Financial Accounting Information for Decisions John Wild 9e - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Financial Accounting, 9e (Wild) Chapter 5 Reporting and Analyzing Inventories 1) Goods in transit are automatically included in inventory regardless of whether title has passed to …
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Financial Accounting Information for Decisions John Wild 9e – Test Bank
Instant Download – Complete Test Bank With Answers
Sample Questions Are Posted Below
Financial Accounting, 9e (Wild)
Chapter 5 Reporting and Analyzing Inventories
1) Goods in transit are automatically included in inventory regardless of whether title has passed to the buyer.
Answer: FALSE
Difficulty: 1 Easy
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
2) Goods on consignment are goods shipped by their owner, called the consignor, to another party called the consignee. The consignee sells goods for the owner.
Answer: TRUE
Difficulty: 2 Medium
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Decision Making
3) If obsolete or damaged goods can be sold, they will be included in inventory at their original cost.
Answer: FALSE
Difficulty: 1 Easy
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
4) If the seller is responsible for paying freight charges, then ownership of inventory passes when goods arrive at their destination.
Answer: TRUE
Difficulty: 1 Easy
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making
5) Net realizable value for damaged or obsolete goods is sales price less the cost of making the sale.
Answer: TRUE
Difficulty: 1 Easy
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
6) The cost of an inventory item includes its invoice cost minus any discount, plus any added or incidental costs necessary to put it in a place and condition for sale.
Answer: TRUE
Difficulty: 1 Easy
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
7) One application of internal control when taking a physical count of inventory is the use of pre-numbered inventory tickets.
Answer: TRUE
Difficulty: 1 Easy
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
8) Incidental costs for acquiring merchandise inventory, such as import duties, freight, storage, and insurance, should not be added to the cost of inventory.
Answer: FALSE
Difficulty: 1 Easy
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
9) The Inventory account is a controlling account for the inventory subsidiary ledger that contains a separate record for each separate product.
Answer: TRUE
Difficulty: 1 Easy
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making
10) Most companies do not take a physical count of inventory each year, but rather rely on inventory records to determine the inventory value.
Answer: FALSE
Difficulty: 1 Easy
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
11) The expense recognition (matching) principle is used to determine how much of the cost of goods available for sale is deducted from sales and how much is carried forward as inventory.
Answer: TRUE
Difficulty: 1 Easy
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
12) The consistency concept allows a company to use different accounting methods from period to period in order to maximize profits.
Answer: FALSE
Difficulty: 1 Easy
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
13) A company must disclose any change in its inventory costing method in its financial statements.
Answer: TRUE
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
14) Whether purchase costs are rising or falling, FIFO always will yield the highest gross profit and net income.
Answer: FALSE
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
15) An advantage of the weighted average inventory method is that it tends to smooth out erratic changes in costs.
Answer: TRUE
Difficulty: 1 Easy
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Remember
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
16) In a period of rising purchase costs, LIFO usually gives a lower taxable income and therefore, yields a tax advantage.
Answer: TRUE
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
17) In a period of rising purchase costs, FIFO usually gives a higher cost of goods sold, lower taxable income and therefore, yields a tax advantage.
Answer: FALSE
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
18) FIFO is preferred when purchase costs are rising and managers have incentives to report higher income for reasons such as bonus plans, job security, and reputation.
Answer: TRUE
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
19) The LIFO method of inventory valuation can result in a company’s ending inventory being valued at less than the inventory’s replacement cost because LIFO inventory leaves the oldest costs in inventory.
Answer: TRUE
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
20) The full disclosure principle requires that the notes to the financial statements report any change in the method of accounting for inventory.
Answer: TRUE
Difficulty: 1 Easy
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Reporting
21) An advantage of FIFO is that it assigns the most recent costs to cost of goods sold, and does a better job of matching current costs with revenues on the income statement.
Answer: FALSE
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
22) According to IRS guidelines, companies may use FIFO for financial reporting and LIFO for tax reporting.
Answer: FALSE
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
23) The IRS requires that when LIFO is used for tax reporting, it must also be used for financial reporting.
Answer: TRUE
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
24) An error in the period-end inventory balance will cause an error in the calculation of cost of goods sold.
Answer: TRUE
Difficulty: 2 Medium
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
25) Errors in the period-end inventory balance only affect the current period’s records and financial statements.
Answer: FALSE
Difficulty: 1 Easy
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Remember
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
26) An inventory error is sometimes said to be self-correcting because it yields an offsetting error in the next period.
Answer: TRUE
Difficulty: 1 Easy
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
27) An understatement of the ending inventory balance will overstate cost of goods sold and understate net income.
Answer: TRUE
Difficulty: 2 Medium
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
28) Overstating beginning inventory will understate cost of goods sold and net income.
Answer: FALSE
Difficulty: 2 Medium
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
29) An understatement of ending inventory will cause an understatement of assets and equity on the balance sheet.
Answer: TRUE
Difficulty: 2 Medium
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
30) An overstatement of ending inventory will cause an overstatement of assets and an understatement of equity on the balance sheet.
Answer: FALSE
Difficulty: 2 Medium
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
31) A merchandiser’s ability to pay its short-term obligations depends on many factors including how quickly it sells its merchandise inventory.
Answer: TRUE
Difficulty: 1 Easy
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Risk Analysis
32) The inventory turnover ratio is computed by dividing cost of goods sold by average merchandise inventory.
Answer: TRUE
Difficulty: 1 Easy
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Risk Analysis
33) The days’ sales in inventory ratio is computed by dividing ending inventory by cost of goods sold and multiplying the result by 365.
Answer: TRUE
Difficulty: 1 Easy
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Risk Analysis
34) The simple rule for inventory turnover is that a low ratio is preferable.
Answer: FALSE
Difficulty: 1 Easy
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Risk Analysis
35) It can be expected that companies selling perishable goods have a higher inventory turnover than companies selling nonperishable goods.
Answer: TRUE
Difficulty: 1 Easy
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Risk Analysis
36) A company’s cost of goods sold was $15,500 and its average merchandise inventory was $4,500. Its inventory turnover equals 3.4.
Answer: TRUE
Explanation: Inventory Turnover = Cost of Goods Sold/Average Merchandise Inventory
Inventory Turnover = $15,500/$4,500 = 3.4
Difficulty: 3 Hard
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis
37) Underwood had cost of goods sold of $8 million and its ending inventory was $2 million. Therefore, its days’ sales in inventory equals 25 days.
Answer: FALSE
Explanation: Days’ Sales in Inventory = Ending Inventory/Cost of Goods Sold × 365
Days’ Sales in Inventory = $2/$8 × 365 = 91 days
Difficulty: 3 Hard
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis
38) Determining the unit costs assigned to inventory items is one of the most important decisions in accounting for inventory.
Answer: TRUE
Difficulty: 1 Easy
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
39) When units are purchased at different costs over time, determining the cost per unit assigned to inventory items is simple.
Answer: FALSE
Difficulty: 1 Easy
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
40) LIFO assumes that inventory costs flow in the order incurred.
Answer: FALSE
Difficulty: 2 Medium
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
41) FIFO assumes that inventory costs flow in the order incurred.
Answer: TRUE
Difficulty: 2 Medium
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
42) The assignment of costs to cost of goods sold and inventory using weighted average usually yields different results depending on whether a perpetual or periodic system is used.
Answer: TRUE
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System; Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.; 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
43) The assignment of costs to cost of goods sold and inventory using FIFO usually yields different results depending on whether a perpetual or periodic system is used.
Answer: FALSE
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System; Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.; 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
44) The FIFO inventory method assumes that costs for the latest units purchased are the first to be charged to the cost of goods sold.
Answer: FALSE
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
45) The costs of goods purchased will vary under the different inventory methods of specific identification, FIFO, LIFO, and weighted average.
Answer: FALSE
Difficulty: 2 Medium
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
46) The assignment of costs to the cost of goods sold and to ending inventory using FIFO is the same for both the perpetual and periodic inventory systems.
Answer: TRUE
Difficulty: 1 Easy
Topic: Inventory Costing Under a Periodic System; Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.; 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Remember
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
47) Under FIFO, the most recent costs are assigned to ending inventory.
Answer: TRUE
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
48) Under LIFO, the most recent costs are assigned to ending inventory.
Answer: FALSE
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
49) The choice of an inventory valuation method has little to no impact on gross profit and cost of sales.
Answer: FALSE
Difficulty: 1 Easy
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Remember
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
50) In applying the lower of cost or market method to inventory valuation, market is defined as the current replacement cost.
Answer: TRUE
Difficulty: 1 Easy
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
51) In applying the lower of cost or market method to inventory valuation, market is defined as the current selling price.
Answer: FALSE
Difficulty: 2 Medium
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
52) A company has inventory with a selling price of $451,000, a market value of $223,000 and a cost of $241,000. According to the lower of cost or market, the inventory should be written down to $223,000.
Answer: TRUE
Difficulty: 2 Medium
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
53) The lower of cost or market rule for inventory valuation is always applied to individual units separately rather than to major categories of inventory or to the entire inventory.
Answer: FALSE
Difficulty: 1 Easy
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Remember
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
54) Accounting principles require that inventory be reported at the market value (cost) of replacing inventory when cost is lower than market value.
Answer: FALSE
Difficulty: 1 Easy
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
55) Accounting principles require that inventory be reported at the market value (cost) of replacing inventory when market value is lower than cost.
Answer: TRUE
Difficulty: 2 Medium
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
56) A company’s total cost of inventory was $329,000 and its current replacement cost is $307,000. Under the lower cost or market, the amount reported should be $329,000.
Answer: FALSE
Difficulty: 2 Medium
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
57) A company’s cost of inventory was $219,500. Due to phenomenal demand the market value of its inventory increased to $221,700. This company should record the inventory at its market value.
Answer: FALSE
Difficulty: 2 Medium
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
58) When LIFO is used with the periodic inventory system, cost of goods sold is assigned costs from the most recent purchases at the point of each sale, rather than from the most recent purchases for the period.
Answer: FALSE
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
59) The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to net sales.
Answer: FALSE
Difficulty: 1 Easy
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
60) The reasoning behind the retail inventory method is that if we can get a good estimate of the cost-to-retail ratio, we can multiply ending inventory at retail by this ratio to estimate ending inventory at cost.
Answer: TRUE
Difficulty: 1 Easy
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
61) The reliability of the gross profit method depends on a good estimate of the gross profit ratio.
Answer: TRUE
Difficulty: 1 Easy
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
62) In the retail inventory method of inventory valuation, the retail amount of inventory refers to its dollar amount measured using selling prices of inventory items.
Answer: TRUE
Difficulty: 1 Easy
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
63) To avoid the time-consuming process of taking an inventory each year, most companies use the gross profit method to estimate ending inventory.
Answer: FALSE
Difficulty: 2 Medium
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
64) Using the retail inventory method, if the cost to retail ratio is 70% and ending inventory at retail is $145,000, then estimated ending inventory at cost is $207,143.
Answer: FALSE
Explanation: $145,000 × 0.70 = $101,500
Difficulty: 3 Hard
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
65) Damaged and obsolete goods that can be sold:
Answer: C
Difficulty: 1 Easy
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
66) Merchandise inventory includes:
Answer: A
Difficulty: 2 Medium
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
67) Goods in transit are included in a purchaser’s inventory:
Answer: B
Difficulty: 2 Medium
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
68) Consignment goods are:
Answer: A
Difficulty: 2 Medium
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
69) Regardless of the inventory costing system used, cost of goods available for sale must be allocated at the end of the period between
Answer: D
Difficulty: 2 Medium
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
70) On December 31 of the current year, Plunkett Company reported an ending inventory balance of $215,000. The following additional information is also available:
Based on the above information, the amount that Plunkett should report in ending inventory on December 31 is:
Answer: E
Explanation: Start with beginning inventory of $215,000. The information in the first bullet point was handled correctly. No adjustment is needed for that merchandise. For the second bullet point, the $44,000 of goods should not have been included in ending inventory since the goods were shipped FOB destination. Subtract $44,000. For the third bullet point, ending inventory should not include goods held on consignment from another company. Subtract $15,000. The information in the fourth bullet point was handled correctly. No adjustment is needed. $215,000 − $44,000 − $15,000 = $156,000.
Difficulty: 3 Hard
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
71) Bedrock Company reported a December 31 ending inventory balance of $412,000. The following additional information is also available:
Based on this information, the correct balance for ending inventory on December 31 is:
Answer: E
Explanation: Start with beginning inventory of $412,000. The information in the first bullet point was handled correctly since inventory should include consigned goods for which the subject company is the consignor. No adjustment. With respect to the second bullet point, inventory should not include office supplies held for use. Subtract $22,000. Ending inventory should be $412,000 − $22,000 = $390,000.
Difficulty: 2 Medium
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
72) Buffalo Company reported a December 31 ending inventory balance of $412,000. The following additional information is also available:
Based on this information, the correct balance for ending inventory on December 31 is:
Answer: B
Explanation: Start with beginning inventory of $412,000. The information in the first bullet point was handled correctly since inventory should not include goods shipped FOB destination that have not yet been received by the buyer. With respect to the second bullet point, damaged goods should not be included in inventory at their original cost if the net realizable value is materially below cost. Subtract $28,000 ($38,000 − $10,000). Ending inventory should be $412,000 − $28,000 = $384,000.
Difficulty: 2 Medium
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
73) Costs included in the Merchandise Inventory account can include all of the following except:
Answer: E
Difficulty: 1 Easy
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Remember
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
74) Internal controls that should be applied when a business takes a physical count of inventory should include all of the following except:
Answer: E
Difficulty: 2 Medium
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis
75) Physical counts of inventory:
Answer: B
Difficulty: 2 Medium
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis
76) During a period of steadily rising costs, the inventory valuation method that yields the highest reported net income is:
Answer: D
Difficulty: 1 Easy
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
77) The inventory valuation method that tends to smooth out erratic changes in costs is:
Answer: B
Difficulty: 1 Easy
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
78) The inventory valuation method that has the advantages of assigning an amount to inventory on the balance sheet that approximates its current cost, and also mimics the actual flow of goods for most businesses is:
Answer: A
Difficulty: 1 Easy
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
79) The inventory valuation method that results in the lowest taxable income in a period of inflation is the:
Answer: A
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
80) The inventory valuation method that results in the highest taxable income in a period of inflation is the:
Answer: B
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
81) The U.S. tax code requires:
Answer: D
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
82) Companies can and often do use different costing methods for financial reporting and tax reporting. An exception to this is the:
Answer: D
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
83) Which of the following inventory costing methods will always result in the same values for ending inventory and cost of goods sold regardless of whether a perpetual or periodic inventory system is used?
Answer: C
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
84) If a period-end inventory amount is reported in error, it can cause a misstatement in all of the following except:
Answer: C
Difficulty: 2 Medium
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
85) Since an error in the period-end inventory causes an offsetting error in the next period:
Answer: B
Difficulty: 1 Easy
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
86) The understatement of the ending inventory balance causes:
Answer: A
Difficulty: 2 Medium
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
87) The overstatement of the ending inventory balance causes:
Answer: D
Difficulty: 2 Medium
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
88) The understatement of the beginning inventory balance causes:
Answer: B
Difficulty: 2 Medium
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
89) The overstatement of the beginning inventory balance causes:
Answer: D
Difficulty: 2 Medium
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
90) Lucia Company reported cost of goods sold for Year 1 and Year 2 as follows:
| Year 1 | Year 2 | |||||
| Beginning inventory | $ | 120,000 | $ | 130,000 | ||
| Cost of goods purchased | 250,000 | 275,000 | ||||
| Cost of goods available for sale | 370,000 | 405,000 | ||||
| Ending inventory | 130,000 | 135,000 | ||||
| Cost of goods sold | $ | 240,000 | $ | 270,000 |
Lucia Company made two errors: 1) ending inventory at the end of Year 1 was understated by $15,000 and 2) ending inventory at the end of Year 2 was overstated by $6,000. Given this information, the correct cost of goods sold figure for Year 2 would be:
Answer: A
Explanation: If ending inventory for Year 1 was reported at $130,000 but was understated by $15,000, the correct ending inventory figure for Year 1 was $145,000. That amount becomes the beginning inventory for Year 2. Add to that amount the $275,000 of cost of goods purchased in Year 2 and you get cost of goods available for sale of $420,000. Finally, the reported ending inventory figure for Year 2 of $135,000 was overstated by $6,000. Thus, the correct ending inventory figure for Year 2 was $129,000. Subtracting ending inventory of $129,000 from cost of goods available for sale of $420,000 yields cost of goods sold of $291,000.
Difficulty: 3 Hard
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
91) Hull Company reported the following income statement information for the current year:
| Sales | $ | 410,000 | |
| Cost of goods sold: | |||
| Beginning inventory | $ | 132,000 | |
| Cost of goods purchased | 273,000 | ||
| Cost of goods available for sale | 405,000 | ||
| Ending inventory | 144,000 | ||
| Cost of goods sold | 261,000 | ||
| Gross profit | $ | 149,000 |
The beginning inventory balance is correct. However, the ending inventory figure was overstated by $20,000. Given this information, the correct gross profit would be:
Answer: C
Explanation: If ending inventory of $144,000 was overstated by $20,000, the correct amount of ending inventory was $124,000. As a result, cost of goods sold was not $261,000 as reported, but rather $281,000. Thus, gross profit was $129,000 (Sales of $410,000 − Cost of Goods Sold of $281,000).
Difficulty: 2 Medium
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
92) An understatement of ending inventory will cause
Answer: B
Difficulty: 2 Medium
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
93) The inventory turnover ratio:
Answer: C
Difficulty: 2 Medium
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis
94) Days’ sales in inventory:
Answer: A
Difficulty: 2 Medium
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis
95) The inventory turnover ratio is calculated as:
Answer: A
Difficulty: 1 Easy
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Remember
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis
96) Days’ sales in inventory is calculated as:
Answer: C
Difficulty: 1 Easy
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Remember
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis
97) Giorgio had cost of goods sold of $9,421 million, ending inventory of $2,089 million, and average inventory of $1,965 million. Its inventory turnover equals:
Answer: C
Explanation: Inventory Turnover = Cost of Goods Sold/Average Inventory
Inventory Turnover = $9,421/$1,965 = 4.79 times
Difficulty: 2 Medium
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis
98) Perfection Company had cost of goods sold of $853,000, ending inventory of $70,500, and average inventory of $71,600. Its inventory turnover equals:
Answer: A
Explanation: Inventory Turnover = Cost of Goods Sold/Average Inventory
Inventory Turnover = $853,000/$71,600 = 11.9 times
Difficulty: 2 Medium
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis
99) Beckenworth had cost of goods sold of $9,421 million, ending inventory of $2,089 million, and average inventory of $1,965 million. Its days’ sales in inventory equals: (Use 365 days a year.)
Answer: E
Explanation: Days’ Sales in Inventory = Ending Inventory/Cost of Goods Sold × 365
Days’ Sales in Inventory = $2,089/$9,421 × 365 = 80.9 days
Difficulty: 3 Hard
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis
100) Ulrich had cost of goods sold of $6.7 million, ending inventory of $2.2 million, and average inventory of $1.9 million. Its days’ sales in inventory equals:
Answer: A
Explanation: Days’ Sales in Inventory = Ending Inventory/Cost of Goods Sold × 365
Days’ Sales in Inventory = $2.2/$6.7 × 365 = 120 days
Difficulty: 3 Hard
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis
101) Acceptable methods of assigning specific costs to inventory and cost of goods sold include all of the following except:
Answer: E
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making
102) Decisions management must make in accounting for inventory cost include all of the following except:
Answer: C
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Decision Making
103) The inventory valuation method that identifies each item in ending inventory with a specific purchase and invoice is the:
Answer: D
Difficulty: 1 Easy
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making
104) A company had the following purchases during its first year of operations:
| Purchases | |
| January: | 10 units at $120 |
| February: | 20 units at $130 |
| May: | 15 units at $140 |
| September: | 12 units at $150 |
| November: | 10 units at $160 |
On December 31, there were 26 units remaining in ending inventory. These 26 units consisted of 2 from January, 4 from February, 6 from May, 4 from September, and 10 from November. Using the specific identification method, what is the cost of the ending inventory?
Answer: B
Explanation:
Ending Inventory
| 2 @ $120 = | $ | 240 | |
| 4 @ $130 = | 520 | ||
| 6 @ $140 = | 840 | ||
| 4 @ $150 = | 600 | ||
| 10 @ $160 = | 1,600 | ||
| 26 units | $ | 3,800 | |
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
105) A company had the following purchases and sales during its first year of operations:
| Purchases | Sales | |
| January: | 10 units at $120 | 6 units |
| February: | 20 units at $125 | 5 units |
| May: | 15 units at $130 | 9 units |
| September: | 12 units at $135 | 8 units |
| November: | 10 units at $140 | 13 units |
On December 31, there were 26 units remaining in ending inventory. Using the Perpetual FIFO inventory valuation method, what is the cost of the ending inventory? (Assume all sales were made on the last day of the month.)
Answer: D
Explanation:
Ending Inventory
| 4 | @ | $130 | = | 520 |
| 12 | @ | $135 | = | 1,620 |
| 10 | @ | $140 | = | 1,400 |
| 26 units | $3,540 | |||
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
106) A company had the following purchases and sales during its first year of operations:
| Purchases | Sales | |
| January: | 10 units at $120 | 6 units |
| February: | 20 units at $125 | 5 units |
| May: | 15 units at $130 | 9 units |
| September: | 12 units at $135 | 8 units |
| November: | 10 units at $140 | 13 units |
On December 31, there were 26 units remaining in ending inventory. Using the Periodic FIFO inventory valuation method, what is the cost of the ending inventory? (Assume all sales were made on the last day of the month.)
Answer: D
Explanation:
Ending Inventory
| 4 | @ | $130 | = | 520 |
| 12 | @ | $135 | = | 1,620 |
| 10 | @ | $140 | = | 1,400 |
| 26 units | $3,540 | |||
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
107) A company had the following purchases and sales during its first year of operations:
| Purchases | Sales | |
| January: | 10 units at $120 | 6 units |
| February: | 20 units at $125 | 5 units |
| May: | 15 units at $130 | 9 units |
| September: | 12 units at $135 | 8 units |
| November: | 10 units at $140 | 13 units |
On December 31, there were 26 units remaining in ending inventory. Using the Perpetual LIFO inventory valuation method, what is the cost of the ending inventory? (Assume all sales were made on the last day of the month.)
Answer: B
Explanation: Ending Inventory
| 4 | @ | $120 | = | 480 |
| 15 | @ | $125 | = | 1,875 |
| 6 | @ | $130 | = | 780 |
| 1 | @ | $135 | = | 135 |
| 0 | @ | $140 | = | 0 |
| 26 units | $3,270 | |||
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
108) A company had the following purchases and sales during its first year of operations:
| Purchases | Sales | |
| January: | 10 units at $120 | 6 units |
| February: | 20 units at $125 | 5 units |
| May: | 15 units at $130 | 9 units |
| September: | 12 units at $135 | 8 units |
| November: | 10 units at $140 | 13 units |
On December 31, there were 26 units remaining in ending inventory. Using the Periodic LIFO inventory valuation method, what is the cost of the ending inventory? (Assume all sales were made on the last day of the month.)
Answer: C
Explanation: Ending Inventory
| 10 | @ | $120 | = | $1,200 |
| 16 | @ | $125 | = | 2,000 |
| 26 units | $3,200 | |||
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
109) A company had the following purchases and sales during its first year of operations:
| Purchases | Sales | |
| January: | 10 units at $120 | 6 units |
| February: | 20 units at $125 | 5 units |
| May: | 15 units at $130 | 9 units |
| September: | 12 units at $135 | 8 units |
| November: | 10 units at $140 | 13 units |
On December 31, there were 26 units remaining in ending inventory. Using the Perpetual FIFO inventory valuation method, what is the value of cost of goods sold? (Assume all sales were made on the last day of the month.)
Answer: D
Explanation:
| 10 | @ | $120 | = | $1,200 |
| 20 | @ | $125 | = | 2,500 |
| 11 | @ | $130 | = | 1,430 |
| 41 units | $5,130 | |||
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
110) A company had the following purchases and sales during its first year of operations:
| Purchases | Sales | |
| January: | 10 units at $120 | 6 units |
| February: | 20 units at $125 | 5 units |
| May: | 15 units at $130 | 9 units |
| September: | 12 units at $135 | 8 units |
| November: | 10 units at $140 | 13 units |
On December 31, there were 26 units remaining in ending inventory. Using the Periodic FIFO inventory valuation method, what is the value of cost of goods sold? (Assume all sales were made on the last day of the month.)
Answer: D
Explanation: Cost of goods sold:
| 10 | @ | $120 | = | $1,200 |
| 20 | @ | $125 | = | 2,500 |
| 11 | @ | $130 | = | 1,430 |
| 41 units | $5,130 | |||
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
111) A company had the following purchases and sales during its first year of operations:
| Purchases | Sales | |
| January: | 10 units at $120 | 6 units |
| February: | 20 units at $125 | 5 units |
| May: | 15 units at $130 | 9 units |
| September: | 12 units at $135 | 8 units |
| November: | 10 units at $140 | 13 units |
On December 31, there were 26 units remaining in ending inventory. Using the Perpetual LIFO inventory valuation method, what is the value of cost of goods sold? (Assume all sales were made on the last day of the month.)
Answer: B
Explanation: Cost goods of sold:
| 6 | @ | $120 | = | $ 720 |
| 5 | @ | $125 | = | 625 |
| 9 | @ | $130 | = | 1,170 |
| 11 | @ | $135 | = | 1,485 |
| 10 | @ | $140 | = | 1,400 |
| 41 units | $5,400 | |||
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
112) A company had the following purchases and sales during its first month of operations:
| January 1 | Purchased 10 units at $4.00 per unit |
| January 9 | Sold 6 units at $12.00 per unit |
| January 17 | Purchased 8 units at $5.50 per unit |
| January 27 | Sold 7 units at $12.00 per unit |
Using the Perpetual weighted average method, what is the value of cost of goods sold? (Round weighted average costs per unit to 2 decimal places.)
Answer: B
Explanation:
Cost of goods sold:
| Average cost per unit | Cost of goods sold | |
| January 1 | $40.00 / 10 units = $4.00 avg. cost | |
| January 9 | 6 units at $4.00 avg. cost = $24.00 | |
| January 17 | ($40.00 – $24.00 + $44.00)/(10 units – 6 units + 8 units) = $60.00/12 units = $5.00 average cost | |
| January 27 | 7 units at $5.00 avg. cost = $35.00 | |
| Ending Inventory | 5 units @ $5.00 avg. cost = $25.00 |
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
113) A company had the following purchases and sales during its first year of operations:
| Purchases | Sales | |
| January: | 10 units at $120 | 6 units |
| February: | 20 units at $125 | 5 units |
| May: | 15 units at $130 | 9 units |
| September: | 12 units at $135 | 8 units |
| November: | 10 units at $140 | 13 units |
On December 31, there were 26 units remaining in ending inventory. Using the Periodic LIFO inventory valuation method, what is the value of cost of goods sold? (Assume all sales were made on the last day of the month.)
Answer: C
Explanation:
Cost of goods sold:
| 4 | @ | $125 | = | $ 500 |
| 15 | @ | $130 | = | 1,950 |
| 12 | @ | $135 | = | 1,620 |
| 10 | @ | $140 | = | 1,400 |
| 41 units | $5,470 | |||
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
114) A company had the following purchases and sales during its first month of operations:
| January 1 | Purchased 10 units at $4.00 per unit |
| January 9 | Sold 6 units at $12.00 per unit |
| January 17 | Purchased 8 units at $5.50 per unit |
| January 27 | Sold 7 units at $12.00 per unit |
Using the Periodic weighted average method, what is the value of cost of goods sold? (Round weighted average cost per unit to 2 decimal places.)
Answer: B
Explanation: Cost of goods sold:
Total cost of goods available for sale = $84 ($40 purchased on January 1 + $44 purchased on January 17)
Total units available for sale = 18 (10 purchased on January 1 + 8 purchased on January 17)
Weighted average cost per unit = Total cost of goods available for sale ÷ Total units available for sale
Weighted average cost per unit = $84 ÷ 18
Weighted average cost per unit = $4.67 per unit
Cost of goods sold = 13 units sold × $4.67 average cost per unit = $60.71
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
115) A company had inventory on November 1 of 5 units at a cost of $20 each. On November 2, they purchased 10 units at $22 each. On November 6 they purchased 6 units at $25 each. On November 8, 8 units were sold for $55 each. Using the LIFO perpetual inventory method, what was the value of the inventory on November 8 after the sale?
Answer: E
Explanation: Units available = 5 + 10 + 6 = 21 units
Units in inventory = 21 − 8 units = 13 units
Cost of inventory = (5 × $20) + (8 × $22) = $276
Difficulty: 3 Hard
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
116) Marquis Company uses a weighted-average perpetual inventory system and has the following purchases and sales:
| August 2 | 10 units were purchased at $12 per unit. |
| August 18 | 15 units were purchased at $14 per unit. |
| August 29 | 12 units were sold. |
What is the amount of the cost of goods sold for this sale? (Round average cost per unit to 2 decimal places.)
Answer: C
Explanation: Average cost = [(10 × $12) + (15 × $14)]/25 units = $13.20/unit
Cost of sale = 12 units × $13.20/unit = $158.40
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
117) Monarch Company uses a weighted-average perpetual inventory system, and has the following purchases and sales:
| January 1 | 20 units were purchased at $10 per unit. |
| January 12 | 12 units were sold. |
| January 20 | 18 units were purchased at $11 per unit. |
What is the value of ending inventory? (Round average cost per unit to 2 decimal places.)
Answer: A
Explanation: Cost of goods sold = 12 units × $10 per unit = $120
Average cost = [(8 × $10) + (18 × $11)]/26 units = $10.69/unit
Ending inventory = 26 units × $10.69/unit = $277.94
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
118) Monarch Company uses a weighted-average perpetual inventory system and has the following purchases and sales:
| January 1 | 20 units were purchased at $10 per unit. |
| January 12 | 12 units were sold. |
| January 20 | 18 units were purchased at $11 per unit. |
What is the value of cost of goods sold?
Answer: E
Explanation: Cost of goods sold = 12 units × $10 per unit = $120
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
119) Eastview Company uses a perpetual LIFO inventory system, and has the following purchases and sales:
| January 1 | 150 units were purchased at $9 per unit. |
| January 17 | 120 units were sold. |
| January 20 | 160 units were purchased at $11 per unit. |
| January 29 | 150 units were sold. |
What is the value of cost of goods sold?
Answer: A
Explanation: Cost of goods sold = (120 units × $9) + (150 units × $11) = $2,730
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
120) Eastview Company uses a perpetual LIFO inventory system, and has the following purchases and sales:
| January 1 | 150 units were purchased at $9 per unit. |
| January 17 | 120 units were sold. |
| January 20 | 160 units were purchased at $11 per unit. |
| January 29 | 150 units were sold. |
What is the value of ending inventory?
Answer: E
Explanation: Ending inventory = (30 units × $9) + (10 units × $11) = $380
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
121) Eastview Company uses a periodic LIFO inventory system, and has the following purchases and sales:
| January 1 | 150 units were purchased at $9 per unit. |
| January 17 | 120 units were sold. |
| January 20 | 160 units were purchased at $11 per unit. |
| January 29 | 150 units were sold. |
What is the value of cost of goods sold?
Answer: B
Explanation: Cost of goods sold = (110 units × $9) + (160 units × $11) = $2,750
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
122) Eastview Company uses a periodic LIFO inventory system, and has the following purchases and sales:
| January 1 | 150 units were purchased at $9 per unit. |
| January 17 | 120 units were sold. |
| January 20 | 160 units were purchased at $11 per unit. |
| January 29 | 150 units were sold. |
What is the value of ending inventory?
Answer: E
Explanation: Ending inventory = (40 units × $9) = $360
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
123) Grays Company has inventory of 10 units at a cost of $10 each on August 1. On August 3, it purchased 20 units at $12 each. 12 units are sold on August 6. Using the perpetual FIFO inventory method, what amount will be reported as cost of goods sold for the 12 units that were sold?
Answer: B
Explanation: (10 units × $10) + (2 × $12) = $124
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
124) McCarthy Company has inventory of 8 units at a cost of $200 each on October 1. On October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the perpetual FIFO inventory method, what amount will be reported as cost of goods sold for the 11 units that were sold?
Answer: E
Explanation: (8 units × $200) + (3 × $205) = $2,215
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
125) McCarthy Company has inventory of 8 units at a cost of $200 each on October 1. On October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the perpetual FIFO inventory method, what is the value of inventory after the October 4 sale?
Answer: A
Explanation: Units in inventory = 8 + 20 − 11 = 17
17 units × $205 = $3,485
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
126) Starlight Company has inventory of 8 units at a cost of $200 each on October 1. On October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the perpetual LIFO inventory method, what amount will be reported in cost of goods sold for the 11 units that were sold?
Answer: B
Explanation: 11 × $205 = $2,255
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
127) Starlight Company has inventory of 8 units at a cost of $200 each on October 1. On October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the perpetual LIFO inventory method, what is the value of inventory after the October 4 sale?
Answer: B
Explanation: Units in inventory = 8 + 20 − 11 = 17
(8 units × $200) × (9 units × $205) = $3,445
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
128) A company’s inventory records report the following:
| August 1 | Beginning balance | 15 units @ $12 |
| August 5 | Purchase | 10 units @ $13 |
| August 12 | Purchase | 20 units @ $14 |
On August 15, it sold 30 units. Using the perpetual FIFO inventory method, what is the value of the inventory at August 15 after the sale?
Answer: C
Explanation: Units available for sale = 15 + 10 + 20 = 45 units
Units in inventory = 45 − 30 = 15 units
Cost of inventory = 15 × $14 each = $210
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
129) A company’s inventory records report the following in November of the current year:
| Beginning | November 1 | 5 units @ $20 |
| Purchase | November 2 | 10 units @ $22 |
| Purchase | November 12 | 6 units @ $25 |
On November 8, it sold 12 units for $54 each. Using the perpetual LIFO inventory method, what was the amount recorded in the cost of goods sold account for the 12 units sold?
Answer: B
Explanation: (2 × $20) + (10 × $22) = $260
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
130) A company’s inventory records report the following in November of the current year:
| Beginning | November 1 | 5 units @ $20 |
| Purchase | November 2 | 10 units @ $22 |
| Purchase | November 12 | 6 units @ $25 |
On November 8, it sold 12 units for $54 each. Using the perpetual LIFO inventory method, what amount of gross profit was earned from the 12 units sold?
Answer: E
Explanation: Sales = 12 × $54 = $648
Cost of goods sold = (10 × $22) + (2 × $20) = $260
Gross profit = $648 − $260 = $388
Difficulty: 3 Hard
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
131) A company sells garden hoses and uses the perpetual inventory system to account for its merchandise. The beginning balance of the inventory and its transactions during September were as follows:
September 1: Beginning balance of 18 units at $13 each
September 12: Purchased 30 units at $14 each
September 19: Sold 24 units at $30 selling price each
September 20: Purchased 24 units at $17 each
September 27: Sold 27 units at $30 selling price each
If the ending inventory is reported at $276, what inventory method was used?
Answer: A
Explanation:
| Purchases | Sales | Balance | |||||||||||||||||||||||
| Date | Units | Unit cost | Total | Units | Unit cost | Total | Units | Unit cost | Total | ||||||||||||||||
| Sept. 1 | 18 | $ | 13 | $ | 234 | ||||||||||||||||||||
| Sept. 12 | 30 | $ | 14 | $ | 420 | 18 | $ | 13 | $ | 234 | |||||||||||||||
| 30 | $ | 14 | $ | 420 | |||||||||||||||||||||
| Sept. 19 | 24 | $ | 14 | $ | 336 | 18 | $ | 13 | $ | 234 | |||||||||||||||
| 6 | $ | 14 | $ | 84 | |||||||||||||||||||||
| Sept. 20 | 24 | $ | 17 | $ | 408 | 18 | $ | 13 | $ | 234 | |||||||||||||||
| 6 | $ | 14 | $ | 84 | |||||||||||||||||||||
| 24 | $ | 17 | $ | 408 | |||||||||||||||||||||
| Sept. 27 | 24 | $ | 17 | $ | 408 | 18 | $ | 13 | $ | 234 | |||||||||||||||
| 3 | $ | 14 | $ | 42 | 3 | $ | 14 | $ | 42 | ||||||||||||||||
| 21 | $ | 276 | |||||||||||||||||||||||
Difficulty: 3 Hard
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
132) Jammer Company uses a perpetual weighted average inventory system and reports the following:
| August 2 | Purchase | 10 units at $12 per unit. |
| August 18 | Purchase | 15 units at $15 per unit. |
| August 29 | Sale | 20 units. |
| August 31 | Purchase | 14 units at $16 per unit. |
What is the per-unit value of ending inventory on August 31?
Answer: C
Explanation:
| Purchases | Cost of goods sold | Balance | |||||||||||||||||||||||||||
| Date | Units | Unit cost | Total | Units | Unit cost | Total | Units | Unit cost | Total | ||||||||||||||||||||
| Aug. 2 | 10 | $ | 12 | $ | 120 | 10 | $ | 12.00 | $ | 120 | |||||||||||||||||||
| Aug. 18 | 15 | $ | 15 | $ | 225 | 25 | $ | 13.80* | $ | 345 | |||||||||||||||||||
| Aug. 29 | 20 | $ | 13.80 | $ | 276 | 5 | $ | 13.80 | $ | 69 | |||||||||||||||||||
| Aug. 31 | 14 | $ | 16 | $ | 224 | 19 | $ | 15.42** | $ | 293 | |||||||||||||||||||
*$345/25 units = $13.80/unit
**$293/19 units = $15.42/unit
Difficulty: 3 Hard
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
133) Given the following information, determine the cost of the inventory at June 30 using the perpetual LIFO inventory method.
| June 1 | Beginning inventory | 15 units at $20 each |
| June 15 | Sale of 6 units for $50 each | |
| June 29 | Purchase | 8 units at $25 each |
The cost of the ending inventory is:
Answer: C
Explanation:
| Purchases | Cost of goods sold | Balance | |||||||||||||||||||||
| Date | Units | Unit cost | Total | Units | Unit cost | Total | Units | Unit cost | Total | ||||||||||||||
| June 1 | 15 | $ | 20 | $ | 300 | 15 | $ | 20 | $ | 300 | |||||||||||||
| June 15 | 6 | $ | 20 | $ | 120 | 9 | $ | 20 | $ | 180 | |||||||||||||
| June 29 | 8 | $ | 25 | $ | 200 | 9 | $ | 20 | $ | 180 | |||||||||||||
| 8 | $ | 25 | $ | 200 | |||||||||||||||||||
| 17 | $ | 380 | |||||||||||||||||||||
Difficulty: 3 Hard
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
134) In applying the lower of cost or market method to inventory valuation, market is defined as:
Answer: B
Difficulty: 1 Easy
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
135) Raleigh Co. has the following products in its ending inventory. Compute the lower of cost or market total for inventory applied separately to each product.
| Product | Quantity | Cost per unit | Market per unit | ||
| Jelly | 150 | $ | 2.00 | 2.15 | |
| Jam | 370 | $ | 2.65 | 2.50 | |
| Marmalade | 260 | $ | 3.10 | 3.05 | |
Answer: C
Explanation: Jelly = 150 * $2.00 = $300
Jam = 370 * $2.50 = $925
Marmalade = 260 * $3.05 = $793
Lower of cost or market value = $2,018
Difficulty: 3 Hard
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
136) Generally accepted accounting principles require that the inventory of a company be reported at:
Answer: C
Difficulty: 1 Easy
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
137) The conservatism constraint prescribes that:
Answer: A
Difficulty: 2 Medium
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
138) A company’s normal selling price for its product is $20 per unit. However, due to market competition, the selling price has fallen to $15 per unit. This company’s current inventory consists of 200 units purchased at $16 per unit. Replacement cost has fallen to $13 per unit. Calculate the value of this company’s inventory at the lower of cost or market.
Answer: B
Explanation: 200 units @ $13 per unit = $2,600
Difficulty: 2 Medium
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
139) A company normally sells its product for $20 per unit. However, the selling price has fallen to $15 per unit. This company’s current inventory consists of 200 units purchased at $16 per unit. Replacement cost has now fallen to $13 per unit. What is the amount of the lower cost of market adjustment the company must make as a result of this decline in value?
Answer: D
Explanation: 200 units × ($16 − $13) = $600
Difficulty: 2 Medium
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
140) A company’s current inventory consists of 5,000 units purchased at $6 per unit. Replacement cost has now fallen to $5 per unit. What is the entry the company must record to adjust inventory to market?
Answer: C
Explanation: 5,000 units × ($6 − $5) = $5,000
Difficulty: 2 Medium
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
141) A company has the following per unit original costs and replacement costs for its inventory. LCM is applied to individual items.
Part A: 50 units with a cost of $5, and replacement cost of $4.50
Part B: 75 units with a cost of $6, and replacement cost of $6.50
Part C: 160 units with a cost of $3, and replacement cost of $2.50
Under the lower of cost or market method, the total value of this company’s ending inventory is:
Answer: B
Explanation:
| Per unit | Total | LCM applied to | ||||||||||||||||||
| Units | Cost | Market | Cost | Market | Items | Whole | ||||||||||||||
| A | 50 | $ | 5 | $ | 4.50 | $ | 250 | $ | 225.00 | $ | 225 | |||||||||
| B | 75 | $ | 6 | $ | 6.50 | 450 | 487.50 | 450 | ||||||||||||
| C | 160 | $ | 3 | $ | 2.50 | 480 | 400.00 | 400 | ||||||||||||
| Total | $ | 1,180 | $ | 1,112.50 | $ | 1,075 | $ | 1,112.50 | ||||||||||||
Difficulty: 2 Medium
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
142) A company has beginning inventory of 10 units at a cost of $10 each on February 1. On February 3, it purchases 20 units at $12 each. 12 units are sold on February 5. Using the periodic FIFO inventory method, what is the cost of the 12 units that are sold?
Answer: B
Explanation: (10 units × $10) + (2 × $12) = $124
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
143) A company has beginning inventory of 15 units at a cost of $12 each on October 1. On October 5, it purchases 10 units at $13 per unit. On October 12 it purchases 20 units at $14 per unit. On October 15, it sells 30 units. Using the periodic FIFO inventory method, what is the value of the inventory at October 15 after the sale?
Answer: C
Explanation: Units available for sale = 15 + 10 + 20 = 45 units
Units in inventory = 45 − 30 = 15 units
Cost of inventory = 15 × $14 each = $210
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
144) A company had beginning inventory of 10 units at a cost of $20 each on March 1. On March 2, it purchased 10 units at $22 each. On March 6 it purchased 6 units at $25 each. On March 8, it sold 22 units for $54 each. Using the perpetual FIFO inventory method, what was the cost of the 22 units sold?
Answer: A
Explanation: (10 × $20) + (10 × $22) + (2 × $25) = $470
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
145) A company uses the periodic inventory system and had the following activity during the current monthly period.
| November 1: | Beginning inventory | 100 units @ $20 |
| November 5: | Purchased | 100 units @ $22 |
| November 8: | Purchased | 50 units @ $23 |
| November 16: | Sold | 200 units @ $45 |
| November 19: | Purchased | 50 units @ $25 |
Using the weighted-average inventory method, the company’s ending inventory would be:
Answer: B
Explanation:
| BI | 100 @ $20 | $ | 2,000 | |
| 11/5 | 100 @ $22 | 2,200 | ||
| 11/8 | 50 @ $23 | 1,150 | ||
| 11/19 | 50 @ $25 | 1,250 | ||
| Total | 300 | $ | 6,600 |
Weighted average cost per unit: $6,600/300 units = $22
Ending inventory: (300 units − 200 units) × $22 = $2,200
Difficulty: 3 Hard
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
146) Health Defense sells first aid kits and uses the periodic inventory system to account for its merchandise. The beginning balance of the inventory and its transactions during January were as follows:
January 1: Beginning balance of 18 units at $13 each
January 12: Purchased 30 units at $14 each
January 19: Sold 24 units at a selling price of $30 each
January 20: Purchased 24 units at $17 each
January 27: Sold 27 units at a selling price of $30 each
If the ending inventory is reported at $357, what inventory method was used?
Answer: B
Explanation:
| Beginning Inventory | 18 @ $13 | $ | 234 |
| January 12 | 30 @ $14 | 420 | |
| January 20 | 24 @ $17 | 408 | |
| Total | 72 units | $ | 1,062 |
| Sold | 51 units | ||
| Ending Inventory | 21 @ 17 | $ | 357 |
Difficulty: 3 Hard
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
147) A company’s warehouse contents were destroyed by a flood on September 12. The following information was the only information that was salvaged:
The company’s average gross profit ratio is 35%. What is the estimated cost of the lost inventory?
Answer: A
Explanation: COGS = ($55,000 − $700) × 65% = $35,295
Goods available for sale = $28,000 + $17,000 = $45,000
EI = $45,000 − $35,295 = $9,705
Difficulty: 3 Hard
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
148) A company reports the following information regarding its inventory.
Beginning inventory: cost is $80,000; retail is $130,000
Net purchases: cost is $65,000; retail is $120,000
Sales at retail: $145,000
The year-end inventory shows $135,000 worth of merchandise available at retail prices. What is the cost of the ending inventory calculated using the retail inventory method?
Answer: C
Explanation:
| At cost | At retail | ||||
| Beginning inventory | $ | 80,000 | $ | 130,000 | |
| Purchases | 65,000 | 120,000 | |||
| Goods available | $ | 145,000 | $ | 250,000 | |
Cost/retail ratio $145,000/$250,000 = 58%
Ending inventory at cost $135,000 × 58% = $78,300
Difficulty: 3 Hard
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
149) On March 31 a company needed to estimate its ending inventory to prepare its first quarter financial statements. The following information is available:
Beginning inventory, January 1: $4,000
Net sales: $80,000
Net purchases: $78,000
The company’s gross margin ratio is 25%. Using the gross profit method, the cost of goods sold would be:
Answer: A
Explanation: 75% × $80,000 = $60,000
Difficulty: 3 Hard
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
150) On March 31 a company needed to estimate its ending inventory to prepare its first quarter financial statements. The following information is available:
Beginning inventory, January 1: $4,000
Net sales: $80,000
Net purchases: $78,000
The company’s gross margin ratio is 25%. Using the gross profit method, the estimated ending inventory value would be:
Answer: D
Explanation: Beginning inventory + Purchases = Cost of Goods Available for Sale
$4,000 + $78,000 = $82,000
Cost of Goods Available for Sale – Estimated Cost of Goods Sold = Estimated Ending Inventory
$82,000 – (75% × $80,000) = Estimated Ending Inventory
$22,000 = Estimated Ending Inventory
Difficulty: 3 Hard
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
151) Big Box Store has operated with a 30% average gross profit ratio for a number of years. It had $100,000 in sales during the second quarter of this year. If it began the quarter with $18,000 of inventory at cost and purchased $72,000 of inventory during the quarter, its estimated ending inventory by the gross profit method is:
Answer: C
Explanation: COGS = $100,000 × 70% = $70,000
Costs available for sale = $18,000 + $72,000 = $90,000
End. Inv. = $90,000 − $70,000 = $20,000
Difficulty: 3 Hard
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
152) On January 31, a company needed to estimate its ending inventory to prepare its monthly financial statements. The following information is currently available:
Inventory as of January 1: $120,500
Net sales for January: $400,000
Net purchases for January: $270,500
This company typically achieves a gross profit ratio of 15%. Ending Inventory under the gross profit method would be:
Answer: D
Explanation: COGS = $400,000 × 85% = $340,000
Costs available for sale = $120,500 + $270,500 = $391,000
EI = $391,000 − $340,000 = $51,000
Difficulty: 3 Hard
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
153) Interim financial statements:
Answer: C
Difficulty: 1 Easy
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Reporting
154) Jefferson Company has sales of $300,000 and cost of goods available for sale of $270,000. If the gross profit ratio is typically 30%, the estimated cost of the ending inventory under the gross profit method would be:
Answer: A
Explanation: If sales for the period were $300,000 and the company’s typical gross profit ratio is 30%, gross profit would be approximately $90,000. That means that cost of goods sold must have been $210,000. Subtracting cost of goods sold of $210,000 from the $270,000 of cost of goods available for sale yields ending inventory of $60,000.
Difficulty: 3 Hard
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
155) Oxford Packing Company reported net sales in November of the current year of $1,000,000. At the beginning of November, the company reported beginning inventory of $368,000. Cost of goods purchased during November amounted to $217,500. The company reported ending inventory at the end of November of $226,750. The company’s gross profit rate for November of the current year was:
Answer: D
Explanation: Combining beginning inventory of $368,000 with purchases for the period of $217,500 yields cost of goods available for sale of $585,500. If we then subtract the ending inventory of $226,750, we get cost of goods sold of $358,750. Subtracting cost of goods sold ($358,750) from sales ($1,000,000) yields gross profit of $641,250. Dividing gross profit of $641,250 by sales of $1,000,000 yields a gross profit percentage of 64.125% or 64.1% rounded.
Difficulty: 3 Hard
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
156) On April 24 of the current year, The Memphis Pecan Company experienced a tornado that destroyed the company’s entire inventory. At the beginning of April, the company reported beginning inventory of $226,750. Inventory purchased during April (until the date of the tornado) was $197,800. Sales for the month of April through April 24 were $642,500. Assuming the company’s typical gross profit ratio is 50%, estimate the amount of inventory destroyed in the tornado.
Answer: B
Explanation: Beginning inventory on April 1 was $226,750. Purchases for the month of April amounted to $197,800, yielding cost of goods available for sale of $424,550. If the company’s typical gross profit ratio is 50% and if sales for the month of April were $642,500, then the cost of goods sold during April was $321,250. Subtracting that amount from the cost of goods available for sale yields ending inventory of $103,300.
Difficulty: 3 Hard
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
157) Avanti purchases inventory from overseas and incurs the following costs: the merchandise cost is $50,000, credit terms 2/10, n/30 that apply only to the $50,000; FOB shipping point freight charges are $1,500; insurance during transit is $500; and import duties are $1,000. Avanti paid within the discount period and incurred additional costs of $1,200 for advertising and $5,000 for sales commissions. Compute the cost that should be assigned to the inventory.
Answer: C
Explanation: $50,000 * 0.98 = $49,000 + $1,500 + $500 + $1,000 = $52,000
Difficulty: 3 Hard
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
158) Hasham purchases inventory from overseas and incurs the following costs: the merchandise cost is $80,000, credit terms 1/10, n/30, applicable only to the $80,000; FOB shipping point freight charges are $2,500; insurance during transit is $300; and import duties are $1,500. Hasham paid within the discount period. Compute the cost that should be assigned to the inventory.
Answer: A
Explanation: ($80,000 * 0.99) + $2,500 + $300 + $1,500 = $83,500
Difficulty: 2 Medium
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
159) Some companies choose to avoid assigning incidental costs of acquiring merchandise to inventory by recording them as cost of goods sold when incurred. The principle that supports this is called:
Answer: B
Difficulty: 2 Medium
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Decision Making
160) All of the following statements related to goods on consignment are true except:
Answer: D
Difficulty: 2 Medium
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Decision Making
161) When costs to purchase inventory regularly decline, which method of inventory costing will yield the lowest gross profit and income?
Answer: A
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
162) When costs to purchase inventory regularly decline, which method of inventory costing will yield the lowest cost of goods sold?
Answer: B
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
163) IFRS reporting currently does not allow which method of inventory costing?
Answer: C
Difficulty: 1 Easy
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Global; FN Reporting
164) All of the following statements regarding U.S. GAAP and IFRS are true except:
Answer: D
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Global; FN Reporting
165) Sandoval needs to determine its year-end inventory. The warehouse contains 20,000 units, of which 3,000 were damaged by flood and are not sellable. Another 2,000 units were purchased from Markor Company, FOB shipping point, and are currently in transit. The company also consigns goods and has 4,000 units at a consignee’s location. How many units should Sandoval include in its year-end inventory?
Answer: C
Explanation: 20,000 − 3,000 + 2,000 + 4,000 = 23,000
Difficulty: 3 Hard
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
166) Strods Company reported the following purchases and sales of its only product. Strods uses a perpetual inventory system. Determine the cost assigned to the ending inventory using FIFO.
| Date | Activities | Units Acquired at Cost | Units Sold at Retail |
| May 1 | Beginning Inventory | 150 units @ $10.00 | |
| 5 | Purchase | 220 units @ $12.00 | |
| 10 | Sales | 140 units @ $20.00 | |
| 15 | Purchase | 100 units @ $13.00 | |
| 24 | Sales | 90 units @ $21.00 |
Answer: A
Explanation: (140 × $12 = $1,680) + (100 × $13 = $1,300) = $2,980
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
167) Strods Company reported the following purchases and sales of its only product. Strods uses a perpetual inventory system. Determine the cost assigned to cost of goods sold using FIFO.
| Date | Activities | Units Acquired at Cost | Units Sold at Retail |
| May 1 | Beginning Inventory | 150 units @ $10.00 | |
| 5 | Purchase | 220 units @ $12.00 | |
| 10 | Sales | 140 units @ $20.00 | |
| 15 | Purchase | 100 units @ $13.00 | |
| 24 | Sales | 90 units @ $21.00 |
Answer: B
Explanation: (140 × $10 = $1,400) + [(10 × $10 = $100) + (80 × $12 = $960)] = $2,460
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
168) Strods Company reported the following purchases and sales of its only product. Strods uses a perpetual inventory system. Determine the cost assigned to ending inventory using LIFO.
| Date | Activities | Units Acquired at Cost | Units Sold at Retail |
| May 1 | Beginning Inventory | 150 units @ $10.00 | |
| 5 | Purchase | 220 units @ $12.00 | |
| 10 | Sales | 140 units @ $20.00 | |
| 15 | Purchase | 100 units @ $13.00 | |
| 24 | Sales | 90 units @ $21.00 |
Answer: C
Explanation: (150 × $10 = $1,500) + (80 × $12 = $960) + (10 × $13 = $130) = $2,590
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
169) Strods Company reported the following purchases and sales for its only product. Strods uses a perpetual inventory system. Determine the cost assigned to cost of goods sold using LIFO.
| Date | Activities | Units Acquired at Cost | Units Sold at Retail |
| May 1 | Beginning Inventory | 150 units @ $10.00 | |
| 5 | Purchase | 220 units @ $12.00 | |
| 10 | Sales | 140 units @ $20.00 | |
| 15 | Purchase | 100 units @ $13.00 | |
| 24 | Sales | 90 units @ $21.00 |
Answer: D
Explanation: (140 × $12 = $1,680) + (90 × $13 = $1,170) = $2,850
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
170) Strods Company reported the following purchases and sales of its only product. Strods uses a periodic inventory system. Determine the cost assigned to the ending inventory using FIFO.
| Date | Activities | Units Acquired at Cost | Units Sold at Retail |
| May 1 | Beginning Inventory | 150 units @ $10.00 | |
| 5 | Purchase | 220 units @ $12.00 | |
| 10 | Sales | 140 units @ $20.00 | |
| 15 | Purchase | 100 units @ $13.00 | |
| 24 | Sales | 90 units @ $21.00 |
Answer: A
Explanation: (140 × $12 = $1,680) + (100 × $13 = $1,300) = $2,980
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
171) Strods Company reported the following purchases and sales of its only product. Strods uses a periodic inventory system. Determine the cost assigned to cost of goods sold using FIFO.
| Date | Activities | Units Acquired at Cost | Units Sold at Retail |
| May 1 | Beginning Inventory | 150 units @ $10.00 | |
| 5 | Purchase | 220 units @ $12.00 | |
| 10 | Sales | 140 units @ $20.00 | |
| 15 | Purchase | 100 units @ $13.00 | |
| 24 | Sales | 90 units @ $21.00 |
Answer: A
Explanation: (150 × $10 = $1,500) + (80 × $12 = $960) = $2,460
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
172) Strods Company reported the following purchases and sales of its only product. Strods uses a periodic inventory system. Determine the cost assigned to ending inventory using LIFO.
| Date | Activities | Units Acquired at Cost | Units Sold at Retail |
| May 1 | Beginning Inventory | 150 units @ $10.00 | |
| 5 | Purchase | 220 units @ $12.00 | |
| 10 | Sales | 140 units @ $20.00 | |
| 15 | Purchase | 100 units @ $13.00 | |
| 24 | Sales | 90 units @ $21.00 |
Answer: C
Explanation: (150 × $10 = $1,500) + (90 × $12 = $1,080) = $2,580
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
173) Strods Company reported the following purchases and sales for its only product. Strods uses a periodic inventory system. Determine the cost assigned to cost of goods sold using LIFO.
| Date | Activities | Units Acquired at Cost | Units Sold at Retail |
| May 1 | Beginning Inventory | 150 units @ $10.00 | |
| 5 | Purchase | 220 units @ $12.00 | |
| 10 | Sales | 140 units @ $20.00 | |
| 15 | Purchase | 100 units @ $13.00 | |
| 24 | Sales | 90 units @ $21.00 |
Answer: D
Explanation: (100 × $13 = $1,300) + (130 × $12 = $1,560) = $2,860
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
174) On September 1 of the current year, Scots Company experienced a flood that destroyed the company’s entire inventory. Because the company had not completed its month end reporting for August, it must estimate the amount of inventory lost using the gross profit method. At the beginning of August, the company reported beginning inventory of $215,450. Inventory purchased during August was $192,530. Sales for the month of August were $542,500. Assuming the company’s typical gross profit ratio is 40%, estimate the amount of inventory destroyed in the flood.
Answer: D
Explanation: Merchandise available for sale − $215,450 + $192,530 = $407,980
Estimate cost of goods sold − $542,500 × 0.6 = $325,500
Estimated ending inventory − $407,980 − $325,500 = $82,480
Difficulty: 3 Hard
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
175) Use the following information for Shafer Company to compute inventory turnover for year 2.
| Year 2 | Year 1 | |||
| Net sales | $ | 647,500 | $ | 582,000 |
| Cost of goods sold | 389,500 | 360,840 | ||
| Ending inventory | 76,700 | 79,380 |
Answer: C
Explanation: Inventory Turnover = Cost of Goods Sold/Average Inventory
Inventory Turnover = $389,500/[($76,700 + $79,380)/2]
Inventory Turnover = $389,500/$78,040 = 4.99
Difficulty: 3 Hard
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
176) Use the following information for Davis Company to compute inventory turnover for Year 2.
| Year 2 | Year 1 | |
| Cost of goods sold | 279,500 | 291,800 |
| Ending inventory | 47,700 | 49,350 |
Answer: B
Explanation: Inventory Turnover = Cost of Goods Sold/Average Inventory
Inventory Turnover = $279,500/[($47,700 + $49,350)/2]
Inventory Turnover = $279,500/$48,525 = 5.76
Difficulty: 2 Medium
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
177) Use the following information for Ephron Company to compute days’ sales in inventory for Year 2. (Use 365 days in a year.)
| Year 2 | Year 1 | |||
| Net sales | $ | 547,500 | $ | 572,000 |
| Cost of goods sold | 348,500 | 370,840 | ||
| Ending inventory | 75,700 | 81,400 |
Answer: E
Explanation: Days’ Sales in Inventory = Ending Inventory/Cost of Goods Sold × 365
Days’ Sales in Inventory = $75,700/$348,500 × 365 = 79.3
Difficulty: 3 Hard
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
Match each of the following terms with the appropriate definition.
178) The number of times a company’s average inventory is sold during a period.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
179) An inventory valuation method where each item in inventory is identified with a specific purchase and invoice.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
180) The expected sales price of an item minus the cost of making the sale.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
181) An inventory pricing method that assumes the unit prices of the beginning inventory and of each purchase are weighted by the number of units of each in inventory; the calculation occurs at the time of each sale.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
182) A method for estimating an ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail price.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
183) An estimate of days needed to convert the inventory at the end of the period into receivables or cash.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
184) An inventory valuation method that assumes that inventory items are sold in the order acquired.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
185) Financial statements prepared for periods of less than one year.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
186) The accounting constraint that aims to select the less optimistic estimate when two or more estimates are about equally likely.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
187) An inventory valuation method that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
Answers: 178) J 179) G 180) E 181) I 182) B 183) F 184) H 185) D 186) A 187) C
Match the following terms with the appropriate definition.
188) The required method of reporting inventory at market when market is lower than cost.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making; FN Measurement
189) The method of assigning costs to inventory where the purchase cost of each item in inventory is identified and used to determine the cost of inventory.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making; FN Measurement
190) A procedure for estimating inventory where the past gross profit rate is used to estimate the cost of goods sold, which is then subtracted from the cost of goods available for sale to determine the estimated ending inventory.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making; FN Measurement
191) An owner of goods who ships them to another party who will then sell the goods for the owner.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making; FN Measurement
192) One who receives and holds goods owned by another for purposes of selling the goods for the owner.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making; FN Measurement
193) The principle that aims to select the less optimistic estimate when two or more estimates are about equally likely.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making; FN Measurement
194) The number of times a company’s average inventory is sold during an accounting period.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making; FN Measurement
195) An estimate of days needed to convert the inventory available at the end of the period into receivables or cash.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making; FN Measurement
196) A method for estimating inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail prices.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making; FN Measurement
197) The accounting principle that a company use the same accounting methods period after period so that the financial statements of succeeding periods will be comparable.
Difficulty: 1 Easy
Topic: Determining Inventory Items; Inventory Costing Under a Perpetual System; Inventory Estimation Methods; Inventory Turnover and Days’ Sales in Inventory; Lower of Cost or Market
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.; 05-P2 Compute the lower of cost or market amount of inventory.; 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making; FN Measurement
Answers: 188) D 189) H 190) B 191) C 192) E 193) J 194) I 195) G 196) A 197) F
198) Match the inventory valuation method from the list below that is being described in each situation in letters a-e. In all cases, assume a period of rising prices.
| FIFO | First in, first out |
| LIFO | Last in, first out |
| WA | Weighted average |
| SI | Specific identification |
________ a. The method that is used if each inventory item can be matched with a specific purchase and invoice.
________ b. The method that will cause the company to have the lowest income taxes.
________ c. The method that will cause the company to have the lowest cost of goods sold.
________ d. The method that will assign a value to inventory that approximates current cost.
________ e. The method that will tend to smooth out erratic changes in costs.
Answer: a. SI; b. LIFO; c. FIFO; d. FIFO; e. WA
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods; Inventory Costing Under a Perpetual System
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.; 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
199) Identify the items that are included in merchandise inventory. (In your answer address the special situations of goods in transit, consigned goods, and damaged goods.)
Answer: Merchandise inventory consists of goods owned by a company and held for resale. Three special cases involving ownership decisions are goods in transit, consigned goods, and damaged goods. Goods in transit are included in the inventory of the company that owns the goods. Consigned goods are included in the inventory of the consignor. Damaged goods are valued at net realizable value.
Difficulty: 2 Medium
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
200) What specific costs and deductions are used to determine the final cost of merchandise inventory? Identify all costs including the incidental costs.
Answer: The costs of merchandise inventory include the invoice price minus any discounts, plus any added or incidental costs necessary to put the inventory in a place and condition for sale. Incidental costs include import duties, freight costs, storage, insurance, and costs of aging.
Difficulty: 2 Medium
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
201) Describe the internal controls that must be applied when taking a physical count of inventory.
Answer: The internal controls should include (1) prenumbered tickets that are all accounted for; (2) counters who are not responsible for the inventory; (3) counters who must confirm the validity of inventory’s existence, amounts, and quality; (4) a second count by a different counter; and (5) confirmation that all inventories are ticketed once and only once by a manager.
Difficulty: 2 Medium
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Risk Analysis
202) Explain the effects of inventory valuation methods on the cost of ending inventory, income, and income taxes.
Answer: The specific identification method exactly identifies the costs of the inventory items sold. The weighted average method tends to smooth out erratic changes in costs by “averaging” inventory costs. However, LIFO and FIFO provide different amounts in periods of rising or falling costs. For example, in periods of rising costs, LIFO provides a lower income and thus lower taxes. In periods of falling costs, LIFO provides a higher income and thus higher taxes. FIFO calculations provide both higher income and taxes in periods of rising costs and lower income and taxes in periods of declining costs.
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
203) How do the consistency concept and the full disclosure principle affect inventory valuation?
Answer: The consistency concept requires that companies use the same accounting method for inventory valuation from period to period so that the financial statements are comparable across periods. The only exception is when a change from one method to another will improve its financial reporting. The consistency principle does not require a company to use one inventory valuation method for all categories of inventory. The full disclosure principle requires that in cases where a company does change its inventory valuation method, the notes to the financial statements report the type of change, its justification, and its effect on net income.
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
204) What is the effect of an error in the ending inventory balance on the accounts reported in the income statement?
Answer: An inventory error causes misstatements in cost of goods sold, gross profit, net income, current assets, and equity. It also causes misstatements in the next period’s cost of goods sold and net income. However, the inventory error is said to be self-correcting because the error in the first period is offset by the error in the second period.
Difficulty: 2 Medium
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
205) Explain how the inventory turnover ratio and the days’ sales in inventory ratio are used to evaluate inventory management.
Answer: A merchandiser’s ability to pay its short term obligations depends, among other factors, on how quickly it sells its merchandise inventory. The inventory turnover ratio reveals how many times a company turns over (sells) its inventory during a period. A low ratio compared to competitors suggests the company may be holding more inventory than necessary to support its sales volume. On the other hand, a ratio that is too high compared to competitors may suggest that the inventory level is too low and customers may have to back order merchandise. The days’ sales in inventory ratio helps to better interpret inventory turnover. It can be interpreted as the number of days one can sell from inventory if no new items are purchased, and can be viewed as a measure of the buffer against out-of-stock inventory.
Difficulty: 2 Medium
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis
206) Identify and describe the four inventory valuation methods.
Answer: The specific identification method assigns costs to each inventory item based on specific invoice costs. The weighted average method assigns costs by using the total balance in inventory and dividing it by the number of units to arrive at a cost per unit at each sale. This cost per unit is then multiplied by the number of units in ending inventory. The first-in-first-out method assigns cost to items sold assuming that the first units purchased are the first to be sold. The last-in-first out method assumes that the last units purchased are the first to be sold.
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
207) Explain why the lower of cost or market rule is used to value inventory.
Answer: The concept of conservatism requires that if there is more than one estimate of the value of an asset, then the lower of the two should be used. The lower of cost or market rule compares the acquisition cost of inventory with the current replacement cost. The lower of these two values is then selected as the amount to be reported. Lower of cost or market can be used on the inventory as a whole, major categories of inventory, or on individual items of inventory.
Difficulty: 2 Medium
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
208) Discuss the important accounting features of a periodic inventory system including accounts and procedures used.
Answer: Each purchase of merchandise is debited to the Purchases account. Cost of goods sold is not recorded at the time of sale. Instead, a physical count of inventory at the end of the accounting period is used to determine the amount of inventory sold. Certain costs of inventory such as transportation-in, purchases discounts, and purchases returns and allowances are recorded in separate accounts. These separate accounts are then used to help compute inventory and cost of goods sold at the end of the period.
Difficulty: 2 Medium
Topic: Inventory Costing Under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
209) Explain the reason a company might use the retail inventory method for valuing inventory.
Answer: The retail method is generally used to prepare interim statements because it avoids the time-consuming and expensive process of taking a physical inventory. It uses the cost to retail ratio to give an estimated ending inventory at cost. Some companies use the retail inventory to prepare annual statements, and may also estimate inventory for audit purposes or when inventory is damaged or destroyed.
Difficulty: 2 Medium
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
210) Explain the reason a company might use gross profit inventory method for valuing inventory.
Answer: The gross profit method is often used when inventory is destroyed, lost or stolen. The cost of ending inventory is estimated by applying the gross profit ratio to net sales at retail. Companies may need an estimate of inventory to file a claim on a loss with its insurer. The method can also be used to see whether inventory amounts from physical counts are reasonable.
Difficulty: 2 Medium
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
211) Sarbanes Oxley (SOX) demands that companies safeguard inventory and properly report it. List methods that companies should use to safeguard inventory and accounting procedures that should be used to properly report inventory.
Answer: Safeguards include restricted access, use of authorized requisitions, security measures, and controlled environments to prevent damage. Proper accounting includes matching inventory received with purchase order terms and quality requirements, preventing misstatements, and controlling access to inventory records.
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; BB Legal; FN Measurement
212) The company’s inventory manager receives compensation that includes a bonus based on gross profit. You discover that the inventory manager has knowingly overstated ending inventory by $2 million. What effect does this error have on the financial statements of the company and specifically gross profit? Why would the manager knowingly overstate ending inventory? Would this be considered an ethics violation?
Answer: By overstating ending inventory, the cost of goods sold is understated, causing the gross profit to be overstated and net income to be overstated. By overstating the gross profit, this would increase the manager’s bonus. The assets and equity would also be overstated. Since the manager’s bonus is based on gross profit, the error would result in a larger bonus since gross profit would be overstated. Yes, this would be considered an ethics violation since the manager intentionally overstated ending inventory and the financial statements would contain errors that could affect decisions made by the users of the financial statements.
Difficulty: 3 Hard
Topic: Financial Statement Effects of Costing Methods; Financial Statement Effects of Inventory Errors
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.; 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Analyze
AACSB: Ethics
AICPA: BB Industry; FN Measurement
213) Mary’s Antiques does not have its own retail location, instead maintains inventory in its warehouse and sells merchandise through Oldtime Antique Mall. Oldtime does not assume responsibility for goods until they are sold to customers at which time it takes a commission for items sold and sends the sale proceeds to Mary’s. Identify which company has the role of the consignor and the consignee. Which company should include any unsold goods as part of its inventory?
Answer: Mary’s Antiques is the consignor; Oldtime Antiques Mall is the consignee. Mary’s Antiques should include any unsold goods as part of its inventory.
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
214) What advantages does a perpetual inventory system have over periodic inventory system?
Answer: Advances in technology have greatly reduced the cost, and effort to manage, a perpetual inventory system. The perpetual inventory system updates the inventory balance as transactions affecting inventory occur, the balance is increased for purchases and decreased for sales. The subsidiary ledger also enables companies to get detailed records for each inventory item without a lot of extra effort. Knowing the exact amount of inventory may avoid the risk of lost sales and also help management reduce the level of inventory, thereby increasing the inventory turnover and decreasing the required number of days’ sales in inventory. The reduced level of inventory also reduces costs. Many companies are now asking whether they can afford not to have a perpetual inventory system because timely access to inventory information is a competitive advantage.
Difficulty: 2 Medium
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Understand
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology
215) Patrick Randall of Sports Supplies finds that maintaining appropriate levels of inventories while controlling costs is a major challenge. What are the challenges Patrick refers to?
Answer: Any entrepreneur who sells inventory must constantly balance the need to have adequate inventory available to meet customers’ demands while also minimizing the amount of investment in inventory. Maintaining too little inventory can result in stock-outs (lost sales due to a lack of available inventory) but maintaining too much inventory wastes the company’s resources (by requiring funds be invested in inventory and not in other more productive assets). Randy knew that to meet his customers’ needs, he would need sound inventory accounting. By implementing inventory management tools, he learned how to fill orders, collect money, and maintain the right inventory.
Difficulty: 2 Medium
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Decision Making
216) Carolina Company uses the LIFO method for valuing its ending inventory. The following financial statement information is available for its first year of operation:
| Carolina Company
Income Statement For the year ended December 31 |
|
| Sales | $60,000 |
| Cost of goods sold | 23,000 |
| Gross profit | $37,000 |
| Expenses | 13,000 |
| Income before taxes | $24,000 |
Carolina’s ending inventory using the LIFO method was $8,700. Carolina’s accountant determined that had the company used FIFO, the ending inventory would have been $9,100.
Answer:
b.
| LIFO | FIFO | |
| Income before taxes | $24,000 | $24,400 |
| Income taxes (30%) | $7,200 | $7,320 |
Difficulty: 3 Hard
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
217) Evaluate each inventory error separately and determine whether it overstates or understates cost of goods sold and net income.
| Inventory error: | Cost of goods sold is: | Net income is: |
| Understatement of beginning inventory | ||
| Understatement of ending inventory | ||
| Overstatement of beginning inventory | ||
| Overstatement of ending inventory |
Answer:
| Inventory error: | Cost of goods sold is: | Net income is: |
| Understatement of beginning inventory | Understated | Overstated |
| Understatement of ending inventory | Overstated | Understated |
| Overstatement of beginning inventory | Overstated | Understated |
| Overstatement of ending inventory | Understated | Overstated |
Difficulty: 3 Hard
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
218) The Community Store reported the following amounts on their financial statements for Year 1, Year 2, and Year 3:
| For the year ended December 31 | |||
| Year 1 | Year 2 | Year 3 | |
| Cost of goods sold | $75,000 | $87,000 | $77,000 |
| Net income | 22,000 | 25,000 | 21,000 |
| Total current assets | 155,000 | 165,000 | 110,000 |
| Equity | 287,000 | 295,000 | 304,000 |
It was discovered early in Year 4 that the ending inventory on December 31, Year 1 was overstated by $6,000, and the ending inventory on December 31, Year 2 was understated by $2,500. The ending inventory on December 31, Year 3 was correct. Ignoring income taxes determine the correct amounts of cost of goods sold, net income, total current assets, and equity for each of the years Year 1, Year 2, and Year 3.
Answer:
| For the year ended December 31 | |||
| Year 1 | Year 2 | Year 3 | |
| Cost of goods sold | $81,000 | $78,500 | $79,500 |
| Net income | 16,000 | 33,500 | 18,500 |
| Total current assets | 149,000 | 167,500 | 110,000 |
| Equity | 281,000 | 297,500 | 304,000 |
Difficulty: 3 Hard
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
219) A company reported the following data:
| Year 1 | Year 2 | |
| Cost of goods sold | $317,500 | $279,100 |
| Average inventory | 72,000 | 93,000 |
Answer: 1. Year 1 $317,500/72,000 = 4.41
Year 2 $279,100/93,000 = 3.00
Difficulty: 2 Medium
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Analyze; Apply
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Risk Analysis
220) A company reported the following data:
| Year 1 | Year 2 | |
| Cost of goods sold | $425,000 | $486,000 |
| Ending inventory | 140,000 | 175,000 |
Required:
Answer: 1. Year 1 ($140,000/$425,000) * 365 = 120 days
Year 2 (175,000/$486,000) * 365 = 131 days
Difficulty: 3 Hard
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Risk Analysis
221) A company made the following purchases during the year:
| Jan. 10 | 15 units @ $360 each |
| Mar. 15 | 25 units @ $390 each |
| Apr. 25 | 10 units @ $420 each |
| July 30 | 20 units @ 450 each |
| Oct. 10 | 15 units @ $480 each |
On December 31, there were 28 units in ending inventory. These 28 units consisted of 2 from the January 10 purchase, 3 from the March 15 purchase, 4 from the April 25 purchase, 11 from the July 30 purchase, and 8 from the October 10 purchase. Using specific identification, calculate the cost of the ending inventory.
Answer:
| 2 * $360 | = | $720 |
| 3 * $390 | = | 1,170 |
| 4 * $420 | = | 1,680 |
| 11 * $450 | = | 4,950 |
| 8 * $480 | = | 3,840 |
| $12,360 |
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
222) A company’s inventory records indicate the following data for the month of July:
| July 1 | Beginning | 380 units at $15 each |
| July 5 | Purchased | 270 units at $17 each |
| July 10 | Sold | 400 units at $50 each |
| July 20 | Purchased | 300 units at $22 each |
| July 25 | Sold | 400 units at $50 each |
If the company uses the weighted average inventory valuation method and the perpetual inventory system, what would be the cost of its ending inventory? (Round average cost per unit to 2 decimals, and final answer to the nearest dollar.)
Answer: Note: As a result of rounding the cost per unit to two decimal places, the sum of cost of goods sold plus ending inventory may not exactly equal cost of goods available for sale.
| Purchases | Sales | Balance | |||||||
| Date | Units | Per unit | Total | Units | Per unit | Total | Units | Per unit | Total |
| 7/1 | 380 | $15 | $5,700 | 380 | $15.00 | $5,700 | |||
| 7/5 | 270 | $17 | $4,590 | 650 | $15.83 | $10,290 | |||
| 7/10 | 400 | $15.83 | $6,332 | 250 | $15.83 | $3,958 | |||
| 7/20 | 300 | $22 | $6,600 | 550 | $19.20 | $10,558 | |||
| 7/25 | 400 | $19.20 | $7,680 | 150 | $19.20 | $2,878 | |||
Difficulty: 3 Hard
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
223) A company’s inventory records indicate the following data for the month of April:
| April 1 | Beginning | 350 units at $18 each |
| April 5 | Purchase | 290 units at $20 each |
| April 9 | Sale | 500 units at $55 each |
| April 14 | Purchase | 250 units at $22 each |
| April 20 | Sale | 200 units at $55 each |
| April 30 | Purchase | 240 units at $25 each |
If the company uses the first-in, first-out (FIFO) method and the perpetual inventory system, what would be the cost of the ending inventory?
Answer:
| Purchases | Sales | Balance | |||||||
| Units | Unit
cost |
Total | Units | Unit
cost |
Total | Units | Unit
cost |
Total | |
| 4/1 | 350 | $18 | $6,300 | 350 | $18 | $6,300 | |||
| 350 | $18 | $6,300 | |||||||
| 4/5 | 290 | $20 | 5,800 | 290 | $20 | 5,800 | |||
| 640 | $12,100 | ||||||||
| 4/9 | 350 | $18 | $6,300 | ||||||
| 150 | $20 | 3,000 | 140 | $20 | $2,800 | ||||
| 4/14 | 140 | $20 | $2,800 | ||||||
| 250 | $22 | 5,500 | 250 | $22 | 5,500 | ||||
| 390 | $8,300 | ||||||||
| 4/20 | 140 | $20 | $2,800 | ||||||
| 60 | $22 | 1,320 | 190 | $22 | $4,180 | ||||
| 4/30 | 240 | $25 | 6,000 | 190 | $22 | $4,180 | |||
| 240 | $25 | 6,000 | |||||||
| 430 | $10,180 | ||||||||
Difficulty: 3 Hard
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
224) A company’s inventory records indicate the following data for the month of January:
| Jan. 1 | beginning | 180 units at $9 each |
| Jan. 5 | purchased | 170 units at $10 each |
| Jan. 9 | sold | 300 units at $35 each |
| Jan. 14 | purchased | 200 units at $11 each |
| Jan. 20 | sold | 150 units at $35 each |
| Jan. 30 | purchased | 230 units at $12 each |
If the company uses the last-in, first-out perpetual inventory system, what would be the cost of the ending inventory?
Answer:
| Purchases | Sales | Balance | |||||||
| Date | Units | Unit
cost |
Total | Units | Unit
cost |
Total | Units | Unit
cost |
Total |
| 1/1 | 180 | $9 | $1,620 | 180 | $9 | $1,620 | |||
| 1/5 | 170 | $10 | $1,700 | 180 | $9 | $1,620 | |||
| 170 | $10 | $1,700 | |||||||
| 350 | $3,320 | ||||||||
| 1/9 | 170 | $10 | $1,700 | ||||||
| 130 | $9 | 1,170 | 50 | $9 | $450 | ||||
| 1/14 | 200 | $11 | $2,200 | 50 | $9 | $450 | |||
| 200 | $11 | $2,200 | |||||||
| 250 | $2,650 | ||||||||
| 1/20 | 150 | $11 | $1,650 | 50 | $9 | $450 | |||
| 50 | $11 | 550 | |||||||
| 100 | $1,000 | ||||||||
| 1/30 | 230 | $12 | $2,760 | 50 | $9 | $450 | |||
| 50 | $11 | 550 | |||||||
| 230 | $12 | 2,760 | |||||||
| 330 | $3,760 | ||||||||
Difficulty: 3 Hard
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
225) A company’s inventory records indicate the following data for the month of January:
| Jan. 1 | Beginning | 180 units at $9 each |
| Jan. 5 | Purchased | 170 units at $10 each |
| Jan. 9 | Sold | 300 units at $35 each |
| Jan. 14 | Purchased | 200 units at $11 each |
| Jan. 20 | Sold | 150 units at $35 each |
| Jan. 30 | Purchased | 230 units at $12 each |
If the company uses the last-in, first-out perpetual inventory system, what is the amount of cost of goods sold for January?
Answer:
| Purchases | Sales | Balance | |||||||
| Date | Units | Unit
cost |
Total | Units | Unit cost | Total | Units | Unit
cost |
Total |
| 1/1 | 180 | $9 | $1,620 | 180 | $9 | $1,620 | |||
| 1/5 | 170 | $10 | $1,700 | 180 | $9 | $1,620 | |||
| 170 | $10 | $1,700 | |||||||
| 350 | $3,320 | ||||||||
| 1/9 | 170 | $10 | $1,700 | ||||||
| 130 | $9 | 1,170 | 50 | $9 | $450 | ||||
| 1/14 | 200 | $11 | $2,200 | 50 | $9 | $450 | |||
| 200 | $11 | $2,200 | |||||||
| 250 | $2,650 | ||||||||
| 1/20 | 150 | $11 | $1,650 | 50 | $9 | $450 | |||
| 50 | $11 | 550 | |||||||
| 100 | $1,000 | ||||||||
| 1/30 | 230 | $12 | $2,760 | 50 | $9 | $450 | |||
| 50 | $11 | 550 | |||||||
| 230 | $12 | 2,760 | |||||||
| $4,520 | 330 | $3,760 | |||||||
Difficulty: 3 Hard
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
226) A company’s inventory records indicate the following data for the month of April:
| April 1 | Beginning | 350 units at $18 each |
| April 5 | Purchase | 290 units at $20 each |
| April 9 | Sale | 500 units at $55 each |
| April 14 | Purchase | 250 units at $22 each |
| April 20 | Sale | 200 units at $55 each |
| April 30 | Purchase | 240 units at $25 each |
If the company uses the first-in, first-out (FIFO) method and the perpetual inventory system, what is the amount of cost of goods sold for April?
Answer:
| Purchases | Sales | Balance | ||||||||
| Units | Unit cost | Total | Units | Unit
cost |
Total | Units | Unit cost | Total | ||
| 4/1 | 350 | $18 | $6,300 | 350 | $18 | $6,300 | ||||
| 350 | $18 | $6,300 | ||||||||
| 4/5 | 290 | $20 | 5,800 | 290 | $20 | 5,800 | ||||
| 640 | $12,100 | |||||||||
| 4/9 | 350 | $18 | $6,300 | |||||||
| 150 | $20 | 3,000 | 140 | $20 | $2,800 | |||||
| 4/14 | 140 | $20 | $2,800 | |||||||
| 250 | $22 | 5,500 | 250 | $22 | 5,500 | |||||
| 390 | $8,300 | |||||||||
| 4/20 | 140 | $20 | $2,800 | |||||||
| 60 | $22 | 1,320 | 190 | $22 | $4,180 | |||||
| 4/30 | 240 | $25 | 6,000 | 190 | $22 | $4,180 | ||||
| 240 | $25 | 6,000 | ||||||||
| $13,420 | 430 | $10,180 | ||||||||
Difficulty: 3 Hard
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
227) Calculate the ending inventory using FIFO for a company that uses a perpetual inventory system, using the information given below.
| Units | Unit Cost | |
| Beginning inventory | 100 | $10 |
| Aug. 5 purchased | 40 | 12 |
| Aug. 10 sold | 60 | – |
| Aug. 15 purchased | 70 | 13 |
| Aug. 25 sold | 50 | – |
Answer:
| Purchases | Cost of Goods Sold | Inventory | |||||||
| Date | Units | Unit
cost |
Total | Units | Unit cost | Total | Units | Unit
cost |
Total |
| 8/1 | 100 | $10 | $1,000 | ||||||
| 8/5 | 40 | $12 | $480 | 100 | $10 | $1,000 | |||
| 40 | $12 | 480 | |||||||
| 140 | $1,480 | ||||||||
| 8/10 | 60 | $10 | $600 | 40 | $10 | $400 | |||
| 40 | $12 | 480 | |||||||
| 80 | $880 | ||||||||
| 8/15 | 70 | $13 | $910 | 40 | $10 | $400 | |||
| 40 | $12 | 480 | |||||||
| 70 | $13 | 910 | |||||||
| 150 | $1,790 | ||||||||
| 8/25 | 40 | $10 | $400 | 30 | $12 | $360 | |||
| 10 | $12 | 120 | 70 | $13 | 910 | ||||
| 100 | $1,270 | ||||||||
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
228) Calculate the ending inventory using LIFO for a company that uses a perpetual inventory system, using the information given below.
| Units | Unit Cost | |
| Beginning inventory | 100 | $10 |
| Aug. 5 purchased | 40 | 12 |
| Aug. 10 sold | 60 | – |
| Aug. 15 purchased | 70 | 13 |
| Aug. 25 sold | 50 |
Answer:
| Purchases | Cost of goods sold | Balance | |||||||
| Date | Units | Unit cost | Total | Units | Unit
cost |
Total | Units | Unit
cost |
Total |
| 8/1 | 100 | $10 | $1,000 | ||||||
| 8/5 | 40 | $12 | $480 | 100 | $10 | $1,000 | |||
| 40 | $12 | $480 | |||||||
| 140 | $1,480 | ||||||||
| 8/10 | 40 | $12 | $480 | 80 | $10 | $800 | |||
| 20 | $10 | $200 | |||||||
| 60 | $680 | ||||||||
| 8/15 | 70 | $13 | $910 | 80 | $10 | $800 | |||
| 70 | $13 | $910 | |||||||
| 150 | $1,710 | ||||||||
| 8/25 | 50 | $13 | $650 | 80 | $10 | $800 | |||
| 20 | $13 | $260 | |||||||
| 100 | $1,060 | ||||||||
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
229) Using the information given below for a company that uses a perpetual inventory system, calculate the ending inventory using weighted average.
| Units | Unit Cost | |
| Beginning inventory | 100 | $10 |
| Jan. 5 purchased | 40 | 12 |
| Jan. 10 sold | 60 | – |
| Jan. 15 purchased | 70 | 13 |
| Jan. 25 sold | 50 | – |
Answer:
| Purchases | Cost of goods sold | Balance | |||||||
| Date | Units | Unit cost | Total | Units | Unit cost | Total | Units | Unit cost | Total |
| 1/1 | 100 | $10.00 | $1,000 | ||||||
| 1/5 | 40 | $12 | $480 | 140 | $10.57* | $1,480 | |||
| 1/10 | 60 | $10.57 | $634 | 80 | $10.57 | $846 | |||
| 1/15 | 70 | $13 | $910 | 150 | $11.71** | $1,756 | |||
| 1/25 | 50 | $11.71 | $585 | 100 | $11.71 | $1,171 | |||
*$1,480/140 units = $10.57/unit
**$1,756/150 units = $11.71/unit
Difficulty: 3 Hard
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
230) Use the information below to determine the sales revenue, cost of goods sold and gross profit that would be reported for the company related to the March 16 sale assuming the company uses FIFO inventory valuation and a perpetual inventory system.
| January 1: | Purchased 100 units at $10 per unit. |
| February 5: | Purchased 60 units at $12 per unit. |
| March 16: | Sold 40 units for $16 per unit. |
Answer: Sales = 40 * $16 = $640
Cost of goods sold = 40 * $10 = $400
Gross profit = $640 – $400 = $240
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
231) Use the information below to determine the sales revenue, cost of goods sold and gross profit that would be reported for the company related to the March 16 sale assuming the company uses LIFO inventory valuation and a perpetual inventory system.
| January 1: | Purchased 100 units at $10 per unit. |
| February 5: | Purchased 60 units at $12 per unit. |
| March 16: | Sold 40 units for $16 per unit. |
Answer: Sales = 40 * $16 = $640
Cost of goods sold = 40 * $12 = $480
Gross profit = $640 – $480 = $160
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
232) Use the information below to determine the sales revenue, cost of goods sold and gross profit that would be reported for the company related to the March 16 sale assuming the company uses weighted average inventory valuation and a perpetual inventory system.
| January 1: | Purchased 100 units at $10 per unit. |
| February 5: | Purchased 60 units at $12 per unit. |
| March 16: | Sold 40 units for $16 per unit. |
Answer: Sales = 40 * $16 = $640
Cost of goods sold = 40 * $10.75* = $430
Gross profit = $640 – $430 = $210
*[(100 * $10) + (60 * $12)]/160 = $10.75
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
233) A company reported the following data related to its ending inventory:
| Product | Units Available | Cost | Market |
| 849 | 100 | $10 | $11 |
| 842 | 75 | 16 | 14 |
| 847 | 60 | 14 | 13 |
| 860 | 40 | 16 | 20 |
Answer:
| Product | Units On Hand | Per Unit Cost | Market | Total Cost | Total Market | LCM by Product |
| 849 | 100 | $10 | $11 | $1,000 | $1,100 | $1,000 |
| 842 | 75 | 16 | 14 | 1,200 | 1,050 | 1,050 |
| 847 | 60 | 14 | 13 | 840 | 780 | 780 |
| 860 | 40 | 16 | 20 | 640 | 800 | 640 |
| $3,680 | $3,470 |
Difficulty: 2 Medium
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
234) A company had the following ending inventory costs:
| Product | Units of Hand | Unit Cost | Market Value |
| A | 10 | $5 | $6 |
| B | 50 | 8 | 7 |
| C | 35 | 10 | 11 |
Required:
Calculate the lower of cost or market (LCM) value for each individual item.
Answer:
| Product | Total Cost | Total Market | LCM |
| A | $50 | $60 | $50 |
| B | 400 | 350 | 350 |
| C | 350 | 385 | 350 |
| TOTAL | 800 | $750 |
Difficulty: 2 Medium
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
235) A company uses the periodic inventory system, and the following information is available. All purchases and sales are on credit. The selling price for the merchandise is $11 per unit.
| Units | Unit Cost | Total Cost | ||
| 6/01 | Inventory Balance | 30 | $3 | $90 |
| 6/06 | Purchase | 70 | 4 | 280 |
| 6/11 | Purchase | 45 | 5 | 225 |
| 6/16 | Purchase | 50 | 6 | 300 |
| Goods available | 195 | $895 | ||
| 6/12 | Sale | 100 | ||
| 6/20 | Sale | 60 | ||
| Goods sold | 160 | |||
| 6/31 | Inventory Balance | 35 |
Required:
Determine the cost of the ending inventory and the cost of goods sold for June using the LIFO method.
Answer: Ending Inventory:
| 30 units @ $3 = | $90 |
| 5 units @ $4 = | 20 |
| 35 units | $110 |
Cost of goods sold:
| Goods available | $895 |
| -End. Inv. | 110 |
| COGS | $785 |
Difficulty: 2 Medium
Topic: Inventory Costing under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
236) A company made the following merchandise purchases and sales during the month of May:
| May 1 | Purchased | 380 units at | $15 each |
| May 5 | Purchased | 270 units at | $17 each |
| May 10 | Sold | 400 units at | $50 each |
| May 20 | Purchased | 300 units at | $22 each |
| May 25 | Sold | 400 units at | $50 each |
There was no beginning inventory. If the company uses the periodic weighted average method, what would be the cost of the ending inventory?
Answer:
| 380 units × $15 each = | $5,700 |
| 270 units × $17 each = | 4,590 |
| 300 units × $22 each = | 6,600 |
| 950 units | $16,890 |
| 800 units sold | |
| 150 units in ending inventory |
| Average cost = $16,890/950 units = | $17.78 per unit |
| Cost of ending inventory = 150 units * $17.78 each = | $2,667 |
Difficulty: 3 Hard
Topic: Inventory Costing under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
237) A company made the following merchandise purchases and sales during the month of May:
| May 1 | Purchased | 380 units at | $15 each |
| May 5 | Purchased | 270 units at | $17 each |
| May 10 | Sold | 400 units at | $50 each |
| May 20 | Purchased | 300 units at | $22 each |
| May 25 | Sold | 400 units at | $50 each |
There was no beginning inventory. If the company uses the periodic LIFO inventory method, what would be the cost of the ending inventory?
Answer:
| 380 units × $15 each = | $5,700 |
| 270 units × $17 each = | 4,590 |
| 300 units × $22 each = | 6,600 |
| 950 units | $16,890 |
| 800 units sold | |
| 150 units in ending inventory | |
| Cost of ending inventory = 150 * $15 each = | $2,250 |
Difficulty: 3 Hard
Topic: Inventory Costing under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
238) A company made the following merchandise purchases and sales during the month of May:
| May 1 | Purchased | 380 units at | $15 each |
| May 5 | Purchased | 270 units at | $17 each |
| May 10 | Sold | 400 units at | $50 each |
| May 20 | Purchased | 300 units at | $22 each |
| May 25 | Sold | 400 units at | $50 each |
There was no beginning inventory. If the company uses the periodic FIFO inventory method, what would be the cost of the ending inventory?
Answer:
| 380 units × $15 each = | $5,700 |
| 270 units × $17 each = | 4,590 |
| 300 units × $22 each = | 6,600 |
| 950 units | $16,890 |
| 800 units sold | |
| 150 units in ending inventory |
Cost of ending inventory = 150 * $22 each = $3,300
Difficulty: 3 Hard
Topic: Inventory Costing under a Periodic System
Learning Objective: 05-P1 Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
239) A company’s store was destroyed by an earthquake on February 10 of the current year. The only information for the current period that could be salvaged included the following:
| Beginning inventory, January 1: | $44,000 |
| Purchases to date: | $198,000 |
| Sales to date: | $310,000 |
Historically, the company’s gross profit ratio has been 30%. Estimate the value of the destroyed inventory using the gross profit method.
Answer:
| Beginning Inventory | $44,000 |
| Purchases | 198,000 |
| Goods available for sale | $242,000 |
| COGS ($310,000 * 70%) | 217,000 |
| Estimated Inventory at 2/10 | $25,000 |
Difficulty: 3 Hard
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
240) Apply the retail method to the following company information to calculate the cost of the ending inventory for the current period.
| Cost | Retail | |
| Beginning inventory | $20,224 | $31,600 |
| Net purchases | 59,508 | 97,000 |
| Sales | 89,000 |
Answer:
| At Cost | At Retail | |
| Goods available for sale: | ||
| Beginning inventory | $20,224 | $31,600 |
| Net purchases | 59,508 | 97,000 |
| Goods available for sale | $79,732 | $128,600 |
| Cost ratio: $79,732/$128,600 = 62% | ||
| Sales at retail | 89,000 | |
| Ending inventory at retail | $39,600 | |
| Ending inventory at cost ($39,600 * 62%) | $24,552 |
Difficulty: 3 Hard
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
241) A company uses the retail inventory method and has the following information available concerning its most recent accounting period:
| At Cost | At Retail | |
| Beginning-of-period inventory | $148,600 | $245,200 |
| Net purchases | 677,400 | 1,229,800 |
| Sales | 1,200,000 |
Answer:
| Cost-to-retail ratio: | ||
| Beginning inventory | $148,600 | $245,200 |
| Net purchases | 677,400 | 1,229,800 |
| Cost of goods available for sale | $826,000 | $1,475,000 |
| Cost to-retail ratio is 56%. | ||
| Estimated cost of the ending inventory: | ||
| Sales | $1,200,000 | |
| Ending inventory at retail | $275,000 | |
| Estimated cost of ending inventory (56% * $275,000) | $154,000 |
Difficulty: 3 Hard
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
242) Forever Young Game Stores (FYG) has taken a physical count of its inventory at March 31, its fiscal year-end. After reviewing the accounting records and documentation, the following items have been discovered:
(a) An invoice from Shreck Co. indicates that $30,000 of games were shipped to FYG on March 27, terms FOB shipping point. The games and invoice did not arrive at FYG until February 2 and were not included in the physical count.
(b) An invoice from Gamers, Inc. indicates that $8,000 of games were shipped to FYG on March 29, terms FOB destination. The games and invoice did not arrive at FYG until February 2 and were not included in the physical count.
The physical count and cost assignment on March 31 prior to these two items is $440,000. The cost of goods sold for FYG is $2,100,000.
Answer:
After adjustment: $470,000/$2,100,000 * 365 = 81.7 days
Difficulty: 3 Hard
Topic: Determining Inventory Items; Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.; 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement; FN Risk Analysis
243) A company reported the current month purchase and sales data for its only product and uses the perpetual inventory system. Determine the cost assigned to ending inventory and cost of goods sold using FIFO.
| Date | Activities | Units Acquired at Cost | Units Sold at Retail |
| April 1 | Beginning Inventory | 175 units @ $15.00 | |
| 4 | Purchase | 150 units @ $16.00 | |
| 7 | Sales | 160 units @ $30.00 | |
| 10 | Purchase | 200 units @ $17.00 | |
| 16 | Sales | 250 units @ $30.00 | |
| 25 | Purchase | 160 units @ $18.00 | |
| 28 | Sales | 150 units @ $32.00 |
Answer:
| Purchases | Cost of goods sold | Balance | |||||||
| Date | Units | Unit cost | Total | Units | Unit cost | Total | Units | Unit cost | Total |
| 4/1 | 175 | $15 | $2,625 | ||||||
| 4/4 | 150 | $16 | $2,400 | 175 | $15 | $2,625 | |||
| 150 | $16 | 2,400 | |||||||
| 325 | $5,025 | ||||||||
| 4/7 | 160 | $15 | $2,400 | 15 | $15 | $225 | |||
| 150 | $16 | 2,400 | |||||||
| 165 | $2,625 | ||||||||
| 4/10 | 200 | $17 | $3,400 | 15 | $15 | $225 | |||
| 150 | $16 | 2,400 | |||||||
| 200 | $17 | 3,400 | |||||||
| 365 | $6,025 | ||||||||
| 4/16 | 15 | $15 | $225 | ||||||
| 150 | $16 | $2,400 | |||||||
| 85 | $17 | $1,445 | 115 | $17 | $1,955 | ||||
| 4/25 | 160 | $18 | $2,880 | 115 | $17 | $1,955 | |||
| 160 | $18 | $2,880 | |||||||
| 275 | $4,835 | ||||||||
| 4/28 | 115 | $17 | $1,955 | ||||||
| 35 | $18 | $630 | 125 | $18 | 2,250 | ||||
| Totals | $9,055 | $2,250 | |||||||
Difficulty: 3 Hard
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
244) A company reported the current month purchase and sales data for its only product and uses the perpetual inventory system. Determine the cost assigned to ending inventory and cost of goods sold using LIFO.
| Date | Activities | Units Acquired at Cost | Units Sold at Retail |
| April 1 | Beginning Inventory | 175 units @ $15.00 | |
| 4 | Purchase | 150 units @ $16.00 | |
| 7 | Sales | 160 units @ $30.00 | |
| 10 | Purchase | 200 units @ $17.00 | |
| 16 | Sales | 250 units @ $30.00 | |
| 25 | Purchase | 160 units @ $18.00 | |
| 28 | Sales | 150 units @ $32.00 |
Answer:
| Purchases | Cost of goods sold | Balance | |||||||
| Date | Units | Unit cost | Total | Units | Unit cost | Total | Units | Unit cost | Total |
| 4/1 | 175 | $15 | $2,625 | ||||||
| 4/4 | 150 | $16 | $2,400 | 175 | $15 | $2,625 | |||
| 150 | $16 | 2,400 | |||||||
| 325 | $5,025 | ||||||||
| 4/7 | 150 | $16 | $2,400 | ||||||
| 10 | $15 | 150 | 165 | $15 | $2,475 | ||||
| 4/10 | 200 | $17 | $3,400 | 165 | $15 | $2,475 | |||
| 200 | $17 | 3,400 | |||||||
| 365 | $5,875 | ||||||||
| 4/16 | 200 | $17 | $3,400 | ||||||
| 50 | $15 | $750 | 115 | $15 | $1,725 | ||||
| 4/25 | 160 | $18 | $2,880 | 115 | $15 | $1,725 | |||
| 160 | $18 | $2,880 | |||||||
| 275 | $4,605 | ||||||||
| 4/28 | 150 | $18 | $2,700 | 115 | $15 | $1,725 | |||
| 10 | $18 | 180 | |||||||
| Totals | $9,400 | _$1,905 | |||||||
Difficulty: 3 Hard
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
245) A company uses the retail inventory method and has the following information available concerning its most recent accounting period:
| At Cost | At Retail | |
| January 1 beginning inventory | $167,340 | $304,240 |
| Cost of goods purchased | 561,850 | 1,021,560 |
| Sales | 940,400 | |
| Sales returns | 40,200 |
Answer:
1.
| $729,190/1,325,800 = | .55 |
| $1,325,800 – $900,200 = | $425,600 |
| $425,600 * .55 = | $234,080 |
2.
| $425,600 – $404,800 = | $20,800 inventory shrinkage at retail |
| $20,800 * .55 = | $11,440 inventory shrinkage at cost |
Difficulty: 3 Hard
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
246) Goods that are in transit and were shipped FOB shipping point should be included in the inventory records of the ________.
Answer: purchaser or buyer
Difficulty: 1 Easy
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making
247) Goods that are in transit and were shipped FOB destination should be included in the inventory records of the ________.
Answer: seller
Difficulty: 1 Easy
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making
248) Goods on consignment are goods that are shipped by the owner, called the ________, to another party called the ________ that will sell the goods for the owner.
Answer: consignor; consignee (answers must appear in this order)
Difficulty: 1 Easy
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
249) ________ is the estimated sales price of damaged goods minus the cost of making the sale.
Answer: Net realizable value
Difficulty: 1 Easy
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
250) Some companies use the ________ constraint to avoid assigning incidental costs of acquiring merchandise to inventory.
Answer: matching; cost-to-benefit (or materiality) (answers can appear in any order)
Difficulty: 2 Medium
Topic: Determining Inventory Items
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
251) The cost of an inventory item includes the ________, plus ________ costs necessary to put it in a place and condition for sale
Answer: invoice price minus any discount; any added or incidental (answers must appear in this order)
Difficulty: 2 Medium
Topic: Determining Inventory Costs
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
252) When purchase costs regularly rise, the ________ method of inventory valuation yields the highest gross profit and net income.
Answer: First in, first out (FIFO)
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
253) When purchase costs regularly rise, the ________ method of inventory valuation yields the lowest gross profit and net income, providing a tax advantage.
Answer: Last in, first out (LIFO)
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
254) An advantage of the ________ method of inventory valuation is that it tends to smooth out the effect of erratic changes in costs.
Answer: weighted average
Difficulty: 2 Medium
Topic: Financial Statement Effects of Costing Methods
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
255) An overstated beginning inventory will ________ cost of goods sold and ________ net income.
Answer: overstate; understate (answers must appear in this order)
Difficulty: 3 Hard
Topic: Financial Statement Effects of Inventory Errors
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement
256) The ________ ratio reflects how much inventory is available in terms of days’ sales.
Answer: days’ sales in inventory
Difficulty: 1 Easy
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Risk Analysis
257) The ________ is a measure of how quickly a merchandiser sells its merchandise inventory.
Answer: inventory turnover
Difficulty: 1 Easy
Topic: Inventory Turnover and Days’ Sales in Inventory
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Risk Analysis
258) The ________ method of assigning costs to inventory and cost of goods sold exactly matches the costs of particular items with the revenues they generate and would be used when items can be easily traced to the purchase invoice cost.
Answer: specific identification
Difficulty: 1 Easy
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
259) The ________ method of assigning costs to inventory and cost of goods sold assumes that the inventory items are sold in the order acquired.
Answer: first in, first out (FIFO)
Difficulty: 1 Easy
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
260) The ________ method of assigning costs to inventory and cost of goods sold assumes that the most recent purchases are sold first.
Answer: last in, first out (LIFO)
Difficulty: 1 Easy
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
261) The ________ method of assigning costs to inventory and cost of goods sold requires that we divide the cost of goods available for sale by the units of inventory available at the time of each sale.
Answer: weighted average (or average cost)
Difficulty: 1 Easy
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
262) Regardless of what inventory method or system is used, cost of goods available for sale must be allocated between ________ and ________.
Answer: cost of goods sold; ending inventory (answers can appear in any order)
Difficulty: 2 Medium
Topic: Inventory Costing Under a Perpetual System
Learning Objective: 05-P3 Appendix 5A– Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Bloom’s: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement
263) When applying the lower of cost or market method of inventory valuation, market is defined as the ________.
Answer: replacement cost
Difficulty: 1 Easy
Topic: Lower of Cost or Market
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
264) The ________ method is commonly used to estimate the value of inventory that has been destroyed, lost, or stolen.
Answer: gross profit
Difficulty: 1 Easy
Topic: Inventory Estimation Methods
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Bloom’s: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
