Chapter 6 Quiz
Lance 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 LIFO using a periodic inventory system? - $100,000 - $113,000 - $108,000 - $99,000 - $91,000
$100,000 Solution: [LIFO periodic ending inventory] Ending inventory under LIFO uses the oldest (i.e., earliest) costs of inventory to compute ending inventory. Ending inventory = (8,000 x $11) + (1,000 x $12) = $100,000 Chapter 6, Learning objective 2
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? - $108,000 - $113,000 - $100,000 - $99,000 - $117,000
$113,00 Solution: [FIFO periodic ending inventory] 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. Chapter 6, Learning objective 2
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? - $113,000 - $110,000 - $120,000 - $100,000 - $108,000
$113,000 Solution: [LIFO periodic ending inventory] 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 Chapter 6, Learning objective 2
Howe Industries had the following inventory transactions occur during the current year: Units Cost/unit Feb. 1 Purchase 40 $41 Mar. 14 Purchase 60 $42 May 1 Purchase 55 $43 The company sold 100 units at $80 each and has a tax rate of 20%. Assuming that a periodic inventory system is used and operating expenses are $1,200, what is the company's after tax net income using LIFO? (rounded to whole dollars) - $2,583 - $2,545 - $3,145 - $3,745 - $2,036
$2,036 Solution: Using periodic LIFO, cost of goods sold includes the last inventory purchased (i.e., the newest inventory).Sales revenue = 100 x $80 = $8,000 Cost of goods sold = (55 x $43) + [(100 - 55) x $42] = $2,365 + 1,890 = $4,255 Gross profit = Sales revenue - cost of goods sold = $8,000- $4,255 = $3,745 Net income before taxes = 8,000 - 4,255 - 1,200 = 2,545 Net income = 2,545 x (100% - 20%) = 2,036 Chapter 6, Learning objective 3
Big Time Widgets has the following inventory data: December 1 Beginning inventory of 50 units at $6.00 per unit December 7 Purchased 10 units at $6.25 per unit December 12 Sold 30 units December 20 Purchased 30 units at $7.50 per unit December 29 Sold 20 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? - $244 using perpetual, and $240 using periodic - $220 using perpetual, and $223 using periodic - $291 using perpetual, and $255 using periodic - $255 using perpetual, and $291 using periodic - $255 using perpetual, and $240 using periodic
$255 using perpetual, and $240 using periodic Solution: When using perpetual LIFO, cost of goods sold includes the last inventory acquired that was on hand at the date of sale; it does not include inventory acquired after the sale occurred. For each sale date, determine the inventory sold using LIFO for each sale of inventory; the inventory not sold during the period belongs in ending inventory. On December 12, sold 10 of the units acquired on Dec. 7 and 20 units of beginning inventory. On December 29, sold 20 of the units acquired on Dec. 20 Ending inventory includes 40 units, including 30 units of beginning inventory, none of the units of inventory acquired on Dec. 7, and 10 units of inventory acquired on Dec. 29. Ending inventory = (30 x $6.00) + (10 x $7.50) = 180 + 75 = $255 When using periodic LIFO, cost of goods sold includes the last inventory acquired regardless of whether it was on hand at the date of sale; it can include inventory acquired after the sale occurred. For each sale date, determine the inventory sold using LIFO for each sale of inventory; the inventory not sold during the period belongs in ending inventory. On Dec. 12, the company sold 30 units. On Dec. 29, the company sold 20 units. Cost of goods sold is based on the last 50 units of inventory acquired; ending inventory includes the oldest 40 units of inventory = (40 x $6.00) = $240 Chapter 6, Learning objective 7
A company uses LIFO. At the beginning of the current year its inventory was $200,000, and at the end of the current year its inventory is $250,000. At the start of the year its LIFO reserve was $30,000 and at the end of the year its LIFO reserve is $40,000. The company operates in an inflationary environment. If the company used FIFO instead of LIFO, its ending inventory would be - $210,000. - $160,000. - $250,000. - $240,000. - $290,000.
$290,000 Solution: The LIFO reserve is the difference between inventory using LIFO and inventory using FIFO. If the company operates in an inflationary environment (i.e., rising prices), then the LIFO reserve is a positive number, add the LIFO reserve to LIFO inventory to determine the company's FIFO inventory. FIFO ending inventory = LIFO ending inventory + LIFO reserve = $250,000 + 40,000 = $290,000 Chapter 6, Learning Objective 6
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 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 gross profit using LIFO? (rounded to whole dollars) - $3,235 - $4,355 - $3,655 - $3,145 - $3,885
$3,145 Solution: Using periodic LIFO, cost of goods sold includes the last inventory purchased (i.e., the newest inventory). 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 Chapter 6, Learning objective 3
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? - $333.75 using perpetual, and $423 using periodic - $333.75 using perpetual, and $313.75 using periodic - $292.5 using perpetual, and $313.75 using periodic - $309.50 using perpetual, and $323 using periodic - $313.75 using perpetual, and $333.75 using periodic
$313.75 using perpetual, and $333.75 using periodic Solution: When using perpetual LIFO, cost of goods sold includes the last inventory acquired that was on hand at the date of sale; it does not include inventory acquired after the sale occurred. On Dec. 12, the company sold 35 units from the Dec. 7 layer of inventory. On Dec. 29, the company sold 10 units from the Dec. 20 layer of inventory. Cost of goods sold = (35 x $6.75) + (10 x $7.75) = 236.25 + 77.50 = $313.75
At December 31, Moore Company's inventory records indicated a balance of $420,000. Upon further investigation it was determined that this amount included the following: (1) $54,000 in inventory purchases made by Moore shipped from the seller December 29 terms FOB shipping point, but not due to be received until January 2. (2) $25,000 in inventory purchases made by Moore shipped from the seller December 29 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 29. The goods are not expected to reach their destination until January 5. (4) $7,000 in goods sold by Moore with terms FOB shipping point on December 29. The goods are not expected to reach their destination until January 4. (5) $15,000 of goods received on consignment from Dollywood Company. What is Moore's correct ending inventory balance at December 31? - $365,000 - $351,000 - $373,000 - $392,000 - $334,000
$373,000 Solution: Learning objective 1 Do not include the following in inventory: --FOB destination purchases not yet received (i.e., $25,000) --FOB shipping point goods sold and shipped (i.e., $7,000) --Goods held on consignment (i.e., $15,000). Ending inventory = $420,000 - 25,000 - 7,000 - 15,000 = $373,000
Ray's Sounds has accumulated the following cost and market data on March 31: Cost Data Market Data iPods $22,000 $19,600 Cell phones $17,000 $18,500 DVDs $26,500 $28,600 Using the lower-of-cost-or-market, how much is the value of the ending inventory? - $65,500 - $63,100 - $65,200 - $56,500 - $66,700
$63,100 Solution: Cost is compared to market for each inventory category as follows: iPods $19,600 + cell phones $17,000 + DVDs $26,500 = $63,100. Chapter 6, Learning objective 4
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? - $640,000 - $658,000 - $746,000 - $634,000 - $560,000
$634,000 Solution: The inventory balance of $752,000 should not include the $112,000 since ownership passes at destination on January 2. It should include the $74,000 because ownership does not pass at the shipping point on December 27. It should not include the $6,000 on consignment because these goods are not owned by Sunrise. The corrected inventory balance = $752,000 - $112,000 - $6,000 = $634,000. Chapter 6, Learning objective 1
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? - $93,150 - $70,000 - $75,250 - $56,000 - $84,000
$75,250 Solution: [Average periodic ending inventory] Ending inventory cost equals the average cost per unit times the number of units of inventory in ending inventory. 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. Chapter 6, Learning objective 2
Cost of goods purchased is $480,000, beginning inventory is $40,000, and cost of goods sold is $440,000. How much is ending inventory? - $40,000 - $60,000 - $80,000 - $0 - $100,000
$80,000 Solution: Beginning inventory + Purchases - Ending inventory = Cost of goods sold 40,000 + 480,000 - Ending inventory = 440,000 Ending inventory = 40,000 + 480,000 + 440,000 = 80,000 Chapter 6, Learning objective 2
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? - 11.4 - 11.6 - 32 - 15.2 - 12.5
15.2 Solution: 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 Chapter 6, Learning objective 5
The following information came from the income statement of the Wilkens Company: sales revenue $2,200,000; beginning inventory $220,000; ending inventory $280,000; and gross profit $1,200,000. What is Wilkens' inventory turnover ratio? - 3.75 times - 5.25 times - 6.0 times - 4.0 times - 4.5 times
4.0 times Solution: Cost of goods sold is the difference between sales revenue and gross profit: $2,200,000 - $1,200,000 = $1,000,000. Inventory turnover ratio = Cost of goods sold divided by average inventory: $1,000,000/[($220,000 + $280,000)/2] = 4.0 Chapter 6, Learning objective 5
The following information came from the income statement of the Watson Company: sales revenue $2,400,000; beginning inventory $150,000; ending inventory $250,000; and gross profit $1,000,000. Inventory turnover is 7 times per year. What is Watson's days in inventory? - 121.7 days - 97.3 days - 91.25 days - 60.8 days - 52.1 days
52.1 Solution: Dividing 365 days of the year by the inventory turnover of 7 results in an average of 52.1 days in inventory. Chapter 6, Learning objective 5
Carlos Company had beginning inventory of $75,000, ending inventory of $105,000, cost of goods sold of $405,000, and sales revenue of $515,000. What is Carlos' days in inventory? - 81.1 days - 121.7 days - 115.5 days - 91.2 days - 75.3 days
81.1 days Solution: Days in inventory equals 365 days ÷ inventory turnover (cost of goods sold ÷ average inventory) = 365 ÷ ($405,000 ÷ [($75,000 + $105,000) ÷ 2]) = 81.1 days Chapter 6, Learning objective 5
Which situation requires using the lower-of-cost-or-market basis to valuing inventory instead of the cost basis? - A decline in the current replacement cost of the inventory - Paying for inventory within the discount period - An increase in the price charged to customers - An increase in the current replacement cost of the inventory - A decrease in the price charged to customers
A decline in the current replacement cost of the inventory Solution: To comply with the concepts of conservatism (e.g., accounting rules should avoid overstating assets, profits, etc.), inventory should be valued at the lower-of-cost-or-market rather than at its cost. When there is a decline in the current replacement cost of inventory and a company had paid more for inventory than similar inventory's current replacement cost, the company's inventory account is considered to be overstated. The amount recorded as inventory should be reduced or lowered from cost to "market". Be careful because "market value" is not the company's sales price to its customers. Rather, "market value" is the current replacement cost or how much the company can buy inventory from its suppliers. For example, a company might purchase $100 of inventory and record it at cost of $100. The company might plan on selling the inventory for $150. Before selling that inventory, the current replacement cost might decline to $95 so the company records a $5 decline in inventory. However, the company might be able to still sell at $150 or perhaps approximately $145. Conservatism simply means that accounting rules are designed to report assets, income, etc. on a conservative basis—that is let's avoid overstating how much a company has as assets, profits, etc. Similarly, let's avoid overstating its inventory and the lower-of-cost-or-market helps us avoid overstating the value of inventory reported on a company's balance sheet. Learning objective 4
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? - Average-cost - Allowance estimation - First-in, first-out - Specific identification - Last-in, first-out
Allowance estimation Solution: A company's management decides which method of computing the cost of inventory. Choices of method include (1) specific identification, (2) first-in, first-out, (3) last-in, first-out, and (4) average cost methods. Chapter 6, Learning objective 2
If the ending inventory is overstated, what occurs? - Stockholders' equity will not be affected. - Assets are overstated and the liabilities are understated. - Assets are overstated and the net income is understated. - Assets are overstated and the cost of goods sold is overstated. - Assets are overstated and stockholders' equity is overstated.
Assets are overstated and stockholders' equity is overstated. Solution: If the ending inventory is overstated, assets, net income, and stockholders' equity will be overstated, while the cost of goods sold will be understated. Chapter 6, Learning objective 8
When is a physical inventory usually taken? - When goods are not being sold or received - In the middle of the fiscal year - When a company has its greatest amount of inventory. - When the company has its least amount of inventory - At the end of the company's fiscal yea
At the end of the company's fiscal year Solution: A physical inventory count is usually taken at the end of the company's fiscal year as a step in the preparation of the company's financial statements. For example, every company must report its end-of-period inventory on its balance sheet. Chapter 6, Learning objective 1
Which of these transactions would cause the inventory turnover ratio to increase the most? - Keeping the amount of inventory on hand constant but decreasing sales - Keeping the amount of inventory on hand constant but increasing sales - Increasing the amount of inventory on hand and decreasing sales - None of these - Decreasing the amount of inventory on hand and increasing sales
Decreasing the amount of inventory on hand and increasing sales Solution: Inventory turnover ratio = Cost of goods sold divided by average inventory. Increasing sales will increase cost of goods sold which increases the numerator of the inventory turnover ratio. A corresponding decrease in inventory decreases the denominator of the inventory turnover ratio. Thus, both an increase of sales (and cost of goods sold) and a decrease in inventory will cause the inventory turnover to increase. Chapter 6, Learning objective 5
In a period of rising prices which inventory method will result in the greatest amount of income tax expense? - FIFO - All of these produce the same income tax expense - Average cost - Specific identification - LIFO
FIFO Solution: The highest or greatest income tax expense occurs with the highest income and the lowest expenses (i.e., lowest cost of goods sold). During periods with rising process, the lowest cost of goods sold occurs with FIFO (i.e., FIFO assumes the oldest units of inventory were sold). Chapter 6, Learning objective 3
Ownership passes to the buyer when purchased goods are received by the buyer from a public carrier if the goods are shipped - FOB shipping point. - FOB buyer. - FOB transit. - FOB destination. - FOB shipper.
FOB Destination Solution: In FOB destination, ownership transfers when the buyer receives the purchased goods from the public carrier rather than when the public carrier accepts them from the seller. Chapter 6, Learning objective 1
Which of the following should be included in the physical inventory of a company? - Goods held on consignment from another company - None of these choices is correct. - All of the answer choices are correct. - Goods in transit from another company shipped FOB destination - Goods shipped on consignment to another company
Goods shipped on consignment to another company Solution: Goods shipped on consignment to another company remain owned. Goods held on consignment are owned by company that shipped them. Inventory should include all goods owned by the company regardless of whether the company holds physical possession or not. Goods in transit from another company shipped FOB shipping point should be included in the physical inventory of the firm to whom the goods are being shipped because title (i.e., legal ownership) passes when the goods leave the seller's place of business but goods in transit shipped from another company FOB destination should not because they are not yet received and ownership does not transfer to the recipient until they are received (i.e., they reach their destination). Chapter 6, Learning objective 1
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 the ending inventory. - It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold. - None of these - It assumes that the cost of the earliest units purchased are the last to be allocated to the beginning inventory. - It assumes that the cost of the earliest units purchased are the last to be allocated to cost of goods sold.
It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold. Solution: FIFO assumes the cost of the earliest units purchased are the first to be allocated to cost of goods sold. Chapter 6, Learning objective 2
In a period of falling prices, which of the following methods will give the largest net income? - Specific identification - LIFO - All of these produce the same net income - Average-cost - FIFO
LIFO Solution: The largest net income occurs with the smallest cost of goods sold. In periods with falling prices (i.e., deflation), low cost of goods sold occurs when the last units of inventory purchased are the ones assumed sold. LIFO will provide the highest net income during a period of falling prices. FIFO will not provide the highest net income during a period of falling prices. Specific identification costing will vary depending on which units are sold. Average costing will produce a net income between LIFO and FIFO. Chapter 6, Learning objective 3
With the assumption of costs and prices generally rising, which of the following is correct? - Specific identification method provides the closest cost of goods sold to replacement cost on the income statement. - FIFO provides the closest cost of goods sold to replacement cost. - LIFO provides the closest valuation of cost of goods sold to replacement cost of inventory sold. - LIFO provides the closest valuation of inventory on the balance sheet to replacement cost. - None of these
LIFO provides the closest valuation of cost of goods sold to replacement cost of inventory sold. Solution: LIFO assumes that the most recently purchased inventory is sold first. The cost to replace inventory that has been sold in likely closest to the cost of the most recently purchased inventory. Thus, LIFO provides the closest relationship of replacement cost to cost of goods sold on the income statement. In contrast, FIFO provides the closest valuation of inventory on the balance sheet to replacement cost. The specific goods to be sold may come from early purchases or inventory just acquired, so it is not possible to know which cost will become an expense. Chapter 6, Learning objective 3
In periods of rising prices, what will LIFO produce? - Higher total assets than FIFO - All of these - Lower expenses than FIFO - Higher stockholders' equity than FIFO - Lower net income than FIFO
Lower net income than FIFO Solution: LIFO (i.e., last-in, first-out) uses the cost of the most recently purchased inventory to determine cost of goods sold. Rising prices suggests the most recently purchased inventory is the most expensive inventory. As a result, LIFO and rising prices produces the highest cost of goods sold. High cost of goods sold produces low gross profit (i.e., gross margin), low net income, low retained earnings, low total stockholders' equity. High cost of goods sold (i.e., selling the expensive inventory) also produces low ending inventory (i.e., keeping the inexpensive inventory) and low total assets. Chapter 6, Learning objective 3
Harold Company overstated its ending inventory by $15,000 at the end of the first year. It never noticed the error. As a result, what was the effect on Harold's stockholders equity at the end of the first year and at the end of the second year, respectively? - Overstated and understated, respectively - None of these - Overstated and overstated, respectively - Understated and understated, respectively - Overstated and properly stated, respectively
Overstated and properly stated, respectively Solution: If the first year's ending inventory is overstated, that same year's cost of goods sold will be understated and stockholders' equity and net income will be overstated (i.e., reported as being higher than it should be reported). If the error is not corrected, the next year's beginning inventory has the error. The second year's net income will be understated by the same amount it was overstated in the first year. The combined total net income for the two periods will be correct (but one is too high and the other is too low) which causes stockholders' equity at the end of the two periods to be correct Chapter 6, Learning objective 8
Which of the following is an inventory account? - All of these are inventory accounts - Equipment - Raw materials - Accounts receivable - Cash
Raw materials Solution: Learning objective 1 Equipment is not an inventory account. Equipment consists of items used in the production of income that are not held for sale. Inventory can include raw materials, work in process, and finished goods. Raw materials is an inventory account that contains the cost of materials that have not yet been started into the production process. Work in process is an inventory account that contains the cost of goods started, but not completed. Finished goods is an inventory account that contains the cost of goods completed that are ready to sell. Chapter 6, Learning objective 1
Which of the following statements is true? - LIFO inventory valuation requires the physical flow of goods to be representative of the cost flow. - None of these answer choices is correct. - Specific identification method inventory valuation requires the physical flow of goods to be representative of the cost flow. - LIFO inventory valuation requires the physical flow of goods to be representative of the cost flow. - All of these answer choices are correct.
Specific identification method inventory valuation requires the physical flow of goods to be representative of the cost flow. Solution: The specific identification method has this constraint--the physical flow of goods must represent . There is no requirement for the physical flow of goods under the LIFO or FIFO inventory valuation concepts to match cost flow. Chapter 6, Learning objective 2
What is the LIFO reserve? - The difference between inventory reported using LIFO and inventory using FIFO - An difference between inventory reported at cost and inventory at lower-of-cost-or-market. - The difference between income reported using LIFO and inventory using average cost. - An amount used to adjust inventory reported using LIFO inventory to its historical cost - The cost of ending inventory using LIFO
The difference between inventory reported using LIFO and inventory using FIFO Solution: The LIFO reserve is the difference between inventory reported using LIFO and inventory using FIFO. Chapter 6, Learning objective 6
A company uses the periodic inventory method and the beginning inventory is understated by $4,000 because the ending inventory in the previous period was understated by $4,000; the ending inventory for this period is correct. The amounts reflected in the current end of the period balance sheet are - None of these - assets are understated and stockholders' equity is understated. - assets are overstated and stockholders' equity is correct. - assets are correct and stockholders' equity is correct. - assets are overstated and stockholders' equity is overstated.
assets are correct and stockholders' equity is correct. Solution: In the periodic inventory system, cost of goods sold is computed at the end of the period (rather than tracked day-by-day as done in a perpetual inventory system). The periodic inventory system uses a formula to compute cost of goods sold: Beginning inventory plus purchased minus ending inventory = cost of goods sold The accuracy of cost of goods sold depends on the accuracy of the beginning and ending physical counts of inventory. Sometimes, a portion of inventory is not counted and inventory is understated. At other times, some inventory may be counted twice resulted in inventory being overstated. Regardless of over- versus under-stating inventory, errors in the amount of inventory results in errors in cost of goods sold. For example, an understatement of beginning inventory adds too little when computing cost of goods sold, and cost of goods sold becomes understated. The next effect is that too little cost of goods sold is subtracted from revenue to compute gross profit making gross profit overstated (and making net income overstated). However, Retained Earnings has the correct balance because it was understated in the prior year due to understated ending inventory in the prior year, and this year too much income was closed to retained earnings. Recall that an error in ending inventory in one year will have a reverse effect on net income in the next accounting period. Chapter 6, Learning Objective 8
Inventory costing methods place primary reliance on assumptions about the flow of - values. - goods. - costs. - margins. - resale prices.
costs Solution: The inventory costing methods, such as first-in first-out, place a primary reliance on assumptions about the costs of inventory to cost of goods sold and ending inventory. Chapter 6, Learning objective 2