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Exam 5: Accounting for Inventories

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Question 81

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A company has the following per unit original costs and replacement costs for its inventory: Part A: 50 units with a cost of $5 and replacement cost of $4.50. Part B: 75 units with a cost of $6 and replacement cost of $6.50. Part C: 160 units with a cost of $3 and replacement cost of $2.50. Under the lower of cost or market method, the total value of this company's ending inventory must be reported as:

A) $1,180.00.
B) $1,075.00.
C) $1,112.50 or $1075.00, depending upon whether LCM is applied to individual items or the inventory as a whole.
D) $1,112.50.
E) $1180.00 or $1075.00, depending upon whether LCM is applied to individual items or to the inventory as a whole.

F) D) and E)
G) A) and B)

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Question 82

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When LIFO is used with the periodic inventory system, cost of goods sold is assigned costs from the most recent purchases at the point of each sale, rather than from the most recent purchases for the period.

A) True
B) False

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Question 83

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An understatement of the ending inventory balance will understate cost of goods sold and overstate net income.

Errors in the period-end inventory balances only have an impact on the current period's records and financial statements.

If the seller is responsible for paying freight charges, then ownership of inventory passes when goods arrive at their destination.

A company made the following merchandise purchases and sales during the month of July: There was no beginning inventory. If the company uses the first-in, first-out perpetual inventory method, what would be the cost of the ending inventory?

Goods on consignment are goods shipped by their owner, called the consignee, to another party called the consignor.

The assignment of costs to cost of goods sold and to inventory using specific identification is the same for both the perpetual and periodic systems.

Explain how the inventory turnover ratio and the days' sales in inventory ratio are used to evaluate inventory management.

Monitor Company uses the LIFO method for valuing its ending inventory. The following financial statement information is available for their first year of operation: MONITOR COMPANY Income Statement For the year ended December 31 $\begin{array}{|l|r|}\hline \text { Sales } & \$ 50,000 \\\hline \text { Cost of goods sold } & 23,000 \\\hline \text { Gross profit } & \$ 27,000 \\\hline \text { Expenses } & 13,000 \\\hline \text { Income before taxes } & \$ 14,000\\\hline\end{array}$ Monitor's ending inventory using the LIFO method was $8,200. Monitor's accountant determined that had they used FIFO, the ending inventory would have been $8,500. a. Determine what the income before taxes would have been had Monitor used the FIFO method of inventory valuation instead of LIFO b. What would be the difference in income taxes between LIFO and FIFO, assuming a 30% tax rate?

Given the following information, determine the cost of goods sold at December 31 using the LIFO perpetual inventory method. December 2: 5 units were purchased at $7 per unit. December 9: 10 units were purchased at $9.40 per unit. December 11: 12 units were sold at $35 per unit. December 15: 20 units were purchased at $10.15 per unit. December 22: 18 units were sold at $35 per unit.

The _____________________ is a measure of how quickly a merchandiser sells its merchandise inventory.

A company had inventory on November 1 of 5 units at a cost of $20 each. On November 2, they purchased 10 units at $22 each. On November 6, they purchased 6 units at $25 each. On November 8, 8 units were sold for $55 each. Using the FIFO perpetual inventory method, what was the value of the inventory on November 8 after the sale?

The matching principle requires that the inventory valuation method follow the physical flow of inventory.

When applying the lower of cost or market method of inventory valuation, market is defined as the ______________________.

Evaluate each inventory error separately and determine whether it overstates or understates cost of goods sold and net income. $\begin{array}{|l|l|l|}\hline \text { Inventory Error } & \text { Cost of Goods Sold } & \text { Net Income } \\\hline \text { Understatement of beginning inventory } & & \\\hline \text { Understatement of ending inventory } & & \\\hline \text { Overstatement of beginning inventory } & & \\\hline \text { Overstatement of ending inventory } & & \\\hline\end{array}$

A company uses the retail inventory method and has the following information available concerning its most recent accounting period: $\begin{array}{|l|r|r|}\hline & {\text { At Cost }} & {\text { At Retail }} \\\hline \text { Beginning-of-period inventory } & \$ 148,600 & \$ 245,200 \\\hline \text { Net purchases } & 677,400 & 1,229,800 \\\hline \text { Sales } & & 1,200,000 \\\hline\end{array}$ (a) What is the cost-to-retail ratio using the retail method? (b) What is the estimated cost of the ending inventory?

When purchase costs regularly rise, the ___________________ method of inventory valuation yields the highest gross profit and net income.

Monthly or quarterly statements are called interim statements because they are prepared between the traditional annual statement dates.

A corporation uses a FIFO perpetual inventory system. August 2, 25 units were purchased at $12 per unit. August 5, 10 units were purchased at $13 per unit. August 15, 12 units were sold at $25 per unit. August 18, 15 units were purchased at $14 per unit. What was the amount of the ending inventory for the month of August?