulted in a $10,000 understatement of the ending inventory. The effect of this error in the current period is that (i) gross profit is _________________ and (ii) retained earnings is ___________________.

(i) Understated and (ii) Understated

Net sales are $2,200,000, cost of goods sold is $1,200,000, and average inventory is $50,000. How many days' sales are in inventory?

15.2 -Days' sales in inventory is calculated as 365 days divided by inventory turnover. Inventory turnover = $1,200,000/$50,000 = 24 times Days' sales in inventory = 365/24 = 15.2 days

The following information came from the income statement of the Wilkens Company: sales revenue $1,800,000; beginning inventory $160,000; ending inventory $240,000; and gross profit $600,000. What is Wilkens' inventory turnover ratio?

6 times -Cost of goods sold is the difference between sales revenue and gross profit: $1,800,000 - $600,000 = $1,200,000. Inventory turnover ratio = Cost of goods sold divided by average inventory: $1,200,000/[($160,000 + $240,000)/2] = 6.0

The following information came from the income statement of the Watson Company: sales revenue $1,800,000; beginning inventory $160,000; ending inventory $240,000; and gross profit $600,000. Inventory turnover is 6 times per year. What is Watson's days in inventory?

60.8 days -Dividing 365 days of the year by the inventory turnover of 6 results in an average of 60.8 days in inventory.

Inventory is accounted for at cost. After a company has determined the quantity of units of inventory, it applies unit costs to the quantities to determine the total cost of inventory and the cost of goods sold. Which of the following statements is not a method for computing the cost of inventory?

Allowance estimation

When is a physical inventory usually taken?

At the end of the company's fiscal year -For example, every company must report its end-of-period inventory on its balance sheet.

Which of these transactions would cause the days in inventory ratio to increase the most?

Increasing the amount of inventory on hand and decreasing sales -Days in inventory = 365 days ÷ (cost of goods sold ÷ average inventory).

Ownership passes to the buyer when the public carrier accepts the goods if the goods are shipped

FOB shipping point

Which of these transactions would cause the days in inventory ratio to increase the most?

Increasing the amount of inventory on hand and decreasing sales

Inventory costing methods place primary reliance on assumptions about the flow of

costs.