Chapter 7: Inventory and Cost of Goods sold

The costs of carrying inventory include the costs of ______.

storage obsolescence theft spoilage

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

Barry, Inc.'s sales equal $30,000 and cost of goods sold equals $10,000. Its beginning inventory was $800 and its ending inventory is $1,200. Barry's inventory turnover ratio equals ______ times.

10; Inventory turnover ratio=cost of goods sold/average inventory or $10,000/ (($800 + $1,200)/2).

Inventory is reported as

current asset on the balance sheet

FIFO uses the ______ cost for Cost of Goods Sold on the income statement and the ______ cost for Inventory on the balance sheet.

oldest; newest

Inventory shrinkage as a result of theft, damage or obsolescence that is discovered during a physical inventory count at the end of the accounting period is recorded with a decrease to Inventory ______.

only in a perpetual system

On May 1, there were 4 inventory items that cost $30 each. On May 5, 2 items were purchased for $35 each. Given one item from the beginning inventory and one from the May 5 inventory were sold, under the <blank> <blank> inventory method, cost of goods sold would equal $75.

specific identification

Which of these might cause the value of inventory to fall below its original cost?

Obsolescence from going out of style Increased competition Damage

Which of the following would be considered merchandise inventory?

Purchased finished goods

Which inventory method is typically used when accounting for expensive and unique inventory items?

Specific Identification

Who decides which of the many inventory accounting methods a company should use?

The company's management

An increase in a company's inventory balance from a prior year is ______.

good if the inventory turnover ratio is higher

Which of the following statements are true?

Managers can choose the method of accounting for inventory cost (i.e., FIFO, LIFO, etc.) that best fits their business. Using a different inventory accounting method leads to reporting a different amount for cost of goods sold.

What is the inventory costing method that adds together the total cost of all goods available for sale during the period, and then divides that by the number of units available for sale to get a value to assign to all goods sold and all goods remaining in inventory?

Weighted Average Cost

Merchandise Inventory

consists of products acquired in a finished condition that are available for sale is reported as a current asset on the balance sheet

In a perpetual inventory system, Inventory is initially recorded at ______.

cost

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using first-in, first-out, the 3 goods sold are assumed to be ______.

from the beginning inventory

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10 each. It purchases 3 more at $12 each. It sold 2 units. Using the <blank> <blank> cost inventory method, Cost of Goods Sold equals $22.40.

weighted average

Which statement is true?

Specific identification, weighted average cost, LIFO and FIFO are acceptable GAAP costing methods.

Delta Diamonds had 5 one-carat diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds that was purchased on July 9. Using periodic specific identification, its Cost of Goods Sold is ______.

$550; Specific identification records the actual cost of the actual diamond sold. The diamond that was purchased on July 9 cost $550

Which of the following statements are true?

An increased inventory balance is undesirable if it is a result of an accumulation of unsaleable inventory. An increased inventory balance is desirable if management is building up stock in anticipation of higher sales.

Which of the following income statement line items are affected by the inventory method chosen?

Income from Operations Gross Profit Net Income Income before Income Tax Expense Income Tax Expense

True or false: Specific identification is an inventory method typically used when accounting for expensive and unique inventory items.

True

The assumption that a company makes about its inventory cost flow has ______.

an effect on the company's income statement an effect on the company's balance sheet

The assumption that a company makes about its inventory cost flow can affect cost of goods sold on its ______ and inventory on its ______.

income statement; balance sheet

As inventory quality increases, its cost usually _____.

increased

Applying the lower of cost or market rule results in inventory being reported at the ______.

market value if lower than cost

Widget Company started the month with 10 gadgets in its Inventory that cost $5 each. During the month, Widget bought 50 more gadgets that cost $6 each. At the end of the month, Widget counted its inventory and found that 8 gadgets remained unsold. If Widget uses FIFO, its Cost of Goods Sold for the month is ______.

$302; Of the 52 gadgets sold, the oldest gadgets are assumed to be sold first. Thus, Cost of Goods Sold equals (10 gadgets x $5) + (42 gadgets x $6).

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using last-in, first-out, Cost of Goods Sold equals ______.

$33; This would be the case if FIFO was used. LIFO assumes the last 3 items purchased were sold first and thus COGS equals $33 (3 x $11).

Alpha Company bought 75 units of inventory for $4 each and 25 units of inventory for $5 each. Alpha's weighted average cost per unit is ______.

$4.25; ((75 x $4) + (25 x $5))/100=$4.25

Which of these inventory accounting methods are acceptable under US GAAP?

FIFO Weighted average Specific identification LIFO

Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using FIFO, its Inventory at December 31 is ______.

$2,300; Inventory using FIFO =(2 x $550) + (2 x $600). Cost of Goods Sold using FIFO =1 x $500. FIFO assumes the oldest one is sold first even if it was the one purchased on July 1.

Mountain Made started the month with 3 quilts in its beginning inventory that cost $200 each. During the month, Mountain Made purchased 20 additional quilts for $210 each. At the end of the month, Mountain Made counted its inventory and found that 5 quilts remained unsold. If Mountain Made uses LIFO periodic, its Cost of Goods Sold for the month is ______.

$3,780; This is FIFO Cost of Goods Sold, not LIFO. The cost of the 18 quilts sold equals 18 quilts x $210.

Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500; 2 purchased July 9 for $550 each; and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using LIFO periodic, its Cost of Goods Sold is ______.

$600; LIFO assumes that the last diamond purchased was the first to be sold. Thus, the diamond purchased on September 23 for $600 is assumed to be sold first.

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using last-in, first-out, the 3 goods sold are ______.

from the purchases made during the month

Delta Diamonds had 5 one-carat diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using a periodic specific identification, its Inventory after the December 24 sale is ______.

$2,250; Inventory equals $2,250 (=$500 + 550 + (2x$600)). Cost of Goods Sold equals $550.

Of the 4 companies listed below, which company is more likely to use specific identification to value its inventory and cost of goods sold?

Custom home builder

Risen, Inc. has beginning inventory of $16 which consists of 2 units at $8 each. It purchased 10 units at $10 each. It sold 5 units for $20 each. Which would result in the higher Gross Profit, FIFO or LIFO and why?

FIFO because the older, less expensive units are assumed to be sold first making Cost of Goods Sold lower and Gross Profit higher than LIFO

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using first-in, first-out, Cost of Goods Sold equals ______.

$30

Which inventory costing method uses the newest cost for Cost of Goods Sold on the income statement and the oldest cost for Inventory on the balance sheet?

LIFO