COMM 2010 Ch7 Questions

Which inventory costing methods are based on assumptions that accountants make about the flow of inventory costs?

FIFO and LIFO

Assuming rising inventory prices, rank which inventory method results in the higher ending inventory value. List, from top to bottom, in order of highest ending inventory to lowest ending inventory value.

FIFO > weighted average > LIFO

When analyzing a company's inventory turnover ratio, it is more important and more meaningful to compare the ratio with __

prior year's ratios for the company

Which of the following may occur with a higher inventory turnover ratio?

reduction in inventory storage costs reduction in obsolence

If a company assumes that its inventory costs flow out in the opposite order from which the goods were purchased, it uses __ to value its inventory.

LIFO

Rank in order, from highest (top) to lowest (bottom) the anticipated inventory turnover ratios for the following companies.

WalMart Tiffany & Co. Bath Iron Works ( battleships sold to govt)

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

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

Which of the following statements are true?

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

If a new company calculates the average cost of its inventory by adding together the total cost of all purchases and then dividing it by the number of units purchased during the period, it is using the weighted __ cost method.

average

Goods available for sale will __ when sold.

become cost of goods sold on the income statement

In a periodic system for cost of goods sold to be updated, which of the following must occur?

compute cost of goods sold by subtracting ending inventory from goods available for sale AND take a physical count of inventory

In a perpetual inventory system, inventory is initially recorded at __.

cost

days to sell measures the average number of __.

days from the time inventory is purchased to the time it is sold

Probes inc wrote down its inventory to the lower replacement value. The effect on probes accounting equation includes an __.

decrease in stockholder's equity decrease in assets

To ensure accuracy of inventory accounted for using a perpetual system, physical counts __.

detect bookkeeping errors detect shrinkage detect theft

gross profit equals __.

net sales minus cost of goods sold

companies generally report their accounting method for inventory in the __.

notes to the financial statements

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

obsolescence from going out of style increased competition damage

What inventory accounts would one expect to see in the accounting records of a company that makes furniture?

work in process inventory finished goods inventory raw materials inventory

Iris, inc. uses FIFO for financial reporting purposes and LIFO for its income tax return. Iris's accounting treatment of its inventory is __.

not in accordance with the LIFO conformity rule

A lower of cost or market write-down __.

recorded incorrectly is one of the most common types of financial statement misstatements AND is viewed by analysts as a negative sign because it may indicate a problem with the company's inventory management

Beyer company bought inventory from sellar company, FOB destination. On dec 31 the last day of the accounting year, the goods were on a truck owned by common carrier, inc. in transit between beyer and sellar. Which company should include these goods in its dec 31 inventory?

sellar

Which of these will require a credit to the inventory account in a perpetual inventory system?

selling inventory on account selling inventory for cash

Beta company bought 80 units of inventory for $12 each and 20 units of inventory for $12.50 each. It sold 90 units for $25 each. Beta's weighted average cost is __.

12.10 weighted average = (80* $12) + (20 * $12.50)/ 100

On may 1 beginning inventory consists of 10 items that cost $10 each. On may 3 10 items are purchased at $12 each. On may 8 12 items are sold. On may 15 10 items are purchased at $14 each. Using perpetual LIFO, cost of goods sold for the month ended May 31 equals __.

$140 (If your'e using FIFO not LIFO with a perpetual system, you should calculate cost of goods sold as soon as the sale takes place, not at the end of the month. The may 15 purchase has not yet occurred as of the date of sale, Thus the cost of goods sold is $140 (= (10 * $12) + (2 * $10)).)

Chicken little started the month with 5 eggs in its inventory that cost $2 each. During the month chicken little bought 30 more eggs that cost $2.50 each. At the end of the month, Chicken little counted its inventory and found that 8 eggs remained unsold. If chicken little uses FIFO periodic, its cost of goods sold for the month is__.

$65 (5 * $2) + (22 * $2.50)

Barry's Inc. sales equal 30000 and cost of goods sold equals 10000. Its beginning inventory was 800 and its ending inventory was 1200. Barry's inventory turnover ratio equals __ times.

10 average inventory = (800+1200)/2 = 1000 cost of goods sold = 10000 10000/1000 = 10

At year end CurlZ Inc.'s inventory consists of 200 bottles of CleanZ at $1/bottle and 100 boxes of DyeZ at $10/box. Market values are $1.20/bottle for CleanZ and $8/box for DyeZ. CurlZ should report its inventory at __.

1000 (the lower cost or market rule requries dyeZ boxes be recorded at the lower market value of $8 instead of the higher cost of $10. Thus inventory equals $1000= 200 * 1 + 100 * 8

Delta diamond had 5 one-carat diamond available for sale this year: 1 purchased june 1 for $500, 2 purchased july 2 for $550 each, and 2 purchased sept 23 for $600 each. On dec 24 it sold one of the diamonds that was purchased on july 9. Using perpetual specific identification its inventory after the dec 24 sale is __.

2250 inventory equals 500 + 550 + (2*600) = 2250 cost of goods sold = 550

On may 1 beginning inventory consists of 10 items that cost $10 each. On may 3 10 items are purchased at $12 each. On may 8 12 items are sold. On may 15 10 items are purchased at $14 each. Using the perpetual weighted average cost, ending inventory at may 31 is __.

228 (10 * $10) + (10 * $12) / 20 = 11 8 * 11 = 228

Delta diamond had 5 one-carat diamond available for sale this year: 1 purchased june 1 for $500, 2 purchased july 2 for $550 each, and 2 purchased sept 23 for $600 each. On dec 24 it sold one of the diamonds that was purchased on july 9. Using FIFO cost inventory for dec31 __.

2300

Mountain made started the month with 3 quilts in its beginning inventory that cost $200 each. During the month, mountain made counted its inventory and found that 2 quilts remained unsold. If mountain made uses LIFO periodic, its cost of goods sold for the month is __.

3780

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

If Barry Bees, Inc.'s days to sell equals 73 days based on a 365-day year, then its inventory turnover ratio equals __. times

5 365/73 = 5

Delta diamond had 5 one-carat diamond available for sale this year: 1 purchased june 1 for $500, 2 purchased july 2 for $550 each, and 2 purchased sept 23 for $600 each. On dec 24 it sold one of the diamonds that was purchased on july 9. Using FIFO cost of goods sold for the year ended is __.

500 (fifo assumes that the 1st diamond purchased for 500 is the first diamond sold.)

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

True (a cumbersome method for inexpensive, high-volume inventory items)

True or False: accounting rules allow companies to choose, from a variety of methods, the inventory method that best fits their business environment

True Managers may choose the method that best fits their business environment

True or False: The inventory method selected by management does not have to correspond to the physical flow of goods to be in accordance with GAAP

True The inventory method is an assumed cost flow and does not have to correspond with the actual physical flow of goods. For example a grocery store that may use LIFO inventory method.

Which of these would explain an increase in a company's inventory turnover ratio?

a decrease in total inventory OR an increase in the demand for the company's products

Which of the following is merchandise inventory?

goods held for sale in the normal course of business

FIFO, an inventory costing method, actually describes how to calculate the cost of __.

goods sold

Mountain people's co-op offers herbal tea for sale on consignment from green heron company. Which company should report the inventory of unsold tea on its balance sheet?

green heron company

if cost of acquiring inventory is rising, LIFO will result in which of the following compared to FIFO?

gross profit will be lower cost of goods sold will be higher income tax expense will be lower (when prices are rising LIFO assumes the higher costing goods are sold firs. thus a cost of goods will be higher causing gross profit to be lower. Since taxes are based on profits a lower profit will result in lower income taxes.)

A company had beginning inventory of 5 units that cost $10 each. Duiring the month, 15 units were purchased for $11 each. The company sold 12 units during the month and had 8 remaining in ending inventory. If the company uses FIFO to calculate cost of goods sold, then its gross profit will be $5 __ than if it had used LIFO.

higher

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

income tax expense income from operations net income income before income tax expense gross profit

As inventory quality increases, its cost usually __.

increases

goods in transit are __.

inventory items being transported from a seller to a buyer

When costs to purchase inventory are falling over time, using LIFO leads to reporting __ cost of goods sold and __ net income than FIFO.

lower; higher

Which inventory costing method assumes that the inventory's cost flow out in the same order the goods are recieved?

FIFO

Delta diamond had 5 one-carat diamond available for sale this year: 1 purchased june 1 for $500, 2 purchased july 2 for $550 each, and 2 purchased sept 23 for $600 each. On dec 24 it sold one of the diamonds that was purchased on july 9. Using periodic weighted average cost, its cost of goods sold is __.

560 using weighted average = (500 + (2 * 550) + (2 * 600) ) / (1 + 2 + 2) = 560 per unit 560 * 1 unit - 560

Using a perpetual inventory system, when a company records a sale of merchandise it must also record __.

cost of goods sold which will be reported on the income statement AND a decrease in its inventory

The journal entry to record a write-down inventory from cost to its lower market value includes a __.

credit to inventory debit to cost of goods sold

Which of the following statements is true?

managers can choose the method of accounting for inventory cost (FIFO/LIFO/etc) that best fits their business AND Using a different inventory accounting method leads to reporting a different amount for cost of goods sold (inventory costing method does not need to mimic the actual physical flow of goods)

On may 1 beginning inventory consists of 10 items at a cost of $10 each. On may 3 10 items are purchased at $12 each. On may 15 10 items are purchased at $14 each. Using perpetual FIFO, the cost of goods sold for the month ended may 31 equals __.

124 Cost of goods sold (using perpetual FIFO assumes all of the 10 units in beginning inventory and 2 units from the may 3 purchases were sold. Thus cost of goods equals 124 (= (10 units * $10) + (2 units * $12))

On may 1 beginning inventory consists of 10 items that cost $10 each. On may 3 10 items are purchased at $12 each. On may 8 12 items are sold. On may 15 10 items are purchased at $14 each. Using the perpetual weighted average cost, cost of goods sold for the month ended may 31 is __.

132 220 = (10 * 10) + (10 * 12) 220/20 = 11 12* 11 = 132

Mountain made started the month with 3 quilts in its beginning inventory that cost $200 each. During the month, mountain made counted its inventory and found that 2 quilts remained unsold. if mountain made uses periodic weighted average cost, its cost of goods sold for the month is __.

1656

On may 1 beginning inventory consists of 10 items that cost $10 each. On may 3 10 items are purchased at $12 each. On may 8 12 items are sold. On may 15 10 items are purchased at $14 each. Using the perpetual LIFO, ending inventory at may 31 is __.

220

King costume started the month with 8 masks in its beginning inventory that cost $10 each. During the month, King Costume purchased 40 additional masks for $12 each. At the end of the month, King counted its inventory and found that 5 masks remained unsold. If king costume uses LIFO periodic its cost of goods sold for the month is__.

510 (The cost of the 43 masks sold equals (50 masks * $12) + (3 masks * $10) Ending inventory equals the 5 remaining masks at $10 each or $50)

Delta diamond had 5 one-carat diamond available for sale this year: 1 purchased june 1 for $500, 2 purchased july 2 for $550 each, and 2 purchased sept 23 for $600 each. On dec 24 it sold one of the diamonds that was purchased on july 9. Using perpetual specific identification its cost of goods sold is __.

550

What may cause inventory turnover ratios to vary significantly between companies in the same industry?

some companies may sell fewer high-cost goods some companies may sell more lower-cost goods