MC #8

Average Days inventory

365/ Inventory Turnover

Texas Petrochemical reported the following April activity for its VC-30 lubricant, which had a balance of 300 qts. @ $2.40 on April 1. Purchases Sales Apr 10 [email protected] Ap 3 200 Apr14 400 @ 2.60 Apr 12 500 Apr 20 400 @2.65 Apr 26 300 The ending inventory assuming LIFO and a perpetual inventory system is:

A. $1,545.

Bond Company adopted the dollar-value LIFO inventory method on January 1, 2011. In applying the LIFO method, Bond uses internal cost indexes and the multiple-pools approach. The following data were available for Inventory Pool No. 3 for the two years following the adoption of LIFO: Yr Cost Base yr cost index 1/1/11 300k 300k 1.00 12/31/11 345600 320k 1.08 12/31/12 420k 350k 1.2 Under the dollar-value LIFO method the inventory at December 31, 2012, should be

A. $357,600.

Inventory records for Herb's Chemicals revealed the following: March 1, 2011, inventory: 1,000 gallons @ $7.20 = $7,200 Purchases Sales Mar 10 [email protected] Mar 5 400 Mar 16 800 @ 7.30 Mar 14 700 Mar 23 600 @7.35 Mar 20 500 Mar 26 700 Ending inventory assuming LIFO in a periodic inventory system would be:

A. $5,040.

Inventory records for Herb's Chemicals revealed the following: March 1, 2011, inventory: 1,000 gallons @ $7.20 = $7,200 Purchases Sales Mar 10 [email protected] Mar 5 400 Mar 16 800 @ 7.30 Mar 14 700 Mar 23 600 @7.35 Mar 20 500 Mar 26 700 The ending inventory under a periodic inventory system assuming average cost (rounding unit cost to three decimal places) is:

A. $5,087.

Inventory records for Herb's Chemicals revealed the following: March 1, 2011, inventory: 1,000 gallons @ $7.20 = $7,200 Purchases Sales Mar 10 [email protected] Mar 5 400 Mar 16 800 @ 7.30 Mar 14 700 Mar 23 600 @7.35 Mar 20 500 Mar 26 700 The ending inventory assuming FIFO is:

A. $5,140.

Linguini Inc. adopted dollar-value LIFO (DVL) as of January 1, 2011, when it had an inventory of $800,000. Its inventory as of December 31, 2011, was $811,200 at year-end costs and the cost index was 1.04. What was DVL inventory on December 31, 2011?

A. $780,000

In a perpetual average cost system:

A. A new weighted-average unit cost is calculated each time additional units are purchased.

The inventory method that will always produce the same amount for cost of goods sold in a periodic inventory system as in a perpetual inventory system would be:

A. FIFO.

Using the gross method, purchase discounts lost are:

A. Included in purchases.

In a periodic inventory system, the cost of purchases is debited to:

A. Purchases.

Dollar-value LIFO:

A. Starts with ending inventory measured at current costs and recreates LIFO layers for measuring inventory costs.

. If a company uses LIFO, a LIFO liquidation is problematic for a company's income taxes:

A. When inventory purchase costs are rising.

Fulbright Corp. uses the periodic inventory system. During its first year of operations, Fulbright made the following purchases (listed in chronological order of acquisition): • 40 units at $100 • 70 units at $80 • 170 units at $60 Sales for the year totaled 270 units, leaving 10 units on hand at the end of the year. Ending inventory using the LIFO method is:

B. $1,000.

Northwest Fur Co. started 2011 with $94,000 of merchandise inventory on hand. During 2011, $400,000 in merchandise was purchased on account with credit terms of 1/15, n/45. All discounts were taken. Purchases were all made f.o.b. shipping point. Northwest paid freight charges of $7,500. Merchandise with an invoice amount of $5,000 was returned for credit. Cost of goods sold for the year was $380,000. Northwest uses a perpetual inventory system. What is ending inventory assuming Northwest uses the gross method to record purchases?

B. $112,550.

On January 1, 2011, Badger Inc. adopted the dollar-value LIFO method. The inventory cost on this date was $100,000. The 2011 ending inventory, valued at year-end costs, was $126,000. The relative cost index for this inventory in 2011 was 1.05. What inventory balance should Badger report on its 12/31/11 balance sheet?

B. $121,000

On January 1, 2011, Badger Inc. adopted the dollar-value LIFO method. The inventory cost on this date was $100,000. The 2011 ending inventory, valued at year-end costs, was $126,000. The relative cost index for this inventory in 2011 was 1.05. Suppose that Badger's 2013 ending inventory, valued at year-end costs, was $153,600 and that the relative cost index for this inventory in 2013 was 1.20. What inventory balance would Badger report on its 12/31/13 balance sheet?

B. $129,800

Nu Company reported the following pretax data for its first year of operations. Net Sales 2,800 COGS 2,500 Op. Exp 880 Effective tax rate 40% Ending inventory (LIFO: 820) Ending inventory (FIFO: 1,060) What is Nu's net income if it elects LIFO?

B. $144.

Nueva Company reported the following pretax data for its first year of operations. Net Sales 7,340 COGS 5,790 Op. Exp 1,728 Effective tax rate 40% Ending inventory (LIFO: 618) Ending inventory (FIFO: 798) What is Nueva's net income if it elects LIFO?

B. $264.

Nu Company reported the following pretax data for its first year of operations. Net Sales 2,800 COGS 2,500 Op. Exp 880 Effective tax rate 40% Ending inventory (LIFO: 820) Ending inventory (FIFO: 1,060) What is Nu's net income if it elects FIFO?

B. $288.

Inventory records for Herb's Chemicals revealed the following: March 1, 2011, inventory: 1,000 gallons @ $7.20 = $7,200 Purchases Sales Mar 10 [email protected] Mar 5 400 Mar 16 800 @ 7.30 Mar 14 700 Mar 23 600 @7.35 Mar 20 500 Mar 26 700 Ending inventory assuming LIFO in a perpetual inventory system would be:

B. $5,060.

Alison's dress shop buys dresses from McGuire Manufacturing. Alison purchased dresses from McGuire on July 17, and received an invoice with a list price amount of $6,000 and payment terms of 2/10, n/30. Alison uses the net method to record purchases. Alison should record the purchase at:

B. $5,880.

Ramen Inc. adopted dollar-value LIFO (DVL) as of January 1, 2011, when it had a cost inventory of $600,000. Its inventory as of December 31, 2011, was $667,800 at year-end costs and the cost index was 1.06. What was DVL inventory on December 31, 2011?

B. $631,800.

Nueva Company reported the following pretax data for its first year of operations. Net Sales 7,340 COGS 5,790 Op. Exp 1,728 Effective tax rate 40% Ending inventory (LIFO: 618) Ending inventory (FIFO: 798) What is Nueva's gross profit ratio (rounded) if it elects FIFO?

B. 32%.

Thompson TV and Appliance reported the following in its 2011 financial statements: Sales 420,000 COGS Inventory 1/1 82,000 Net Purchases 340,000 Goods Avail for Sale 422,000 Inventory 12/31 86,00 COGS 336,000 Gross Profit 84,000 Thompson's 2011 inventory turnover ratio is

B. 4.00.

The largest expense on a retailer's income statement is typically:

B. Cost of goods sold.

When reported in financial statements, a LIFO allowance account usually:

B. Is added to LIFO cost to indicate what the inventory would cost on a FIFO basis.

The primary reason for the popularity of LIFO is that it:

B. Saves income taxes currently.

The LIFO Conformity Rule states that if LIFO is used for:

B. Tax purposes, it must be used for financial reporting.

Cinnamon Buns Co. (CBC) started 2011 with $52,000 of merchandise on hand. During 2011, $280,000 in merchandise was purchased on account with credit terms of 2/10 n/30. All discounts were taken. Purchases were all made f.o.b. shipping point. CBC paid freight charges of $9,000. Merchandise with an invoice amount of $4,000 was returned for credit. Cost of goods sold for the year was $316,000. CBC uses a perpetual inventory system. Assuming CBC uses the gross method to record purchases, ending inventory would be:

C. $15,480.

Cinnamon Buns Co. (CBC) started 2011 with $52,000 of merchandise on hand. During 2011, $280,000 in merchandise was purchased on account with credit terms of 2/10 n/30. All discounts were taken. Purchases were all made f.o.b. shipping point. CBC paid freight charges of $9,000. Merchandise with an invoice amount of $4,000 was returned for credit. Cost of goods sold for the year was $316,000. CBC uses a perpetual inventory system. What is cost of goods available for sale, assuming CBC uses the gross method?

C. $331,480.

The Mateo Corporation's inventory at December 31, 2011, was $325,000 based on a physical count priced at cost, and before any necessary adjustment for the following: ▪ Merchandise costing $30,000, shipped F.o.b. shipping point from a vendor on December 30, 2011, was received on January 5, 2012. ▪ Merchandise costing $22,000, shipped F.o.b. destination from a vendor on December 28, 2011, was received on January 3, 2012. ▪ Merchandise costing $38,000 was shipped to a customer F.o.b. destination on December 28, arrived at the customer's location on January 6, 2012. ▪ Merchandise costing $12,000 was being held on consignment by Traynor Company. What amount should Mateo Corporation report as inventory in its December 31, 2011, balance sheet?

C. $405,000.

Buckeye Corporation adopted dollar-value LIFO on January 1, 2011, when the inventory value was $500,000 and the cost index was 1.0. On December 31, 2011, the inventory value at year-end costs was $535,000 and the cost index was 1.06. Buckeye would report a LIFO inventory of:

C. $505,000.

Fulbright Corp. uses the periodic inventory system. During its first year of operations, Fulbright made the following purchases (listed in chronological order of acquisition): • 40 units at $100 • 70 units at $80 • 170 units at $60 Sales for the year totaled 270 units, leaving 10 units on hand at the end of the year. Ending inventory using the average cost method (rounded) is:

C. $707.

Udon Inc. adopted dollar-value LIFO (DVL) as of January 1, 2011, when it had an inventory of $700,000. Its inventory as of December 31, 2011, was $777, 000 at year-end costs and the cost index was 1.05. What was DVL inventory on December 31, 2011?

C. $742,000.

Thompson TV and Appliance reported the following in its 2011 financial statements: Sales 420,000 COGS Inventory 1/1 82,000 Net Purchases 340,000 Goods Avail for Sale 422,000 Inventory 12/31 86,00 COGS 336,000 Gross Profit 84,000 Thompson's 2011 gross profit ratio is:

C. 20%.

Nu Company reported the following pretax data for its first year of operations. Net Sales 2,800 COGS 2,500 Op. Exp 880 Effective tax rate 40% Ending inventory (LIFO: 820) Ending inventory (FIFO: 1,060) What is Nu's gross profit ratio if it elects LIFO?

C. 40%.

On January 1, 2011, Badger Inc. adopted the dollar-value LIFO method. The inventory cost on this date was $100,000. The 2011 ending inventory, valued at year-end costs, was $126,000. The relative cost index for this inventory in 2011 was 1.05. Suppose that Badger's 2012 ending inventory, valued at year-end costs, was $143,000 and that the relative cost index for this inventory in 2012 was 1.10. In determining the inventory balance should Badger report in its 12/31/12 balance sheet:

C. An additional layer of $11,000 is added to the 1/1/12 balance.

In a perpetual inventory system, the cost of inventory sold is:

C. Debited to cost of goods sold.

Inventory does not include:

C. Equipment used in the manufacturing of assets for sale.

In a period when costs are rising and inventory quantities are stable, the inventory method that would result in the highest ending inventory is:

C. FIFO.

Under the net method, purchase discounts lost are:

C. Included in interest expense.

In a perpetual inventory system, the cost of purchases is debited to:

C. Inventory.

Ending inventory is equal to the cost of items on hand plus:

C. Items in transit sold f.o.b. destination.

GG Inc. uses LIFO. GG disclosed that if FIFO had been used, inventory at the end of 2011 would have been $15 million higher than the difference between LIFO and FIFO at the end of 2010. Assuming GG has a 40% income tax rate:

C. Its reported net income for 2011 would have been $9 million higher if it had used FIFO rather than LIFO for its financial statements.

A company that prepares its financial statements according to International Financial Reporting Standards can use each of the following inventory valuation methods except:

C. LIFO.

During periods when costs are rising and inventory quantities are stable, cost of goods sold will be:

C. Lower under average cost than LIFO.

Compared to dollar-value LIFO, unit LIFO is:

C. More costly to implement.

Company A is identical to Company B in every regard except that Company A uses FIFO and Company B uses LIFO. In an extended period of rising inventory costs, Company A's gross profit and inventory turnover ratio, compared to Company B's, would be:

C. Option C (Gross Profit: higher / Inventory turnover: Lower)

Purchases equal the invoice amount:

C. Plus freight-in, less purchase discounts.

The use of LIFO during a long inflationary period can result in:

C. Significant cash flow advantages over FIFO.

The use of LIFO in accounting for a firm's inventory:

C. Usually provides a better match of expenses with revenues.

Inventory Turnover

COGS/ Avg Inventory

Texas Petrochemical reported the following April activity for its VC-30 lubricant, which had a balance of 300 qts. @ $2.40 on April 1. Purchases Sales Apr 10 [email protected] Ap 3 200 Apr14 400 @ 2.60 Apr 12 500 Apr 20 400 @2.65 Apr 26 300 The ending inventory assuming LIFO and a periodic inventory system is:

D. $1,470.

Robertson Corporation's inventory balance was $22,000 at the beginning of the year and $20,000 at the end. The inventory turnover ratio for the year was 6.0 and the gross profit ratio 40%. What were net sales for the year?

D. $210,000

Nueva Company reported the following pretax data for its first year of operations. Net Sales 7,340 COGS 5,790 Op. Exp 1,728 Effective tax rate 40% Ending inventory (LIFO: 618) Ending inventory (FIFO: 798) What is Nueva's net income if it elects FIFO?

D. $372.

Tiger Inc. adopted dollar-value LIFO on January 1, 2011, when the inventory value was $360,000 and the cost index was 1.25. On December 31, 2011, the inventory was valued at year-end cost of $395,000 and the cost index was 1.30. Tiger would report a LIFO inventory of:

D. $380,600.

Northwest Fur Co. started 2011 with $94,000 of merchandise inventory on hand. During 2011, $400,000 in merchandise was purchased on account with credit terms of 1/15, n/45. All discounts were taken. Purchases were all made f.o.b. shipping point. Northwest paid freight charges of $7,500. Merchandise with an invoice amount of $5,000 was returned for credit. Cost of goods sold for the year was $380,000. Northwest uses a perpetual inventory system. Assuming Northwest uses the gross method to record purchases, what is the cost of goods available for sale?

D. $492,550.

Fulbright Corp. uses the periodic inventory system. During its first year of operations, Fulbright made the following purchases (listed in chronological order of acquisition): • 40 units at $100 • 70 units at $80 • 170 units at $60 Sales for the year totaled 270 units, leaving 10 units on hand at the end of the year. Ending inventory using the FIFO method is:

D. $600.

Under the gross method, purchase discounts taken are:

D. Deducted from purchases.

In periods when costs are rising, LIFO liquidations:

D. Distort the net income.

In a period when costs are falling and inventory quantities are stable, the lowest taxable income would be reported by using the inventory method of:

D. FIFO.

During periods when costs are rising and inventory quantities are stable, ending inventory will be:

D. Higher under FIFO than LIFO.

During 2011, WW Inc. reduced its LIFO eligible inventory quantities due to a problem with its major supplier. The effect of this liquidation was to increase its cost of goods sold by approximately $50 million. WW has a 40% income tax rate. If WW had not experienced these supplier problems and the resulting liquidation,

D. Its 2011 net income would have been $30 million higher because inventory purchase prices were declining.

HH Company uses LIFO. HH disclosed that if FIFO had been used, inventory at the end of 2011 would have been $20 million lower than the difference between LIFO and FIFO at the end of 2010. Assuming HH has a 30% income tax rate:

D. Its reported cost of goods sold for 2011 would have been $20 million higher if it had used FIFO rather than LIFO for its financial statements.

Cost of goods sold is given by:

D. Net Purchases + beginning inventory - ending inventory.

In a periodic inventory system, the cost of inventories sold is:

D. Not recorded at the time of sale.

Company C is identical to Company D in every respect except that Company C uses LIFO and Company D uses average costs. In an extended period of rising inventory costs, Company C's gross profit and inventory turnover ratio, compared to Company D's, would be:

D. Option d (Gross Profit: lower/ Inventory turnover: higher)

Gross Profit Ratio

Gross Profit / Sales

Gross Profit

total Revenue - COGS