SB Ch 8
Bethany Corp. uses a periodic inventory system. Cost of beginning inventory is $150,000. During the year, Bethany purchases inventory costing $250,000. Based on a physical count at the end of the period, Bethany determines that inventory costing $25,000 is still on hand. Bethany Corporation's cost of goods sold will be
$375,000. Reason: $150,000 + $250,000 - $25,000 = $375,000
Smith Company adopted dollar-value LIFO (DVL) as of January 1, when it had an inventory of $690,000. Its inventory as of December 31, of the same year was $758,100 at year-end costs and the cost index was 1.05. What was DVL inventory on December 31?
$723,600 Reason: $758,100/1.05 = $722,000 giving 2 layers of $690,000 and $32,000. $690,000 x 1.0 = $690,000 $32,000 x 1.05 = $33,600 $690,000 + $33,600 = $723,600
Western Company adopted dollar-value LIFO (DVL) as of January 1, when it had an inventory of $715,000. Its inventory as of December 31, of the same year was $815,400 at year-end costs and the cost index was 1.08. What was DVL inventory on December 31?
$758,200 Reason: $815,400/1.08 = $755,000 giving 2 layers of $715,000 and $40,000. $715,000 x 1.0 = $715,000 $40,000 x 1.08 = $43,200 $715,000 + $43,200 = $758,200
Smith Company purchases merchandise for $10,000. The payment terms are stated as 2/10, n/30. If the company utilizes the net method to record purchases, the merchandise will be recorded at what amount?
$9,800. Reason: $10,000 x 2% = 200 discount
Periodic inventory Perpetual inventory
- A separate freight-in account is used. - Freight is added directly to the inventory account.
What type of expenditures should be included in the cost of inventory of a manufacturing company? (Select all that apply.)
- Expenditures necessary to acquire inventory. - Expenditures necessary to bring inventory to sales location.
The LIFO reserve shows how ending inventory would have differed if the company had utilized ______ or ______, instead of LIFO. (Select all that apply.)
- FIFO - weighted-average
In a perpetual inventory system, when inventory is returned which accounts will the purchaser adjust to reflect the effect of the return? (Select all that apply.)
- Inventory - Accounts payable
FIFO LIFO
- Most closely approximates the actual physical flow of inventory - Provides better matching of current revenues with current inventory cost
A slowing turnover ratio combined with higher than normal inventory levels may indicate which of the following? (Select all that apply.)
- Potential for inventory becoming obsolete - Potential for decreased production
A just-in-time (JIT) inventory system (Select all that apply.)
- allows companies to maintain relatively low inventory balances. - assists managers with inventory management.
The cost of inventory includes (Select all that apply.)
- expenditures to acquire the inventory - the cost to bring inventory to its desired location
Ownership of inventory at the end of the accounting period is determined for (Select all that apply.)
- goods shipped by suppliers. - goods shipped to customers.
Inventory cost flow assumptions can be used to assign dollar amounts to (Select all that apply.)
- goods sold. - ending inventory.
Steiner Company's average days in inventory has decreased during the current year as compared to the prior year. From this information, we can conclude that Steiner (Select all that apply.)
- has a higher inventory turnover ratio. - is selling its inventory faster.
The specific identification method (select all that apply):
- matches each unit of inventory with its actual cost - would be beneficial to a company that makes fine jewelry
Daryl Corp. purchases 10,000 units of inventory on account for $50,000. Two days after receiving the inventory, Daryl discovers that 1,000 units are defective and returns the defective units to the vendor. The company utilizes a perpetual inventory system. As a result of this return, (Select all that apply.)
- the accounts payable balance decreases. - the inventory balance decreases.
In a perpetual inventory system the inventory account is adjusted (Select all that apply.)
- when inventory is sold. - when inventory is purchased.
Rudy Company reports gross sales revenue of $5.2 million, net sales revenue of $5 million, and cost of goods sold of $3 million. Its inventory balance was $250,000 at the beginning of the accounting period and $300,000 at the end of the accounting period. The company's inventory turnover ratio is closest to
11 Reason: $3 million/($250,000+$300,000/2)=10.9 rounded to 11
Doris recently started her position at Monro Company. The company uses the dollar-value LIFO inventory method. On her first day at work, Doris was asked to calculate the cost index for a new inventory layer. The company's records reveal that the cost in terms of the base year was $50,000 and the cost in terms of the layer year was $100,000. What is the cost index for the new layer?
2
On December 31, Richard Company purchases 1,000 units of merchandise, f.o.b. destination, from Neumann Corp. and 2,000 units, f.o.b. shipping point from Smith Corp. The goods are shipped on December 31. How many units should Richard include in its ending inventory on December 31 from this purchase?
2,000 units Reason: The units shipped f.o.b. shipping point are included
Arranging for another company to sell a company's products is referred to as a(n) _____ . (Enter only one word.)
Blank 1: consignment, consigning, or consign
A(n) _____ inventory system adjusts for each change caused by a purchase, a sale, or a return of merchandise. (Enter only one word.)
Blank 1: perpetual
A(n) _____ inventory system allows management to determine the amount of goods on hand on any date without having to take a physical count. (Enter only one word.)
Blank 1: perpetual
When a buyer returns goods to the seller, the buyer records a(n) . (Enter one word per blank.)
Blank 1: purchase Blank 2: return
If goods are shipped f.o.b. destination, the ____ usually is responsible for shipping. (Enter only one word.)
Blank 1: seller or supplier
In a period of rising prices, LIFO produces a higher cost of goods sold, lower net income and therefore, lower ____ liability. (Enter only one word.)
Blank 1: tax
Analyzing changes in the inventory _____ ratio can provide information about the quality of current period earnings.
Blank 1: turnover
If a company has a policy of not including shipping charges in cost of goods sold, which of the following must occur?
Both the amount of freight-out charges incurred during the period and the income statement classification of charges must be disclosed.
Bern Company has 100 units costing $200 in beginning inventory. During the year, the company purchases 900 additional units for $1,980. At the end of the year, 200 units remain unsold. If Bern Company utilizes the periodic LIFO method, cost of goods sold will be
$1,760. Reason: (($1,980/900) x 800) = $1,760
Smith Company has 150 units costing $450 in beginning inventory. During the year, the company purchases 1,000 units for a total cost of $3,300. At the end of the year, a physical count reveals that 200 units remain in ending inventory. If the company uses the periodic LIFO method, cost of goods sold will be
$3,135 Reason: 1150 total units - 200 units = 950 units sold x ($3,300/1,000) = $3135
Smith Company has 150 units costing $450 in beginning inventory. During the year, the company purchases 1,000 units for a total cost of $3,300. At the end of the year, a physical count reveals that 200 units remain in ending inventory. If the company uses the periodic LIFO method, ending inventory will be
$615 Reason: ($3,300/1,000) x 50 units + $450
Where can freight-out charges be found? (Select all that apply.)
- Selling expenses - Cost of goods sold
On December 31, Salz Company sells 1,000 units of merchandise to Wein Corp. and 2,000 units to Torr Corp. Shipping terms are f.o.b. destination for the 1,000-unit sale and f.o.b. shipping point for the 2,000-unit sale and the goods have shipped. If Salz still has 10,000 physical units in its inventory after these sales, how many units should Salz include in its ending inventory on December 31?
11,000 units Reason: The 10,000 units in ending inventory plus the 1,000 units shipped f.o.b. destination are included in Salz's inventory
Rudy Company reports gross sales revenue of $5.2 million, net sales revenue of $5 million, and cost of goods sold of $3 million. Rounding to the nearest percent, the company's gross profit ratio would be
40%. Reason: Gross profit ratio is computed as gross profit/NET SALES. Be sure to use the net sales number, not gross sales. ($5 million -$3 million)/$5 million
Chase Company reports gross sales revenue of $7.5 million, net sales revenue of $7 million, and cost of goods sold of $3.5 million. Rounding to the nearest percent, the company's gross profit ratio would be
50%. Reason: Gross profit ratio is computed as gross profit/NET SALES. Be sure to use the net sales number, not gross sales. ($7 million -$3.5 million)/$7 million
What is required at the end of a reporting period in a periodic inventory system?
A physical count of the period's ending inventory so an adjustment can be made.
Terms like 2/10, n/30 represent what?
A purchase discount
Which of the following companies would be most likely to utilize the specific identification method?
Adams Company produces one-of-a-kind products.
Which of the following would be recognized as inventory?
An item that is manufactured and held for future resale.
Which inventory costing method assumes that cost of goods sold and ending inventory consist of a mixture of all the goods available for sale?
Average cost
Cost flow _____ are made to assign dollar amounts to the physical quantities of goods sold and remaining in ending inventory. (Enter only one word.)
Blank 1: assumptions or assumption
Under the _____ inventory system, purchase discounts are treated as a reduction in the inventory account. (Enter only one word.)
Blank 1: perpetual
Those costs that are included in inventory are referred to as ______ costs. (Enter only one word.)
Blank 1: product
Smith Company arranges for Tucker and Associates to sell their products. If Tucker is unable to sell the products, they will return the goods to Smith. This is an example of what?
Consigning
In a periodic inventory system, purchase returns are closed to what account at the end of the reporting period?
Cost of goods sold
Suppose that Michale Company operates in an environment of rising prices and utilizes the periodic inventory system. If the company were to use the LIFO inventory method, its cost of goods would be $500,000; if it were to use the FIFO method, its cost of goods sold would be $400,000. Based on this information, which of the following predictions would be correct with respect to the weighted-average cost method?
Cost of goods sold would be between $400,000 and $500,000.
What is the first step in measuring inventory and cost of goods sold?
Determining the physical quantities of goods.
Assuming that prices increase, which of the following inventory methods results in lower costs of goods sold?
FIFO
The ______ inventory cost flow assumption typically approximates the actual physical flow of inventory items of most companies.
FIFO
Which inventory costing method assumes that items in ending inventory are the most recently acquired?
FIFO
Many companies maintain their internal records using ______ or the average cost method, but use ______ for external reporting and income tax purposes.
FIFO; LIFO
True or false: A periodic inventory system allows management to determine the amount of goods on hand without having to take a physical count.
False Reason: A periodic inventory system does not track inventory changes and a physical count is necessary.
True or false: The LIFO inventory cost flow method most often mirrors the physical flow of inventory.
False Reason: FIFO typically approximates the physical flow of inventory.
True or false: Goods shipped f.o.b. destination are included in the purchaser's inventory while the goods are in transit.
False Reason: Title of goods with f.o.b. destination shipping terms transfer when the goods reach the purchaser.
Which of the following is a correct interpretation of the information provided by the gross profit margin?
It indicates the percentage of each sales dollar available to cover other expenses.
A(n) ______ inventory pool groups items based on physical similarities.
LIFO
If a company uses ______ to measure taxable income, they must use the same method for external financial reporting.
LIFO
In which type of inventory costing system are inventory costs on the balance sheet generally out of date?
LIFO
Another name for the LIFO reserve account is
LIFO allowance.
The cost of goods sold equation assumes that all inventory not on hand at the end of the period was sold and does not account for damaged or stolen merchandise. This is a disadvantage in which type of inventory system?
Periodic
The cost of components purchased from outside companies that will become part of the finished product are referred to as what?
Raw materials
Which inventory costing method matches each unit sold with its actual cost?
Specific identification
Which of the following situations would result in a LIFO liquidation for a company that has 200 units in beginning inventory and sales of 1,000 units?
The company purchases 950 units during the year.
Which of the following is not a characteristic of an asset classified as inventory?
The item is currently used as part of the company's day-to-day operations.
When merchandise is shipped f.o.b. shipping point, who includes the inventory on their balance sheet when the goods are with the common carrier?
The purchaser
When merchandise is shipped f.o.b. destination, who includes the inventory on their balance sheet when the goods are with the common carrier?
The seller
True or false: Under U.S. GAAP, companies are required to disclose the inventory costing method(s) used.
True Reason: Because of the possible differential effects on the financial statements, the method(s) must be disclosed.
True or false: Dollar-value LIFO allows a company to combine a large variety of goods into one pool.
True Reason: DVL extends the concept of inventory pools and allows various goods to be combined into one pool.
True or false: The impact on reported income numbers is an important consideration when choosing an inventory cost flow method.
True Reason: Inventory cost method can have an impact on how well costs are matched with associated revenues and impact the timing of income and income tax expense.
True or false: LIFO, FIFO, and the weighted average inventory costing methods are all allowed under U.S. GAAP.
True Reason: U.S. GAAP permits the use of all three while IFRS does not permit the use of LIFO.
The dollar-value LIFO (DVL) inventory method
allows a broader range of goods to be included in pools.
Determining ownership of goods that are in transit at the end of the accounting period is important to
assure proper inventory cutoff.
A periodic inventory system allocates cost of goods available for sale ______; a perpetual inventory system allocates cost of goods available for sale ______.
at the end of the period; each time goods are sold
The inventory turnover ratio is computed as cost of goods sold divided by ______.
average inventory
The measurement of inventory and cost of goods sold starts with determining the physical quantities of goods in which of the following systems?
both the periodic and perpetual inventory system
The dollar-value LIFO method extends the concept of inventory pools by allowing companies to
combine a large variety of goods in one pool.
In a periodic inventory system, the inventory account during the accounting period reflects
cost of beginning inventory.
The inventory turnover ratio is computed as _____ divided by average inventory.
cost of goods sold
When a company utilizes a periodic inventory system, a physical count is necessary to determine cost of goods sold because
cost of goods sold is not determined at the time of sale.
In a LIFO inventory system, inventory amounts shown in the balance sheet may be distorted because they may represent
costs incurred several years earlier.
At the end of an accounting period, it is important to ensure proper inventory ______ to determine the ownership of goods in transit.
cutoff
When inventory quantities ______ during a period, out-of-date inventory layers are liquidated and cost of goods sold will match noncurrent costs with current selling prices in a LIFO inventory costing system.
decline
A LIFO liquidation occurs when inventory quantities ______.
decrease
The amount of cost of goods sold determined under the average cost method typically
falls between the amounts determined using LIFO and FIFO.
Inventory costs that relate to products that are ready for sale are transferred to
finished goods inventory
The FIFO method assumes that units sold are the Blank______ units acquired and that units remaining in ending inventory are the Blank______ units purchased.
first; last
The ______ ratio indicates the percentage of each sales dollar available to cover expenses other than cost of goods sold and then to provide a profit.
gross profit
The gross profit ratio is computed as ______ divided by net sales.
gross profit
The inventory turnover ratio shows
how many times the average inventory balance is sold during the current reporting period.
Over the total life of a company, total cost of goods sold
is the same under each cost flow assumption.
Which of the following inventory cost flow assumptions is prohibited under International Financial Reporting Standards?
last in, first out
The layer year cost index is calculated by dividing the cost in ______ year by the cost in ______ year.
layer; base
If goods are shipped f.o.b. shipping point, at time of shipment
legal title passes to the buyer.
A ______ company resells goods while a ______ company produces goods.
merchandising; manufacturing
GAAP requires disclosure of significant LIFO liquidations with respect to the effect on
net income
Work-in-process contains costs of inventory items that are
not yet complete.
A LIFO inventory pool consists of inventory grouped according to ______.
physical similarities
Companies closely monitor inventories to maintain a sufficient ______ of inventory to meet customer demand, while also controlling the ______ of carrying inventory.
quantity; cost
In a periodic inventory system, freight-in costs are
recognized in a temporary freight-in account.
The seller views returns as a reduction of net ______; the buyer views returns as a reduction of net ______.
sales; purchases
In a consignment, a company arranges for another company to
sell its products.
LIFO inventory pools
simplify recordkeeping.
A JIT inventory system allows companies to maintain ______ inventory levels.
smaller
Generally, product costs are expensed when the related products are
sold
Timothy Company purchases merchandise costing $100,000. The payment terms are 3/10, n/30. If Timothy Company utilizes the gross method and pays the amount within the 10-day period,
the cost of inventory will be reduced by $3,000.
The LIFO inventory method assumes that the units sold are
the most recent units purchased.
Different inventory methods can produce significantly different amounts for cost of goods sold in a given year. Across the life of a company, cost of goods sold will be
the same under each cost assumption.
A perpetual inventory system is designed to
track inventory quantities from acquisition to sale.
High recordkeeping costs and possible LIFO liquidation are disadvantages of
unit LIFO.
Raw materials inventory consists of the cost of units that
will be used as components of a manufactured product
Dollar amounts are assigned to goods sold and goods remaining in ending inventory by making an assumption regarding what?
How units of goods and their associated costs flow through the system.
Where must a company indicate the inventory costing method(s) used?
In a disclosure note
When prices increase, the ______ inventory method provides the best matching of revenue and expenses.
LIFO
Assuming that prices rise over time, which inventory cost flow assumption will result in the highest cost of goods sold?
LIFO Reason: In a period of rising prices, LIFO results in goods with the highest cost being sold first resulting in higher cost of goods sold.
Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory?
LIFO Reason: In a period of rising prices, LIFO results in goods with the highest cost being sold first resulting in lower ending inventory.
If a company uses LIFO to measure its taxable income, the IRS requires that LIFO also be used to measure income reported to investors and creditors. This is know as the
LIFO conformity rule.
Consistent with International Financial Reporting Standards, which of the following cost flow assumptions are currently permitted? (Select all that apply.)
- first in, first out - weighted-average
Which of the following statements is correct?
A company can apply more than one inventory cost flow assumption.
Under the ____ inventory system, purchase discounts are treated as a reduction in the inventory account. (Enter only one word.)
Blank 1: perpetual
The average cost method assumes that cost of goods sold consists of
a mixture of all the goods available for sale.
When prices increase, the ______ inventory method tends to decrease a company's tax liability during a particular fiscal period relative to other inventory methods. (Enter one word per blank)
last-in, first-out
Gerhard Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased at least 1,200 units, COGS would have been
$2,000 higher.
Joachim Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased 1,200 units, pretax income would have been
$2,000 lower. Reason: Currently cost of goods sold ($22,000) is computed using the 1,000 units at $20 plus 200 units at $10 ((1,000 x $20) + (200 x $10))so the units from beginning inventory are liquidated. If they had purchased at least 1,200 units, cost of goods sold would have been $24,000 (1,200 x $20); $2,000 higher; resulting in lower pretax income of $2,000.
Smith Corp. uses a periodic inventory system. Cost of beginning inventory is $5,000. During the year, Smith purchases inventory costing $24,000. Based on a physical count at the end of the period, Smith determines that inventory costing $2,500 is still on hand. Smith Corporation's cost of goods sold will be
$26,500. Reason: $5,000 + $24,000 - $2500 = $26,500
The ______ inventory method assumes that the units in ending inventory were the items acquired first.
last-in, first-out
Which of the following could motivate a company that uses LIFO for external reporting to use another method for internal recordkeeping? (Select all that apply.)
- Contractual agreements such as bonus contracts. - The high recordkeeping cost of LIFO.
Which of the following are disadvantages of unit LIFO? (Select all that apply.)
- Significant recordkeeping costs - Possibility of LIFO liquidation
Which of the following represent a reason why managers closely monitor inventory levels? (Select all that apply.)
- To minimize costs of ordering and carrying inventory. - To ensure that sufficient units are available.
A periodic inventory system (Select all that apply.)
- does not continuously track the cost of merchandise sold. - does not continuously track the quantity of merchandise.
The dollar-value LIFO (DVL) method (Select all that apply.)
- reduces the risk of liquidation of layers. - simplifies recordkeeping.
Which factors may influence a company's choice of inventory cost flow assumption? (Select all that apply.)
- tax implications of choice - financial statement effect - actual physical flow of inventory
A company is most likely to utilize the specific identification method if its inventory consists of (Select all that apply.)
- unique products. - very expensive products.
Which of the following cost flow assumptions currently are acceptable under U.S. GAAP? (Select all that apply.)
- weighted average - last-in, first-out - first-in, first-out
Parker Company reports gross sales revenue of $7.5 million, net sales revenue of $7 million, and cost of goods sold of $3.5 million. Its inventory balance was $150,000 at the beginning of the accounting period and $200,000 at the end of the accounting period. The company's inventory turnover ratio is closest to
20 Reason: $3.5 million/($150,000+$200,000/2)
Companies must disclose the impact of a LIFO liquidation on earnings to provide users information about _____ _____ .
Blank 1: earnings Blank 2: quality
Companies must disclose the impact of a LIFO liquidation on earnings to provide users information about ______ ______ .
Blank 1: earnings Blank 2: quality
Once products are completely manufactured, the related costs are transferred to ____ ____ . (Enter one word per blank.)
Blank 1: finished Blank 2: goods
The cost of freight-in paid by the purchaser is most commonly included in the cost of _____ . (Enter only one word.)
Blank 1: inventory
Use of LIFO inventory pools reduces the chance of unintentional LIFO layer ______ . (Enter only one word.)
Blank 1: liquidations or liquidation
The ______ method of recording purchase discounts, subtracts the discount from total purchases to determine net purchases.
Blank 1: net
A disadvantage to the ____ inventory system is that all inventory quantities not on hand at the end of the period are assumed to have been sold, and damaged or stolen items are not identified. (Enter only one word.)
Blank 1: periodic
A physical count of inventory is necessary in a(n) _____ inventory system to determine cost of goods sold. (Enter only one word.)
Blank 1: periodic
In a periodic inventory system, the inventory account is ______ and cost of goods sold is recorded ______.
not adjusted as purchases and sales are made; at the end of the reporting period
Which inventory system allocates cost of goods available for sale only at the end of each reporting period?
periodic inventory system