CHAPTER 6 INVENTORIES:Test Bank for Accounting Principles, Eleventh Edition. This document/TEST BANK Contains 234 Questions With Answers, Worked Solutions and Essay Explanations.

CHAPTER 6 INVENTORIES SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY sg This question also appears in the Study Guide. st This question also appears in a self-test at the student companion websi ...

CHAPTER 6 INVENTORIES SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY sg This question also appears in the Study Guide. st This question also appears in a self-test at the student companion website. a This question covers a topic in an appendix to the chapter. SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Note: TF = True-False BE = Brief Exercise C = Completion MC = Multiple Choice Ex = Exercise MA = Matching SA = Short-Answer Essay CHAPTER LEARNING OBJECTIVES 1. Determine how to classify inventory and inventory quantities. 2. Explain the accounting for inventories, and apply the inventory cost flow methods. 3. Explain the financial effects of the inventory cost flow assumptions. 4. Explain the lower-of-cost-or-market basis of accounting for inventories. 5. Indicate the effects of inventory errors on the financial statements. 6. Compute and interpret the inventory turnover. a7. Apply the inventory cost flow methods to perpetual inventory records. a8. Describe the two methods of estimating inventories. TRUE-FALSE STATEMENTS 1. Transactions that affect inventories on hand have an effect on both the balance sheet and the income statement. , LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 2. The more inventory a company has in stock, the greater the company's profit. , LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economic 3. Raw materials inventories are the goods that a manufacturer has completed and are ready to be sold to customers. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic 4. Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods. Reporting 5. Goods out on consignment should be included in the inventory of the consignor. Reporting 6. The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 7. Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 8. The first-in, first-out (FIFO) inventory method results in an ending inventory valued at the most recent cost. , LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 9. The expense recognition principle requires that the cost of goods sold be matched against the ending merchandise inventory in order to determine income. , LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 10. The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items. , LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 11. If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 12. If the unit price of inventory is increasing during a period, a company using the LIFO inventory method will show less gross profit for the period, than if it had used the FIFO inventory method. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 13. If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 14. A company may use more than one inventory costing method concurrently. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 15. Use of the LIFO inventory valuation method enables a company to report paper or phantom profits. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 16. If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 17. Under the lower-of-cost-or-market basis, market is defined as current replacement cost. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 18. Accountants believe that the write down from cost to market should not be made in the period in which the price decline occurs. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 19. An error that overstates the ending inventory will also cause net income for the period to be overstated. , LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 20. If inventories are valued using the LIFO cost assumption, they should not be classified as a current asset on the balance sheet. , LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 21. Inventory turnover is calculated as cost of goods sold divided by ending inventory. , LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a22. If a company uses the FIFO cost assumption, the cost of goods sold for the period will be the same under a perpetual or periodic inventory system. , LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic a23. In applying the LIFO assumption in a perpetual inventory system, the cost of the units most recently purchased prior to sale is allocated first to the units sold. , LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic a24. Under generally accepted accounting principles, management has the choice of physically counting inventory on hand at the end of the year or using the gross profit method to estimate the ending inventory. , LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a25. The retail inventory method requires a company to value its inventory on the balance sheet at retail prices. , LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 26. Finished goods are a classification of inventory for a manufacturer that are completed and ready for sale. , LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 27. Under the FIFO method, the costs of the earliest units purchased are the first charged to cost of goods sold. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 28. The cost of goods available for sale consists of the beginning inventory plus the cost of goods purchased. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 29. In a period of falling prices, the LIFO method results in a lower cost of goods sold than the FIFO method. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 30. The lower-of-cost-or-market basis is an example of the accounting concept of conservatism. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 31. Inventories are reported in the current assets section of the balance sheet immediately below receivables. , LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a32. In a perpetual inventory system, the cost of goods sold under the FIFO method is based on the cost of the latest goods on hand during the period. , LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a33. The gross profit method is based on the assumption that the rate of gross profit remains constant from one year to the next. , LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Answers to True-False Statements MULTIPLE CHOICE QUESTIONS 34. Inventories affect a. only the balance sheet. b. only the income statement. c. both the balance sheet and the income statement. d. neither the balance sheet nor the income statement. Reporting 35. Inventory is a. reported under the classification of Property, Plant, and Equipment on the balance sheet. b. often reported as a miscellaneous expense on the income statement. c. reported as a current asset on the balance sheet. d. generally valued at the price for which the goods can be sold. Reporting 36. Items waiting to be used in production are considered to be a. raw materials. b. work in progress. c. finished goods. d. merchandise inventory. Reporting 37. In a manufacturing business, inventory that is ready for sale is called a. raw materials inventory. b. work in process inventory. c. finished goods inventory. d. store supplies inventory. Reporting 38. The factor which determines whether or not goods should be included in a physical count of inventory is a. physical possession. b. legal title. c. management's judgment. d. whether or not the purchase price has been paid. Reporting 39. If goods in transit are shipped FOB destination a. the seller has legal title to the goods until they are delivered. b. the buyer has legal title to the goods until they are delivered. c. the transportation company has legal title to the goods while the goods are in transit. d. no one has legal title to the goods until they are delivered. Reporting 40. An auto manufacturer would classify vehicles in various stages of production as a. finished goods. b. merchandise inventory. c. raw materials. d. work in process. , LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 41. Which of the following should be included in the physical inventory of a company? a. Goods held on consignment from another company. b. Goods in transit to another company shipped FOB shipping point. c. Goods in transit from another company shipped FOB shipping point. d. Both b and c above. , LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls 42. Manufacturers usually classify inventory into all the following general categories except a. work in process b. finished goods c. merchandise inventory d. raw materials , LO: 1, Blooms Taxonomy: C, Difficulty: Easy, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 43. Freight terms of FOB shipping point mean that the a. seller must debit freight out. b. buyer must bear the freight costs. c. goods are placed free on board at the buyer's place of business. d. seller must bear the freight costs. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls 44. For companies that use a perpetual inventory system, all of the following are purposes for taking a physical inventory except a. to check the accuracy of the records. b. to determine the amount of wasted raw materials. c. to determine losses due to employee theft. d. to determine ownership of the goods. , LO: 1, Blooms Taxonomy: C, Difficulty: Easy, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem solving, IMA: Internal Controls 45. Fetherston Company's goods in transit at December 31 include: sales made purchases made (1) FOB destination (3) FOB destination (2) FOB shipping point (4) FOB shipping point Which items should be included in Fetherston's inventory at December 31? a. (2) and (3) b. (1) and (4) c. (1) and (3) d. (2) and (4) , LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 46. The term "FOB" denotes a. free on board. b. freight on board. c. free only (to) buyer. d. freight charge on buyer. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economic 47. Under a consignment arrangement, the a. consignor has ownership until goods are sold to a customer. b. consignor has ownership until goods are shipped to the consignee. c. consignee has ownership when the goods are in the consignee's possession. d. consigned goods are included in the inventory of the consignee. Business Economic 48. As a result of a thorough physical inventory, Horace Company determined that it had inventory worth $320,000 at December 31, 2014. This count did not take into consideration the following facts: Herschel Consignment currently has goods worth $47,000 on its sales floor that belong to Horace but are being sold on consignment by Herschel. The selling price of these goods is $75,000. Horace purchased $22,000 of goods that were shipped on December 27. FOB destination, that will be received by Horace on January 3. Determine the correct amount of inventory that Horace should report. a. $320,000. b. $340,000. c. $367,000. d. $387,000. , LO: 1, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $320,000 + $47,000  $367,000 49. Partridge Bookstore had 500 units on hand at January 1, costing $9 each. Purchases and sales during the month of January were as follows: Date Purchases Sales Jan. 14 375 @ $14 17 250 @ $10 25 250 @ $11 29 260 @ $16 Partridge does not maintain perpetual inventory records. According to a physical count, 365 units were on hand at January 31. The cost of the inventory at January 31, under the FIFO method is: a. $3,285. b. $3,650. c. $3,900. d. $4,015. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (250  $11) + [(365  250)  $10]  $3,900 50. Partridge Bookstore had 500 units on hand at January 1, costing $9 each. Purchases and sales during the month of January were as follows: Date Purchases Sales Jan. 14 375 @ $14 17 250 @ $10 25 250 @ $11 29 260 @ $16 Partridge does not maintain perpetual inventory records. According to a physical count, 365 units were on hand at January 31. The cost of the inventory at January 31, under the LIFO method is: a. $3,285. b. $3,650. c. $3,900. d. $4,015. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 365  $9  $3,285 51. Nick's Place recorded the following data: Units Unit Date Received Sold On Hand Cost 1/1 Inventory 600 $2.50 1/8 Purchased 1,000 1,600 3.00 1/12 Sold 1,200 300 The weighted average unit cost of the inventory at January 31 is: a. $2.50. b. $2.75. c. $2.81. d. $3.400. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (600  $2.50) + (1,000  $3.00) 1,600  $2.81 52. Inventoriable costs include all of the following except the a. freight costs incurred when buying inventory. b. costs of the purchasing and warehousing departments. c. cost of the beginning inventory. d. cost of goods purchased. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 53. Beginning inventory plus the cost of goods purchased equals a. cost of goods sold. b. cost of goods available for sale. c. net purchases. d. total goods purchased. , LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 54. Cost of goods sold is computed from the following equation: a. beginning inventory – cost of goods purchased + ending inventory. b. sales – cost of goods purchased + beginning inventory – ending inventory. c. sales + gross profit – ending inventory + beginning inventory. d. beginning inventory + cost of goods purchased – ending inventory. , LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 55. A company just starting in business purchased three merchandise inventory items at the following prices. First purchase $64; Second purchase $76; Third purchase $68. If the company sold two units for a total of $200 and used FIFO costing, the gross profit for the period would be a. $56. b. $60. c. $62. d. $68. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $200  ($64 + $76)  $60 56. The LIFO inventory method assumes that the cost of the latest units purchased are a. the last to be allocated to cost of goods sold. b. the first to be allocated to ending inventory. c. the first to be allocated to cost of goods sold. d. not allocated to cost of goods sold or ending inventory. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 57. A company just starting business made the following four inventory purchases in June: June 1 150 units $ 390 June 10 200 units 585 June 15 200 units 630 June 28 150 units 510 $2,115 A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is a. $683. b. $825. c. $1,290. d. $1,432. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $390 + [($585  200) × 100]  $683 58. A company just starting business made the following four inventory purchases in June: June 1 150 units $ 390 June 10 200 units 585 June 15 200 units 630 June 28 150 units 510 $2,115 A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for June is a. $683. b. $825. c. $1,290. d. $1,432. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $510 + [($630  200) × 100]  $825; $2,115  $825 = $1,290 59. A company just starting business made the following four inventory purchases in June: June 1 150 units $ 390 June 10 200 units 585 June 15 200 units 630 June 28 150 units 510 $2,115 A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand. Using the average-cost method, the amount allocated to the ending inventory on June 30 is a. $683. b. $755. c. $825. d. $1,360. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,115  700  3.02; 250  3.02 = $755 60. A company just starting business made the following four inventory purchases in June: June 1 150 units $ 390 June 10 200 units 585 June 15 200 units 630 June 28 150 units 510 $2,115 A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand. The inventory method which results in the highest gross profit for June is a. the FIFO method. b. the LIFO method. c. the weighted average unit cost method. d. not determinable. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 61. A company purchased inventory as follows: 150 units at $5 350 units at $6 The average unit cost for inventory is a. $5.00. b. $5.50. c. $5.70. d. $6.00. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [(150  $5)  (350  $6)]  500  $5.70 62. Which of the following items will increase inventoriable costs for the buyer of goods? a. Purchase returns and allowances granted by the seller b. Purchase discounts taken by the purchaser c. Freight charges paid by the seller d. Freight charges paid by the purchaser , LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 63. Inventoriable costs may be thought of as a pool of costs consisting of which two elements? a. The cost of beginning inventory and the cost of ending inventory b. The cost of ending inventory and the cost of goods purchased during the year c. The cost of beginning inventory and the cost of goods purchased during the year d. The difference between the costs of goods purchased and the cost of goods sold during the year , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 64. The cost of goods available for sale is allocated between a. beginning inventory and ending inventory. b. beginning inventory and cost of goods on hand. c. ending inventory and cost of goods sold. d. beginning inventory and cost of goods purchased. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 65. Indrisano's Used Cars uses the specific identification method of costing inventory. During March, Indrisano purchased three cars for $12,000, $14,400, and $19,200, respectively. During March, two cars are sold for a total of $34,600. Indrisano determines that at March 31, the $14,400 car is still on hand. What is Indrisano’s gross profit for March? a. $1,000. b. $3,400. c. $4,200. d. $8,200. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $34,600  ($12,000  $19,200)  $3,400 66. Of the following companies, which one would not likely employ the specific identification method for inventory costing? a. Music store specializing in organ sales b. Farm implement dealership c. Antique shop d. Hardware store , LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 67. A problem with the specific identification method is that a. inventories can be reported at actual costs. b. management can manipulate income. c. matching is not achieved. d. the lower-of-cost-or-market basis cannot be applied. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economic 68. The selection of an appropriate inventory cost flow assumption for an individual company is made by a. the external auditors. b. the SEC. c. the internal auditors. d. management. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic 69. Which one of the following inventory methods is often impractical to use? a. Specific identification b. LIFO c. FIFO d. Average cost , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economic 70. Which of the following is not a common cost flow assumption used in costing inventory? a. First-in, first-out b. Middle-in, first-out c. Last-in, first-out d. Average cost , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 71. The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is a. called the expense recognition principle. b. called the consistency principle. c. nonexistent; that is, there is no accounting requirement. d. called the physical flow assumption. , LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 72. Which of the following statements is true regarding inventory cost flow assumptions? a. A company may use more than one costing method concurrently. b. A company must comply with the method specified by industry standards. c. A company must use the same method for domestic and foreign operations. d. A company may never change its inventory costing method once it has chosen a method. , LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 73. Which of the following statements is correct with respect to inventories? a. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold. b. It is generally good business management to sell the most recently acquired goods first. c. Under FIFO, the ending inventory is based on the latest units purchased. d. FIFO seldom coincides with the actual physical flow of inventory. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 74. The cost of goods available for sale is allocated to the cost of goods sold and the a. beginning inventory. b. ending inventory. c. cost of goods purchased. d. gross profit. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 75. At May 1, 2014, Kibbee Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows: 800 units at $7 600 units at $8 The company sold 1,000 units during the month for $12 per unit. Kibbee uses the average cost method. The average cost per unit for May is a. $7.000. b. $7.375. c. $7.500. d. $8.000. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: [(200 × $7)  (800  $7)  (600 × $8)]  1,600  $7,375 76. At May 1, 2014, Kibbee Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows: 800 units at $7 600 units at $8 The company sold 1,000 units during the month for $12 per unit. Kibbee uses the average cost method. The value of Kibbee’s inventory at May 31, 2014 is a. $3,000. b. $4,425. c. $4,500. d. $7,500. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: (200  800  600)  1,000  600; 600  $7,375  $4,425 77. At May 1, 2014, Kibbee Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows: 800 units at $7 600 units at $8 The company sold 1,000 units during the month for $12 per unit. Kibbee uses the average cost method. Kibbee’s gross profit for the month of May is a. $4,625. b. $4,571. c. $4,000. d. $4,500. , LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: [(200  $7) + (800  $7) + (600  $8)]  1,600  $7.375; 1,000  (12  $7.375)  $4,625 78. Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2014 are as follows: Units Per unit price Total Balance, 1/1/14 200 $5.00 $1,000 Purchase, 1/15/14 100 5.30 530 Purchase, 1/28/14 100 5.50 550 An end of the month (1/31/14) inventory showed that 160 units were on hand. How many units did the company sell during January, 2014? a. 60 b. 160 c. 200 d. 240 , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: (200 + 100 + 100)  160  240 79. Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2014 are as follows: Units Per unit price Total Balance, 1/1/14 200 $5.00 $1,000 Purchase, 1/15/14 100 5.30 530 Purchase, 1/28/14 100 5.50 550 An end of the month (1/31/14) inventory showed that 160 units were on hand. If the company uses FIFO, what is the value of the ending inventory? a. $800 b. $832 c. $848 d. $868 , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $550 + [(160  100)  $5.30]  $868 80. Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2014 are as follows: Units Per unit price Total Balance, 1/1/14 200 $5.00 $1,000 Purchase, 1/15/14 100 5.30 530 Purchase, 1/28/14 100 5.50 550 An end of the month (1/31/14) inventory showed that 160 units were on hand. If the company uses LIFO, what is the value of the ending inventory? a. $800 b. $832 c. $848 d. $868 , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: 160  $5.00  $800 81. Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2014 are as follows: Units Per unit price Total Balance, 1/1/14 200 $5.00 $1,000 Purchase, 1/15/14 100 5.30 530 Purchase, 1/28/14 100 5.50 550 An end of the month (1/31/14) inventory showed that 160 units were on hand. If the company uses FIFO and sells the units for $10 each, what is the gross profit for the month? a. $1,120 b. $1,188 c. $1,532 d. $1,600 , LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $1,000 + [(240  200)  $5.30]  1,212; (240  $10)  $1,212 = $1,188 82. Eneri Company's inventory records show the following data: Units Unit Cost Inventory, January 1 10,000 $9.20 Purchases: June 18 9,000 8.00 November 8 6,000 7.00 A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. Under the FIFO method, the December 31 inventory is valued at a. $28,000. b. $32,267. c. $32,960. d. $36,800. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: 4000  $7.00  $28,000 83. Eneri Company's inventory records show the following data: Units Unit Cost Inventory, January 1 10,000 $9.20 Purchases: June 18 9,000 8.00 November 8 6,000 7.00 A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. What is the cost of goods available for sale? a. $169,200 b. $178,000 c. $206,000 d. $325,000 , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: (10,000  $9.20) + (9,000  $8.00) + (6,000  $7.00) = $206,000 84. Eneri Company's inventory records show the following data: Units Unit Cost Inventory, January 1 10,000 $9.20 Purchases: June 18 9,000 8.00 November 8 6,000 7.00 A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. Under the LIFO method, cost of goods sold is a. $28,000. b. $169,200. c. $173,040. d. $178,000. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: 4,000  $9.20 = $36,800; $206,000  $36,800 = $169,200 85. Eneri Company's inventory records show the following data: Units Unit Cost Inventory, January 1 10,000 $9.20 Purchases: June 18 9,000 8.00 November 8 6,000 7.00 A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. The weighted-average cost per unit is a. $8.00. b. $8.01. c. $8.24. d. $9.30. , LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: [(10,000  $9.20) + (9,000  $8.00) + ($6,000  $7.00)]  25,000 = $8.24 86. Eneri Company's inventory records show the following data: Units Unit Cost Inventory, January 1 10,000 $9.20 Purchases: June 18 9,000 8.00 November 8 6,000 7.00 A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. If the company uses FIFO, what is the gross profit for the period? a. $95,000 b. $99,266 c. $99,960 d. $103,800 , LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $206,000  (4,000  $7.00) = $178,000; [(25,000  4,000)  13]  $178,000 = $95,000 87. Eneri Company's inventory records show the following data: Units Unit Cost Inventory, January 1 10,000 $9.20 Purchases: June 18 9,000 8.00 November 8 6,000 7.00 A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. What is the difference in taxes if LIFO rather than FIFO is used? a. $1,760 additional taxes b. $992 additional taxes c. $786 additional taxes d. $992 tax savings , LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: [(25,000  4,000)  $13]  $169,200 = $103,800; [$103,800  $95,000)  .20 = $1,760 88. Priscilla has the following inventory information. July 1 Beginning Inventory 20 units at $19 $ 380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $23 230 $2,010 A physical count of merchandise inventory on July 31 reveals that there are 35 units on hand. Using the average-cost method, the value of ending inventory is a. $680. b. $704. c. $723. d. $730. , LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $2,010  100 = $20.10; $20.10  35 = $704 89. Priscilla has the following inventory information. July 1 Beginning Inventory 20 units at $19 $ 380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $23 230 $2,010 A physical count of merchandise inventory on July 31 reveals that there are 35 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is a. $1,280. b. $1,287 c. $1,306. d. $1,330. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $230 + [(35  10)  $20] = $730; $2,010  $730 = $1,280 90. Priscilla has the following inventory information. July 1 Beginning Inventory 20 units at $19 $ 380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $23 230 $2,010 A physical count of merchandise inventory on July 31 reveals that there are 35 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is a. $1,280. b. $1,287. c. $1,306. d. $1,330. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $380 + [(35  20)  $20] = $680; $2,010  $680 = $1,330 91. Moroni Industries has the following inventory information. July 1 Beginning Inventory 40 units at $120 5 Purchases 240 units at $112 14 Sale 160 units 21 Purchases 120 units at $115 30 Sale 140 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a LIFO basis? a. $11,500 b. $11,520 c. $33,960 d. $33,980 , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: 40 + 240 + 120  (160 + 140) = 100; (40  $120) + [(100  40)  $112] = $11,520 92. Moroni Industries has the following inventory information. July 1 Beginning Inventory 40 units at $120 5 Purchases 240 units at $112 14 Sale 160 units 21 Purchases 120 units at $115 30 Sale 140 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis? a. $11,500 b. $11,520 c. $33,960 d. $33,980 , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: 40 + 240 + 120  (160 + 140) = 100; 100  $115 = $11,500 93. Netta Shutters has the following inventory information. Nov. 1 Inventory 30 units @ $8.00 8 Purchase 120 units @ $8.30 17 Purchase 60 units @ $8.40 25 Purchase 90 units @ $8.80 A physical count of merchandise inventory on November 30 reveals that there are 90 units on hand. Assume a periodic inventory system is used. Cost of goods sold (rounded to the nearest dollar) under the average-cost method is a. $1,740. b. $1,772. c. $1,778. d. $1,794. , LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: (30  $8.00) + (120  $8.30) + (60  $8.40) + (90  8.80) = $2,532; $2,532  (30 + 120 + 60 + 90) = $8.44; (300  90)  $8.44 = $1,772 94. Netta Shutters has the following inventory information. Nov. 1 Inventory 30 units @ $8.00 8 Purchase 120 units @ $8.30 17 Purchase 60 units @ $8.40 25 Purchase 90 units @ $8.80 A physical count of merchandise inventory on November 30 reveals that there are 90 units on hand. Assume a periodic inventory system is used. Ending inventory under FIFO is a. $738. b. $792. c. $1,740. d. $1,794. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: 90  $8.80 = $792 95. Netta Shutters has the following inventory information. Nov. 1 Inventory 30 units @ $8.00 8 Purchase 120 units @ $8.30 17 Purchase 60 units @ $8.40 25 Purchase 90 units @ $8.80 A physical count of merchandise inventory on November 30 reveals that there are 90 units on hand. Assume a periodic inventory system is used. Ending inventory under LIFO is a. $738. b. $792. c. $1,740. d. $1,794. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: (30  $8.00) + (60  $8.30) = $738 96. Netta Shutters has the following inventory information. Nov. 1 Inventory 30 units @ $8.00 8 Purchase 120 units @ $8.30 17 Purchase 60 units @ $8.40 25 Purchase 90 units @ $8.80 A physical count of merchandise inventory on November 30 reveals that there are 90 units on hand. Assume a periodic inventory system is used. Assuming that the specific identification method is used and that ending inventory consists of 20 units from each of the three purchases and 30 units from the November 1 inventory, cost of goods sold is a. $1,740. b. $1,772. c. $1,782. d. $1,794. , LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: (30  $8.00) + (20  $8.30) (20  $8.40) + (20  $8.80) = $750; $2,532  $750 = $1,782 97. Romanoff Industries had the following inventory transactions occur during 2014: Units Cost/unit 2/1/14 Purchase 54 $45 3/14/14 Purchase 93 $47 5/1/14 Purchase 66 $49 The company sold 150 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to whole dollars) a. $3,318 b. $3,552 c. $6,948 d. $7,182 , LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: (66  $49) + [(150  66)  $47] = $7,182; (150  $70)  $7,182 = $3,318 98. Romanoff Industries had the following inventory transactions occur during 2014: Units Cost/unit 2/1/14 Purchase 54 $45 3/14/14 Purchase 93 $47 5/1/14 Purchase 66 $49 The company sold 150 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s after-tax income using LIFO? (rounded to whole dollars) a. $2,323 b. $2,486 c. $3,318 d. $3,552 , LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: (150  $70)  $7,182 = $3,318; $3,318  (1  .30) = $2,323 99. Romanoff Industries had the following inventory transactions occur during 2014: Units Cost/unit 2/1/14 Purchase 54 $45 3/14/14 Purchase 93 $47 5/1/14 Purchase 66 $49 The company sold 150 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to whole dollars) a. $3,318 b. $3,552 c. $6,948 d. $7,182 , LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: (54  $45) + (93  $47) + [(150  147)  $49] = $6,948; (150  $70)  $6,948 = $3,552 100. Romanoff Industries had the following inventory transactions occur during 2014: Units Cost/unit 2/1/14 Purchase 54 $45 3/14/14 Purchase 93 $47 5/1/14 Purchase 66 $49 The company sold 150 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s after-tax income using FIFO? (rounded to whole dollars) a. $2,322 b. $2,486 c. $3,318 d. $3,552 , LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: (150  $70)  $6,948 = $3,552; $3,552  (1  .30) = $2,486 101. Companies adopt different cost flow methods for each of the following reasons except a. balance sheet effects. b. cost effects. c. income statements effects. d. tax effects. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 102. In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the a. FIFO method. b. LIFO method. c. average-cost method. d. tax method. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 103. Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using a. LIFO will have the highest ending inventory. b. FIFO will have the highest cost of good sold. c. FIFO will have the highest ending inventory. d. LIFO will have the lowest cost of goods sold. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 104. If companies have identical inventoriable costs but use different inventory flow assumptions when the price of goods have not been constant, then the a. cost of goods sold of the companies will be identical. b. cost of goods available for sale of the companies will be identical. c. ending inventory of the companies will be identical. d. net income of the companies will be identical. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 105. In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense? a. FIFO b. LIFO c. Average Cost d. Income tax expense for the period will be the same under all assumptions. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 106. The specific identification method of costing inventories is used when the a. physical flow of units cannot be determined. b. company sells large quantities of relatively low cost homogeneous items. c. company sells large quantities of relatively low cost heterogeneous items. d. company sells a limited quantity of high-unit cost items. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 107. The specific identification method of inventory costing a. always maximizes a company's net income. b. always minimizes a company's net income. c. has no effect on a company's net income. d. may enable management to manipulate net income. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 108. The managers of Constantine Company receive performance bonuses based on the net income of the firm. Which inventory costing method are they likely to favor in periods of declining prices? a. LIFO b. Average Cost c. FIFO d. Physical inventory method , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 109. In periods of inflation, phantom or paper profits may be reported as a result of using the a. perpetual inventory method. b. FIFO costing assumption. c. LIFO costing assumption. d. periodic inventory method. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 110. Selection of an inventory costing method by management does not usually depend on a. the fiscal year end. b. income statement effects. c. balance sheet effects. d. tax effects. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 111. In a period of rising prices, the costs allocated to ending inventory may be understated in the a. average-cost method. b. FIFO method. c. gross profit method. d. LIFO method. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 112. The accountant at Almira Company is figuring out the difference in income taxes the company will pay depending on the choice of either FIFO or LIFO as an inventory costing method. The tax rate is 30% and the FIFO method will result in income before taxes of $8,190. The LIFO method will result in income before taxes of $7,290. What is the difference in tax that would be paid between the two methods? a. $270. b. $630. c. $900. d. Cannot be determined from the information provided. , LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: ($8,190  $7,290)  .30) = $270 113. The accountant at Cedric Company has determined that income before income taxes amounted to $7,000 using the FIFO costing assumption. If the income tax rate is 30% and the amount of income taxes paid would be $315 greater if the LIFO assumption were used, what would be the amount of income before taxes under the LIFO assumption? a. $5,950 b. $7,000 c. $7,315 d. $8,050 , LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $7,000 + ($315  .30) = $8,050 114. The manager of Brick Company is given a bonus based on income before income taxes. Net income, after taxes, is $11,200 for FIFO and $9,800 for LIFO. The tax rate is 30%. The bonus rate is 20%. How much higher is the manager's bonus if FIFO is adopted instead of LIFO? a. $84 b. $2,800 c. $400 d. $420 , LO: 3, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: ($11,200  $9,800) × .20 = $280; $280  (1  .30) = $400 115. The consistent application of an inventory costing method is essential for a. conservatism. b. accuracy. c. comparability. d. efficiency. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 116. Which costing method cannot be used to determine the cost of inventory items before lower-of-cost-or-market is applied? a. Specific identification b. FIFO c. LIFO d. All of these methods can be used. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 117. Inventory is reported in the financial statements at a. cost. b. market. c. the higher-of-cost-or-market. d. the lower-of-cost-or-market. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 118. The lower-of-cost-or-market basis of valuing inventories is an example of a. comparability. b. the cost principle. c. conservatism. d. consistency. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 119. Under the lower-of-cost-or-market basis in valuing inventory, market is defined as a. current replacement cost. b. selling price. c. historical cost plus 10%. d. selling price less markup. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 120. The lower-of-cost-or-market (LCM) basis may be used with all of the following methods except a. average cost. b. FIFO. c. LIFO. d. The LCM basis may be used with all of these. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 121. Alfalfa Company developed the following information about its inventories in applying the lower-of-cost-or-market (LCM) basis in valuing inventories: Product Cost Market A $112,000 $120,000 B 80,000 76,000 C 155,000 162,000 If Alfalfa applies the LCM basis, the value of the inventory reported on the balance sheet would be a. $343,000. b. $347,000. c. $358,000. d. $362,000. , LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $112,000 + $76,000 + $155,000 = $343,000 122. Switzer, Inc. has 8 computers which have been part of the inventory for over two years. Each computer cost $600 and originally retailed for $900. At the statement date, each computer has a current replacement cost of $400. What value should Switzer, Inc., have for the computers at the end of the year? a. $2,400. b. $3,200. c. $4,800. d. $7,200. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $400 × 8= $3,200 123. Switzer, Inc. has 8 computers which have been part of the inventory for over two years. Each computer cost $600 and originally retailed for $900. At the statement date, each computer has a current replacement cost of $400. How much loss should Switzer, Inc., record for the year? a. $1,600. b. $2,400. c. $3,200. d. $4,000. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($600  $400) × 8 = $1,600 124. Othello Company understated its inventory by $20,000 at December 31, 2014. It did not correct the error in 2014 or 2015. As a result, Othello's owner's equity was: a. understated at December 31, 2014, and overstated at December 31, 2015. b. understated at December 31, 2014, and properly stated at December 31, 2015. c. overstated at December 31, 2014, and overstated at December 31, 2015. d. understated at December 31, 2014, and understated at December 31, 2015. , LO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 125. Understating beginning inventory will understate a. assets. b. cost of goods sold. c. net income. d. owner's equity. , LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 126. An error in the physical count of goods on hand at the end of a period resulted in a $15,000 overstatement of the ending inventory. The effect of this error in the current period is Cost of Goods Sold Net Income a. Understated Understated b. Overstated Overstated c. Understated Overstated d. Overstated Understated , LO: 5, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 127. If beginning inventory is understated by $13,000, the effect of this error in the current period is Cost of Goods Sold Net Income a. Understated Understated b. Overstated Overstated c. Understated Overstated d. Overstated Understated , LO: 5, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 128. A company uses the periodic inventory method and the beginning inventory is overstated by $7,000 because the ending inventory in the previous period was overstated by $7,000. The amounts reflected in the current end of the period balance sheet are Assets Owner’s Equity a. Overstated Overstated b. Correct Correct c. Understated Understated d. Overstated Correct , LO: 5, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 129. Overstating ending inventory will overstate all of the following except a. assets. b. cost of goods sold. c. net income. d. owner's equity. , LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 130. Disclosures about inventory should include each of the following except the a. basis of accounting. b. costing method. c. quantity of inventory. d. major inventory classifications. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 131. Days in inventory is calculated by dividing a. the inventory turnover by 365 days. b. average inventory by 365 days. c. 365 days by the inventory turnover. d. 365 days by average inventory. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 132. The following information is available for Everett Company at December 31, 2014: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $1,050,000; and sales $1,800,000. Everett’s inventory turnover in 2014 is a. 8.7 times. b. 10.5 times. c. 13.2 times. d. 18 times. , LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,050,000  [($80,000 + $120,000)  2] = 10.5 133. The following information was available for Pete Company at December 31, 2014: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $984,000; and sales $1,350,000. Pete’s inventory turnover in 2014 was a. 10.9 times. b. 12.3 times. c. 14.1 times. d. 16.9 times. , LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $984,000  [($90,000 + $70,000)  2] = 12.3 134. The following information was available for Pete Company at December 31, 2014: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $984,000; and sales $1,350,000. Pete’s days in inventory in 2014 was a 21.6 days. b. 25.9 days. c. 29.7 days. d. 33.5 days. , LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $984,000  [($90,000 + $70,000)  2] = 12.3; 365  12.3 = 29.7 135. Delmar Company had beginning inventory of $90,000, ending inventory of $110,000, cost of goods sold of $600,000, and sales of $960,000. Delmar's days in inventory is: a 38.0 days. b. 54.3 days. c. 60.8 days. d. 67.5 days. , LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $600,000  [($90,000 + $110,000)  2] = 6; 365  6 = 60.8 a136. During July, the following purchases and sales were made by Big Dan Company. There was no beginning inventory. Big Dan Company uses a perpetual inventory system. Purchases Sales July 3 40 units @ $12 July 13 50 units 11 40 units @ $13 22 20 units 20 20 units @ $15 Under the FIFO method, the cost of goods sold for each sale is: July 13 July 22 a. $600 $240 b. 610 260 c. 650 260 d. 750 300 , LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (40 × $12) + [(50  40) × $13] = $610; 20 × $13 = $260 a137. During July, the following purchases and sales were made by Big Dan Company. There was no beginning inventory. Big Dan Company uses a perpetual inventory system. Purchases Sales July 3 40 units @ $12 July 13 50 units 11 40 units @ $13 22 20 units 20 20 units @ $15 Under the LIFO method, the cost of goods sold for each sale is: July 13 July 22 a. $600 $240 b. 640 300 c. 650 300 d. 750 260 , LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (40 × $13) + [(50  40) × $12] = $640; 20 × $15 = $300 a138. Pappy’s Staff has the following inventory information. July 1 Beginning Inventory 20 units at $90 5 Purchases 120 units at $92 14 Sale 80 units 21 Purchases 60 units at $95 30 Sale 56 units Assuming that a perpetual inventory system is used, what is the ending inventory on a FIFO basis? a. $5,848 b. $5,860 c. $6,068 d. $6,346 , LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (20 + 120 + 60)  (80 + 56) = 64; (60 × $95) + [(64  60) × $92] = $6,068 a139 Pappy’s Staff Junkets has the following inventory information. July 1 Beginning Inventory 20 units at $90 5 Purchases 120 units at $92 14 Sale 80 units 21 Purchases 60 units at $95 30 Sale 56 units Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis? a. $5,848 b. $5,860 c. $6,068 d. $6,346 , LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (20 × $90) + (40 + $92) + [(64  60) × $95] = $5,860 a140. Langer Company has the following inventory information. July 1 Beginning Inventory 10 units at $90 5 Purchases 60 units at $92 14 Sale 40 units 21 Purchases 30 units at $95 30 Sale 28 units Assuming that a perpetual inventory system is used, what is the ending inventory (round all calculations to nearest dollar) under the moving-average cost method? a. $2,930 b. $2,966 c. $2,986 d. $3,054 , LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 141. A new average cost is computed each time a purchase is made in the a. average-cost method. b. moving-average cost method. c. weighted-average cost method. d. All of these choices are correct. , LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic a142. When valuing ending inventory under a perpetual inventory system, the a. valuation using the LIFO assumption is the same as the valuation using the LIFO assumption under the periodic inventory system. b. moving average requires that a new average be computed after every sale. c. valuation using the FIFO assumption is the same as under the periodic inventory system. d. earliest units purchased during the period using the LIFO assumption are allocated to the cost of goods sold when units are sold. , LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a143. Sawyer Company uses the perpetual inventory system and the moving-average method to value inventories. On August 1, there were 10,000 units valued at $30,000 in the beginning inventory. On August 10, 20,000 units were purchased for $6 per unit. On August 15, 24,000 units were sold for $12 per unit. The amount charged to cost of goods sold on August 15 was a. $30,000. b. $108,000. c. $120,000. d. $144,000. , LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economic Solution: [$30,000 + (20,000 × $6)]  30,000 = $5; 24,000 × 5 = $120,000 a144. Under the gross profit method, each of the following items are estimated except for the a. cost of ending inventory. b. cost of goods sold. c. cost of goods purchased. d. gross profit. , LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a145. Under the retail inventory method, the estimated cost of ending inventory is computed by multiplying the cost-to-retail ratio by a. net sales. b. goods available for sale at retail. c. goods purchased at retail. d. ending inventory at retail. , LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a146. Inventories are estimated a. more frequently under a periodic inventory system than a perpetual inventory system. b. using the wholesale inventory method. c. more frequently under a perpetual inventory system than the periodic inventory system. d. using the net method. , LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic a147. Clooney Department Store estimates inventory by using the retail inventory method. The following information was developed: At Cost At Retail Beginning inventory $360,000 $ 750,000 Goods purchased 900,000 1,350,000 Net sales 1,400,000 The estimated cost of the ending inventory is a. $280,000. b. $336,000. c. $420,000. d. $466,667. , LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [$360,000 + $900,000)  ($750,000 + $1,350,000) = .60; ($2,100,000  $1,400,000) × .60 = $420,000 a148. Turturro Department Store utilizes the retail inventory method to estimate its inventories. It calculated its cost to retail ratio during the period at 75%. Goods available for sale at retail amounted to $600,000 and goods were sold during the period for $420,000. The estimated cost of the ending inventory is a. $135,000. b. $180,000. c. $315,000. d. $450,000. , LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($600,000  $420,000) × .75 = $135,000 a149. TB Nelson Company prepares monthly financial statements and uses the gross profit method to estimate ending inventories. Historically, the company has had a 40% gross profit rate. During June, net sales amounted to $180,000; the beginning inventory on June 1 was $54,000; and the cost of goods purchased during June amounted to $90,000. The estimated cost of TB Nelson Company's inventory on June 30 is a. $21,600. b. $36,000. c. $72,000. d. $126,000. , LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $54,000 + $90,000 = $144,000; $144,000  ($180,000 × .60) = $36,000 150. Goods in transit should be included in the inventory of the buyer when the a. public carrier accepts the goods from the seller. b. goods reach the buyer. c. terms of sale are FOB destination. d. terms of sale are FOB shipping point. Reporting 151. Inventory items on an assembly line in various stages of production are classified as a. Finished goods. b. Work in process. c. Raw materials. d. Merchandise inventory. Reporting 152. The cost flow method that often parallels the actual physical flow of merchandise is the a. FIFO method. b. LIFO method. c. average-cost method. d. gross profit method. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 153. Goodman Company's inventory records show the following data: Units Unit Cost Inventory, January 1 10,000 $9.00 Purchases: June 18 9,000 8.20 November 8 6,000 7.00 A physical inventory on December 31 shows 6,000 units on hand. Under the FIFO method, the December 31 inventory is a. $42,000. b. $49,200. c. $49,392. d. $54,000. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 6,000 × $7.00 = $42,000 154. In a period of inflation, the cost flow method that results in the lowest income taxes is the a. FIFO method. b. LIFO method. c. average-cost method. d. gross profit method. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 155. In a period of rising prices, FIFO will have a. lower net income than LIFO. b. lower cost of goods sold than LIFO. c. lower income tax expense than LIFO. d. lower net purchases than LIFO. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 156. Under the LCM approach, the market value is defined as a. FIFO cost. b. LIFO cost. c. current replacement cost. d. selling price. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 157. Penny Company made an inventory count on December 31, 2014. During the count, one of the clerks made the error of counting an inventory item twice. For the balance sheet at December 31, 2014, the effects of this error are Assets Liabilities Owner’s Equity a. overstated understated overstated b. understated no effect understated c. overstated no effect overstated d. overstated overstated understated , LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 158. The inventory turnover is computed by dividing cost of goods sold by a. beginning inventory. b. ending inventory. c. average inventory. d. 365 days. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a159. H. Hunter Company's records indicate the following information for the year: Merchandise inventory, 1/1 $ 550,000 Purchases 2,250,000 Net sales 3,200,000 On December 31, a physical inventory determined that ending inventory of $500,000 was in the warehouse. H. Hunter's gross profit on sales has remained constant at 30%. H. Hunter suspects some of the inventory may have been taken by some new employees. At December 31, what is the estimated cost of missing inventory? a. $60,000 b. $100,000 c. $150,000 d. $1,340,000 , LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: ($550,000 + $2,250,000)  ($3,200,000 × .70) = $560,000; $560,000  $500,000 = $60,000 160. The requirements for accounting for and reporting of inventories under IFRS, compared to GAAP, tend to be more a. detailed. b. rules-based. c. principles-based. d. full of disclosure requirements. IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 161. The major IFRS requirements related to accounting for and reporting inventories are a. the same as GAAP. b. the same as GAAP with a couple of exceptions. c. completely different fom GAAP. d. not comparable to GAAP. IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 162. Inventory accounting under IFRS differs from GAAP in regard to a. neither the use of LIFO nor lower-of-cost-or-market. b. the use of LIFO but not lower-of-cost-or-market. c. the use of lower-of-cost-or-market but not LIFO. d. the use of LIFO and lower-of-cost-or-market. IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 163. Under GAAP, companies can choose which inventory system? LIFO FIFO a. Yes No b. Yes Yes c. No Yes d. Yes No IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 164. Under IFRS, companies can choose which inventory system? LIFO FIFO a. Yes No b. Yes Yes c. No Yes d. No No IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 165. GAAP’s definition for inventory and provision of guidelines for inventory accounting, as compared to IFRS are: Definitions for Inventory Guideliness for inventory accounting a. essentially similar more detailed b. essentially different more detailed c. essentially similar less detailed d. essentially different less detailed IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 166. Inventories are defined by IFRS as a. held-for-sale in the ordinary course of business. b. in the process of production for sale in the ordinary course of business. c. in the form of materials or supplies to be consumed in the production process or in the providing of services. d. all of the above. IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 167. Specific Identification can be used for inventory valuation under GAAP IFRS a. Yes No b. Yes Yes c. No No d. No Yes IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 168. Specific Identification must be used for inventory valuation where the inventory items are not interchangeable under GAAP IFRS a. Yes No b. Yes Yes c. No No d. No Yes IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 169. GAAP’s provision for ownership of goods (goods-in-transit or consigned goods), as well as which costs to include in inventory, as compared to IFRS are: Ownership of goods Costs to include in inventory a. essentially similar essentially similar b. essentially different essentially different c. essentially similar essentially different d. essentially different essentially similar IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 170. The only acceptable cost flow assumptions under IFRS are a. FIFO and LIFO. b. FIFO and average. c. LIFO and average. d. FIFO, LIFO and average. IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 171. LIFO can be used a. under neither GAAP nor IFRS. b. under IFRS but not GAAP. c. under GAAP but not IFRS. d. under both GAAP and IFRS. IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 172. The requirement that companies use the same cost flow assumption of all goods of a similar nature is found in GAAP IFRS a. Yes No b. Yes Yes c. No No d. No Yes IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 173. IFRS defines market for lower-of-cost-or market as a. net realizable value. b. estimated selling price in the ordinary course of business. c. replacement cost. d. replacement cost less costs of disposal. IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 174. GAAP defines market for lower-of-cost-or market essentially as a. net realizable value. b. estimated selling price in the ordinary course of business. c. replacement cost. d. replacement cost less costs of disposal. IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 175. Inventory written down under lower-of-cost-or market may be written back up to original cost in a subsequent period under GAAP IFRS a. Yes No b. Yes Yes c. No No d. No Yes IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 176. The option to value inventory at fair value exists under GAAP IFRS a. Yes No b. Yes Yes c. No No d. No Yes IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 177. Certain agricultural and mineral products can be reported at net realizable value under GAAP IFRS a. Yes No b. Yes Yes c. No No d. No Yes IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 178. The convergence issue that will be most difficult to resolve in the area of inventory accounting is: a. FIFO. b. LIFO. c. ownership of goods. d. costs to include in inventory. IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 179. The specific identification method a. cannot be used under GAAP. b. cannot be used under IFRS. c. must be used under IFRS if the inventory items can be specifically identified. d. must be used under IFRS if it would result in the lowest net income. IFRS: , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Answers to Multiple Choice Questions BRIEF EXERCISES BE 180 Waegelein Company identifies the following items for possible inclusion in the physical inventory. Indicate whether each item should be included or excluded from the inventory taking. 1. Goods shipped on consignment by Waegelein to another company. 2. Goods in transit from a supplier shipped FOB destination. 3. Goods shipped via common carrier to a customer with terms FOB shipping point. 4. Goods held on consignment from another company. , LO: 1, Bloom: C, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting BE 181 In the first month of operations, Mordica Company made three purchases of merchandise in the following sequence: (1) 200 units at $6, (2) 300 units at $7, and (3) 400 units at $9. Assuming there are 300 units on hand, compute the cost of the ending inventory under (1) the FIFO method and (2) the LIFO method. Mordica uses a periodic inventory system. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods BE 182 Flaherty Company had beginning inventory on May 1 of $12,000. During the month, the company made purchases of $40,000 but returned $2,000 of goods because they were defective. At the end of the month, the inventory on hand was valued at $15,500. Calculate cost of goods available for sale and cost of goods sold for the month. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods BE 183 Shellhammer Company's inventory records show the following data for the month of September: Units Unit Cost Inventory, September 1 100 $3.34 Purchases: September 8 450 3.50 September 18 350 3.70 A physical inventory on September 30 shows 200 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses FIFO inventory costing and a periodic inventory system. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting BE 184 Shellhammer Company's inventory records show the following data for the month of September: Units Unit Cost Inventory, September 1 100 $3.34 Purchases: September 8 450 3.50 September 18 350 3.70 A physical inventory on September 30 shows 200 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses LIFO inventory costing and a periodic inventory system. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting BE 185 Shellhammer Company's inventory records show the following data for the month of September: Units Unit Cost Inventory, September 1 100 $3.34 Purchases: September 8 450 3.50 September 18 350 3.70 A physical inventory on September 30 shows 200 units on hand. Calculate the value of the ending inventory and cost of goods sold if the company uses weighted average inventory costing and a periodic inventory system. Round cost per unit to 2 decimal places and ending inventory and cost of goods sold to the nearest dollar. , LO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting BE 186 The following accounts are included in the ledger of Wainwright Company: Advertising expense Freight-in Inventory Purchases Purchase returns and allowances Sales revenue Sales returns and allowances Which of the accounts would be included in calculating cost of goods sold? , LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting BE 187 The Vogelson Company accumulates the following cost and market data at December 31. Inventory Categories Cost Data Market Data Camera $11,000 $9,900 Camcorders 7,800 8,500 DVDs 14,000 12,000 What is the lower-of-cost-or-market value of the inventory? , LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods BE 188 Garner Supply Company reports net income of $120,000 in 2014. The ending inventory did not include goods valued at $7,000 that Garner had consigned to Sharif’s Gift Shop. (1) What is the correct net income for 2014? (2) What impact will this error have on the balance sheet at 12/31/14? , LO: 5, Bloom: C, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting BE 189 At December 31, 2014, the following information was available for Deen Company: ending inventory $22,600; beginning inventory $21,400; cost of goods sold $171,000; and sales revenue $430,000. Calculate the inventory turnover and days in inventory for Deen. , LO: 6, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitative Methods EXERCISES Ex. 190 The following information is available for Yancey Company: Beginning inventory 600 units at $4 First purchase 900 units at $6 Second purchase 500 units at $7.20 Assume that Yancey uses a periodic inventory system and that there are 700 units left at the end of the month. Instructions Compute the cost of ending inventory under the (a) FIFO method. (b) LIFO method. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 191 The following information is available for Yancey Company: Beginning inventory 600 units at $4 First purchase 900 units at $6 Second purchase 500 units at $7.20 Assume that Waldrip uses a periodic inventory system and that there are 700 units left at the end of the month. Instructions Compute each of the following under the average-cost method: (a) Cost of ending inventory. (b) Cost of goods sold. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 192 Shanrock Company uses the periodic inventory method and had the following inventory information available: Units Unit Cost Total Cost 1/1 Beginning Inventory 100 $4 $ 400 1/20 Purchase 400 $6 2,400 7/25 Purchase 200 $7 1,400 10/20 Purchase 300 $8 2,400 1,000 $6,600 A physical count of inventory on December 31 revealed that there were 400 units on hand. Instructions Answer the following independent questions and show computations supporting your answers. 1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________. 2. Assume that the company uses the Average-Cost method. The value of the ending inventory on December 31 is $__________. 3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________. 4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less? , LO: 2, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 193 Lester Company sells many products. Hackenberry is one of its popular items. Below is an analysis of the inventory purchases and sales of Hackenberry for the month of March. Lester Company uses the periodic inventory system. Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 $40 3/3 Purchase 60 $50 3/4 Sales 70 $80 3/10 Purchase 200 $55 3/16 Sales 80 $90 3/19 Sales 60 $90 3/25 Sales 40 $90 3/30 Purchase 40 $65 Instructions (a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations) (b) Using the weighted average method, calculate the amount assigned to the inventory on hand on March 31. (Show computations) (c) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations) , LO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 194 Gray Company uses the periodic inventory system to account for inventories. Information related to Gray Company's inventory at October 31 is given below: October 1 Beginning inventory 400 units @ $9.80 = $ 3,920 8 Purchase 800 units @ $10.40 = 8,320 16 Purchase 600 units @ $10.80 = 6,480 24 Purchase 200 units @ $11.80 = 2,360 Total units and cost 2,000 units $21,080 Instructions 1. Show computations to value the ending inventory using the FIFO cost assumption if 550 units remain on hand at October 31. 2. Show computations to value the ending inventory using the weighted-average cost method if 550 units remain on hand at October 31. 3. Show computations to value the ending inventory using the LIFO cost assumption if 550 units remain on hand at October 31. , LO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 195 Ford Co. uses a periodic inventory system. Its records show the following for the month of May, in which 75 units were sold. Units Unit Cost Total Cost May 1 Inventory 35 $ 8 $ 280 15 Purchases 30 12 360 24 Purchases 40 13 520 Totals 105 $1,160 Instructions Compute the ending inventory at May 31 and cost of goods sold using the FIFO and LIFO methods. Prove the amount allocated to cost of goods sold under each method. , LO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 196 Washington Bottom Company reports the following for the month of June. Units Unit Cost Total Cost June 1 Inventory 300 $5 $1,500 12 Purchase 450 6 2,700 23 Purchase 750 8 6,000 30 Inventory 180 Instructions (a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO and (2) LIFO. (b) Compute the cost of the ending inventory and the cost of goods sold using the average-cost method. , LO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 197 Queen Company is in the electronics industry and the price it pays for inventory is decreasing. Instructions Indicate which inventory method will: a. provide the highest ending inventory. b. provide the highest cost of goods sold. c. result in the highest net income. d. result in the lowest income tax expense. e. produce the most stable earnings over several years. , LO: 3, Bloom: C, Difficulty: Easy, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Quantitative Methods Ex. 198 Vance Company reported the following summarized annual data at the end of 2014: Sales revenue $1,000,000 Cost of goods sold* 600,000 Gross margin 400,000 Operating expenses 250,000 Income before income taxes $ 150,000 *Based on an ending FIFO inventory of $250,000. The income tax rate is 40%. The controller of the company is considering a switch from FIFO to LIFO. He has determined that on a LIFO basis, the ending inventory would have been $180,000. Instructions (a) Restate the summary information on a LIFO basis. (b) What effect, if any, would the proposed change have on Vance’s income tax expense, net income, and cash flows? (c) If you were an owner of this business, what would your reaction be to this proposed change? , LO: 3, Bloom: E, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 199 Compute the lower-of-cost-or-market valuation for Gantner Company's total inventory based on the following: Inventory Categories Cost Data Market Data A $18,000 $16,900 B 13,900 14,600 C 21,000 20,500 , LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Ex. 200 The controller of Alt Company is applying the lower-of-cost-or-market basis of valuing its ending inventory. The following information is available: Cost Market Lawnmowers: Self-propelled $14,800 $17,000 Push type 19,000 18,000 Total 33,800 35,000 Snowblowers: Manual 29,800 31,000 Self-start 19,000 21,000 Total 48,800 52,000 Total inventory $82,600 $87,000 Instructions Compute the value of the ending inventory by applying the lower-of-cost-or-market basis. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Ex. 201 Nolen Company is preparing the annual financial statements dated December 31, 2014. Information about inventory stocked for regular sale follows: Quantity Unit Cost Replacement Cost Item on Hand When Acquired (market) at year end A 50 $20 $19 B 100 45 45 C 20 59 62 D 40 40 36 Instructions Compute the valuation for the December 31, 2014, inventory using the lower-of-cost-or-market basis. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Foley Company applied FIFO to its inventory and got the following results for its ending inventory. DVRs 140 units at a cost per unit of $59 DVD players 210 units at a cost per unit of $75 iPods 175 units at a cost per unit of $80 The cost of purchasing units at year-end was DVRs $71, DVD players $68, and iPods $78. Instructions Determine the amount of ending inventory at lower-of-cost-or-market. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 203 Morton Watch Company reported the following income statement data for a 2-year period. 2014 2015 Sales revenue $260,000 $320,000 Cost of goods sold Beginning inventory 32,000 44,000 Cost of goods purchased 193,000 225,000 Cost of goods available for sale 225,000 269,000 Ending inventory 44,000 57,000 Cost of goods sold 181,000 212,000 Gross profit $ 79,000 $108,000 Mortan uses a periodic inventory system. The inventories at January 1, 2014, and December 31, 2015, are correct. However, the ending inventory at December 31, 2014, was overstated $5,000. Instructions (a) Prepare correct income statement data for the 2 years. (b) What is the cumulative effect of the inventory error on total gross profit for the 2 years? , LO: 5, Bloom: AN, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 204 Wellington Company reported net income of $60,000 in 2014 and $80,000 in 2015. However, ending inventory was overstated by $7,000 in 2014. Instructions Compute the correct net income for Wellington Company for 2014 and 2015. , LO: 5, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 205 For each of the independent events listed below, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item. Code: O = item is overstated U = item is understated NA = item is not affected Events Items Assets Owner’s Equity Cost of Goods Sold Net Income 1. A physical count of goods on hand at the end of the current year resulted in some goods being counted twice. 2. The ending inventory in the previous period was overstated. 3. Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31. 4. Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31. 5. The internal auditors discovered that the ending inventory in the previous period was understated $17,000 and that the ending inventory in the current period was overstated $27,000. , LO: 5, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 206 Baden's Hardware Store prepared the following analysis of cost of goods sold for the previous three years: 2013 2014 2015 Beginning inventory 1/1 $40,000 $18,000 $25,000 Cost of goods purchased 50,000 55,000 70,000 Cost of goods available for sale 90,000 73,000 95,000 Ending inventory 12/31 18,000 25,000 40,000 Cost of goods sold $72,000 $48,000 $55,000 Net income for the years 2013, 2014, and 2015 was $70,000, $60,000, and $55,000, respectively. Since net income was consistently declining, Mr. Baden hired a new accountant to investigate the cause(s) for the declines. The accountant determined the following: 1. Purchases of $25,000 were not recorded in 2013. 2. The 2013 December 31 inventory should have been $24,000. 3. The 2014 ending inventory included inventory costing $5,000 that was purchased FOB destination and in transit at year end. 4. The 2015 ending inventory did not include goods costing $4,000 that were shipped on December 29 to Sampson Plumbing Company, FOB shipping point. The goods were still in transit at the end of the year. Instructions Determine the correct net income for each year. (Show all computations.) , LO: 5, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 207 Galena Pharmacy reported cost of goods sold as follows: 2014 2015 Beginning inventory $ 54,000 $ 64,000 Cost of goods purchased 847,000 891,000 Cost of goods available for sale 901,000 955,000 Ending inventory 64,000 55,000 Cost of goods sold $837,000 $900,000 Jim Holt, the bookkeeper, made two errors: (1) 2014 ending inventory was overstated by $7,000. (2) 2015 ending inventory was understated by $16,000. Instructions Assuming the errors had not been corrected, indicate the dollar effect that the errors had on the items appearing on the financial statements listed below. Also indicate if the amounts are overstated (O) or understated (U). 2014 2015 Overstated/ Overstated/ Amount Understated Amount Understated Total assets $_________ _______ $_________ _______ Owner’s equity $_________ _______ $_________ _______ Cost of goods sold $_________ _______ $_________ _______ Net income $_________ _______ $_________ _______ , LO: 5, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 208 This information is available for Eaton's Photo Corporation for 2014 and 2015. 2014 2015 Beginning inventory $ 200,000 $ 300,000 Ending inventory 300,000 380,000 Cost of goods sold 1,150,000 1,330,000 Sales revenue 1,600,000 1,900,000 Instructions Calculate inventory turnover, days in inventory, and gross profit rate for Eaton's Photo Corporation for 2014 and 2015. Comment on any trends. , LO: 6, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 209 The following information is available for Heller Company: Beginning inventory $ 60,000 Cost of goods sold 640,000 Ending inventory 100,000 Sales revenue 1,000,000 Instructions Compute each of the following: (a) Inventory turnover. (b) Days in inventory. , LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting aEx. 210 Winsor Company uses the perpetual inventory system and the LIFO method. The following information is available for the month of May: May 1 Beginning inventory 20 units @ $5 10 Purchase 20 units @ $8 15 Sales 15 units 18 Purchase 10 units @ $9 21 Sales 15 units 30 Purchase 10 units @ $10 Instructions Prepare a schedule to show cost of goods sold and the value of the ending inventory for the month of May. , LO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting aEx. 211 Norris Company uses the perpetual inventory system and had the following purchases and sales during March. Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 $40 3/3 Purchase 60 $50 3/4 Sales 70 $80 3/10 Purchase 200 $55 3/16 Sales 80 $90 3/19 Purchase 40 $60 3/25 Sales 120 $90 Ex. 211 (Cont.) Instructions Using the inventory and sales data above, calculate the value assigned to cost of goods sold in March and to the ending inventory at March 31 using (a) FIFO and (b) LIFO. , LO: 7, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting aEx. 212 Shoemaker Department Store prepares monthly financial statements but only takes a physical count of merchandise inventory at the end of the year. The following information has been developed for the month of July: At Cost At Retail Beginning inventory $ 30,000 $ 50,000 Merchandise purchases 99,000 150,000 The net sales for July amounted to $142,000. Instructions Use the retail inventory method to estimate the ending inventory at cost for July. Show all computations to support your answer. , LO: 8, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting aEx. 193 Agler Company suffered a loss of its inventory on March 28 due to a fire in its warehouse. As a basis for filing a claim with its insurance company, Agler Company developed the following information: March net sales through March 28 $350,000 Beginning Inventory, March 1 100,000 Merchandise purchases through March 28 180,000 The company has experienced an average gross profit rate of 35% in the past and this rate appears to be appropriate in the current period. Instructions Using the gross profit method, prepare an estimate of the cost of the inventory destroyed by fire on March 28. Show all computations in good form. , LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting aEx. 214 The inventory of columbo Company was destroyed by fire on April 1. From an examination of the accounting records, the following data for the first three months of the year are obtained: Sales Revenue $185,000 Sales Returns and Allowances 5,000 Purchases 110,000 Freight-In 3,500 Purchase Returns and Allowances 4,000 Instructions Determine the merchandise lost by fire, assuming a beginning inventory of $50,000 and a gross profit rate of 40% on net sales. , LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting aEx. 215 Talkington Rae Company reports goods available for sale at cost, $76,800. Beginning inventory at retail is $40,000 and goods purchased during the period at retail were $80,000. Sales for the period amounted to $85,000. Instructions Determine the estimated cost of the ending inventory using the retail inventory method. , LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting COMPLETION STATEMENTS 216. Accounting for inventories is important because inventories affect the ______________ section of the balance sheet and the ______________ section on the income statement. 217. In a manufacturing company, goods that are ready to be sold to customers are referred to as ________________, whereas in a merchandising company they are generally referred to as _______________. 218. The cost of goods purchased during a period plus the beginning inventory is the amount of goods ________________ during the period. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 219. Inventoriable costs are allocated to ______________ and cost of goods ____________. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 220. It is generally recognized that a major objective of accounting for inventory is the proper determination of ______________. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 221. The ______________ method tracks the actual physical flow of each unit of inventory available for sale; however, management may be able to manipulate ______________ by using this method. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 222. If the unit cost of inventory has continuously increased, the ______________, first-out inventory valuation method will result in a higher valued ending inventory than if the ______________, first-out method had been used. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 223. The lower-of-cost-or-market basis of accounting for inventories should be applied when the ______________ cost of the goods is lower than its cost. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic 224. ______________ is calculated as cost of goods sold divided by average inventory. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic a225. Two widely used methods of estimating inventories are the ______________ method and the _____________ method. , LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic MATCHING 226. Match the items below by entering the appropriate code letter in the space provided. A. Merchandise Inventory F. First-in, first-out (FIFO) method B. Work in process G. Last-in, first-out (LIFO) method C. FOB shipping point H. Average-cost method D. FOB destination I. Inventory turnover E. Specific identification method J. Current replacement cost 1. Measures the number of times the inventory sold during the period. 2. Tracks the actual physical flow for each inventory item available for sale. 3. Goods that are only partially completed in a manufacturing company. 4. Cost of goods sold consists of the most recent inventory purchases. 5. Goods ready for sale to customers by retailers and wholesalers. 6. Title to the goods transfers when the public carrier accepts the goods from the seller. 7. Ending inventory valuation consists of the most recent inventory purchases. 8. The same unit cost is used to value ending inventory and cost of goods sold. 9. Title to goods transfers when the goods are delivered to the buyer. 10. The amount that would be paid at the present time to acquire an identical item. , LO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting SHORT-ANSWER ESSAY QUESTIONS S-A E 227 FIFO and LIFO are the two most common cost flow assumptions made in costing inventories. The amounts assigned to the same inventory items on hand may be different under each cost flow assumption. If a company has no beginning inventory, explain the difference in ending inventory values under the FIFO and LIFO cost bases when the price of inventory items purchased during the period have been (1) increasing, (2) decreasing, and (3) remained constant. , LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic S-A E 228 In a period of rising prices, the inventory reported in Crawford Company's balance sheet is close to the current cost of the inventory. Breland Company's inventory is considerably below its current cost. Identify the inventory cost flow method being used by each company. Which company has probably been reporting the higher gross profit? , LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic S-A E 229 Errors occasionally occur when physically counting inventory items on hand. Identify the financial statement effects of an overstatement of the ending inventory in the current period. If the error is not corrected, how does it affect the financial statements for the following year? , LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic S-A E 230 A survey of major U.S. companies revealed that 77% of those companies used either LIFO or FIFO cost flow methods, while 19% used average cost, and only 4% used other methods. Required: Provide brief, yet concise responses to the following questions. a. Why are LIFO and FIFO so popular? b. Since computers and inventory management software are readily available, why aren’t more companies using specific identification? , LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic S-A E 231 Your former college roommate is opening a new retail store and asks you “Which inventory costing method should I use?” What is your response? Include a comparison of the tax effect, balance sheet effect, and income statement effect for FIFO versus LIFO. , LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic S-A E 232 Robert Tingle is studying for the next accounting mid-term examination. What should Robert know about (a) departing from the cost basis of accounting for inventories and (b) the meaning of "market" in the lower-of-cost-or-market method? , LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic S-A E 233 (Ethics) Glenda Good and Danny Rock are department managers in the house wares and shoe departments, respectively, for Litwins, a large department store. Danny has observed Glenda taking inventory from her own department home, apparently without paying for it. He hesitates confronting Glenda because he is due to be promoted, and needs Glanda's recommendation. He also does not want to notify the company management directly, because he doesn't want an ethics investigation on his record, believing that it will give him a “goody-goody” image. This week, Glenda tried on several pairs of expensive running shoes in his department before finding a pair that suited her. She did not, however, buy them. That very pair was missing this morning. Litwins recently replaced its old periodic inventory system with a perpetual inventory system using scanners and bar codes. In addition, the annual inventory is to be replaced by a monthly inventory conducted by an independent firm. On hearing the news of the changes, Danny relaxes. "The system will catch Glenda now," he says to himself. Required: 1. Is Danny's attitude justified? Why or why not? 2. What, if any, action should Danny take now? , LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Internal Controls S-A E 234 (Communication) Frank Jeffries, a new employee of Stine Company, recorded $1,000 in consigned goods received as part of the firm's inventory. The goods were received one day after the end of the fiscal period, but Frank reasoned that the goods should be included in inventory sooner because Stine paid the freight. The mistake was brought to his attention by the purchasing department who said the goods should not have been recorded as Stine inventory at all. Frank told Sara Janik, the purchasing supervisor, that nobody needed to worry, because the mistake would cancel itself out the following month. In Frank opinion, there was no reason to get everyone excited over nothing, especially since it was monthly, and not annual, financial statements that were affected. Sara Janik has reported the problem to the accounting department. Required: You are Frank's supervisor. Write a memo to Frank explaining why the error should have been corrected. , LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: FSA