financial accounting chapter 6

Assume the following beginning inventory, purchases, and sales during the month of April: April 1 Beginning Merchandise Inventory, 10 units @ $15 each 3 7 units sold 10 Purchased 9 units at $16 23 4 units sold Determine the Cost of Goods Sold using the LIFO inventory costing method and the periodic inventory system on April 30.

174 Take the last 9 units purchased at $16 , then take 2 units * $15 (the next level up for a total of 11 units): (9 * $16) + (2 * $15) = $174 Or it can be put into the following format: Beginning Merchandise Inventory (10 units x $15) $150 Net Cost of Purchases (9 units x $16) 144 Cost of Goods Available for Sale 294 Less: Ending Merchandise Inventory (8 units x $15)** (120) Cost of Goods Sold $174 **Use $15 as in LIFO the first units purchased at $15 would be the units remaining in merchandise inventory. You have 8 units in merchandise inventory (10 beginning inventory + 9 purchases - 7 sold - 4 sold = 8 units).

Assume Jones Manufacturing begins March with 20 units of inventory that cost $15 each. During March, the following purchases and goods sold were: March 15 Purchased 25 units at $18 30 Sold 30 units Using the LIFO inventory costing method and the perpetual system, what is the ending Merchandise Inventory on March 30?

225 If Jones Manufacturing is using LIFO, Cost of Goods Sold would be the (25 units * $18) + (5 units * $15) and Merchandise Inventory would have the remaining 15 units at $15 = $225.

Assume the following beginning inventory, purchases, and sales during the month of April: April 1 Beginning Merchandise Inventory, 10 units @ $20 each 3 8 units sold 10 Purchased 9 units at $21 23 4 units sold Determine the Cost of Goods Sold using the FIFO inventory costing method and the periodic inventory system on April 30.

242 Take the first 10 units purchased at $20, then take 2 units * $21 (the next purchase down for a total of 11 units): (10 * $20) + (2 * $21) = $242 Or it can be put into the following format: Beginning Merchandise Inventory (10 units x $20) $200 Net Cost of Purchases (9 units x $21) 189 Cost of Goods Available for Sale 389 Less: Ending Merchandise Inventory (7 units x $21)** (147) Cost of Goods Sold $242 **Use $21 as in FIFO the last units purchased at $21 would be the units remaining in merchandise inventory. You have 8 units in merchandise inventory (10 beginning inventory + 9 purchases - 8 sold - 4 sold = 7 units).

Data for Shelby Company for the current year is as follows: Assume that the ending Merchandise Inventory was accidentally understated by $300. What are the correct amounts for Cost of Goods Sold and Gross Profit?

Cost of Goods Sold = $7,700 Gross Profit = $2,300 If Merchandise Inventory is understated, then Cost of Goods Sold is overstated by $300 (need to subtract $300 from Cost of Goods Sold). This makes Net Income understated by $300 or needs to be $300 more at $2,300. After ending Merchandise Inventory is corrected, data for Shelby Company for the current year is as follows:

Data for Shelby Company for the current year is as follows: Sales Revenue $10,000 Cost of Goods Sold: Beginning Merchandise Inventory $3,000 Net Cost of Purchases 7,000 Cost of Goods Available for Sale 10,000 Less: Ending Merchandise Inventory 2,000 Cost of Goods Sold 8,000 Gross Profit $2,000 Assume that the ending Merchandise Inventory was accidentally overstated by $500. What are the correct amounts for Cost of Goods Sold and Gross Profit?

Cost of Goods Sold = $8,500 Gross Profit = $1,500 If Merchandise Inventory is overstated, then Cost of Goods Sold is understated by $500 (need to add another $500 to Cost of Goods Sold). This makes Net Income overstated by $500 or needs to be $500 less at $1,500.

The following statement is true regarding inventory errors (overstating or understating ending Merchandise Inventory):

Ending merchandise inventory is subtracted to compute costs of goods sold in one period and the same amount is added to the beginning merchandise inventory of the next period. Therefore, an inventory error cancels out after two periods.

Assume Baxter Manufacturing begins March with 25 units of inventory that cost $20 each. During March, the following purchases and goods sold were: March 15 Purchased 10 units at $22 30 Sold 30 units Using the LIFO inventory costing method and the perpetual system, what is the ending Merchandise Inventory on March 30?

If Baxter Manufacturing is using LIFO, Cost of Goods Sold would be the (10 units * $22) + (20 units * $20) and Merchandise Inventory would have the remaining 5 units at $20 = $100.

On December 31 of the current year, Aztec Company understated ending Merchandise Inventory by $10,000. How does this error affect the Cost of Goods Sold and the Net Income for the current year?

Overstates Cost of Goods Sold and understates Net Income. If ending Merchandise Inventory is $10,000 less than it should be, then that indicates that $10,000 too much went to Cost of Goods Sold, so Costs of Goods Sold it is overstated. If Cost of Goods Sold is overstated, then that means the Net Income is understated as too much was taken away as Cost of Goods Sold.

Assume Jones Manufacturing begins January with 10 units of inventory that cost $10 each. During January, the following purchases and goods sold were: Jan 5 Purchased 8 units at $11 7 Sold 11 units 15 Purchased 6 units at $12 30 Sold 15 units Using the FIFO inventory costing method and the perpetual system, how much is Costs of Goods Sold for the sale of January 7?

Since the company is using FIFO, the 10 units in beginning inventory at $10 each would be moved to Cost of Goods Sold first and you would need 1 more unit (for the total sale of 11 units) from the next purchase of $11 per unit. As a result, Cost of Goods Sold for the sale on January 7 is (10 units * $10) + (1 unit * $11) = $111.

Assume the following beginning inventory, purchases, and sales during the month of April: April 1 Beginning Merchandise Inventory, 10 units @ $15 each 3 7 units sold 10 Purchased 9 units at $16 23 4 units sold Determine the Cost of Goods Sold using the FIFO inventory costing method and the periodic inventory system on April 30.

Take the first 10 units purchased at $15, then take 1 unit * $16 (the next purchase down for a total of 11 units): (10 * $15) + (1 * $16) = $166 Or it can be put into the following format: Beginning Merchandise Inventory (10 units x $15) $150 Net Cost of Purchases (9 units x $16) 144 Cost of Goods Available for Sale 294 Less: Ending Merchandise Inventory (8 units x $15)** (128) Cost of Goods Sold $166 **Use $16 as in FIFO the last units purchased at $16 would be the units remaining in merchandise inventory. You have 8 units in merchandise inventory (10 beginning inventory + 9 purchases - 7 sold - 4 sold = 8 units).

Ace Manufacturing purchased merchandise inventory for $8,000. At the end of the accounting period it has a market value of $7,800. Using the lower-of-cost-or-market rule, what is the journal entry to record the adjustment?

The Merchandise Inventory account has gone down in value by $200 ($8,000 - $7,800). Therefore you have to credit Merchandise Inventory for $200 to reduce the value, and debit Cost of Goods Sold.

Which principle holds that a business's financial statements must report enough information for outsiders to make a knowledgeable decision about the company?

The disclosure principle holds that a company should report enough information for outsiders to make knowledgeable decisions about the company.

lower of cost or market rule

The lower of cost or market rule states that a business must record the cost of inventory at whichever cost is lower - the original cost or its current market price.

Bates Manufacturing purchased merchandise inventory for $10,000. At the end of the accounting period it has a market value of $8,700. Using the lower-of-cost-or-market rule, what is the amount to report on the Balance Sheet as Merchandise Inventory?

Using the lower-of-cost-or-market, the lower of the cost or market value is reported on the Balance Sheet. The market value is lower at $8,700 so that is the amount to report on the Balance Sheet as Merchandise Inventory.

Which of the following costing method results in the highest net income during a period of increasing inventory costs?

When costs are rising, in FIFO the lower cost units are moved first to Cost of Goods Sold. This results in a lower Cost of Goods Sold and a higher net income.