Fundamental Financial Accounting Concepts Thomas Edmonds 9e - Test Bank

Fundamental Financial Accounting Concepts Thomas Edmonds 9e – Test Bank

Instant Download – Complete Test Bank With Answers

Sample Questions Are Posted Below

Chapter 05 Accounting for Inventories Answer Key

Short Answer Questions
Use the following information for questions 1-5:

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts.

Stan’s Surf Shack purchased 5 surfboards for $200 each. Later it purchased 2 more surfboards for $250 each. Stan’s uses the perpetual inventory system. Assume that 6 surfboards were sold during the period for $350 cash each.

Assume that Stan’s Surf Shack purchased the first five surfboards on account. How would the purchase transaction affect its financial statements?

Answer: (I) (I) (N) (N) (N) (N) (N)

Learning Objective: 05-01

Topic Area: Effect of Cost Flow on Financial Statements

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 1 Easy
Feedback: The purchase of inventory on account increases assets (inventory) and increases liabilities (accounts payable). It does not affect the income statement or the income statement. The event is recorded the same way regardless of what type of cost flow system the company uses.

Assume that Stan’s Surf Shack made the second purchase for cash. How would that purchase affect the financial statements?

Answer: (N) (N) (N) (N) (N) (N) (D)

Learning Objective: 05-01

Topic Area: Effect of Cost Flow on Financial Statements

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 1 Easy
Feedback: The purchase of inventory for cash increases one asset (inventory) and decreases another asset (cash). It does not affect the income statement, but it is reported as a cash outflow for operating activities. The event is recorded the same way regardless of what type of cost flow system the company uses.

How would the sale affect the financial statements if Stan’s Surf Shack uses the LIFO inventory cost flow method?

Answer: (I) (N) (I) (I) (I) (I) (I)

Learning Objective: 05-01

Topic Area: Effect of Cost Flow on Financial Statements

Topic Area: LIFO

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback: The cash sale will increase assets (cash) and increase revenue, which will increase net income and equity, by the selling price. It will also decrease assets (inventory) and increase expenses (cost of goods sold), which will decrease net income and equity, by the cost of the last book purchased. It will be reported as a cash inflow from operating activities on the statement of cash flows.

How would the sale affect the financial statements if Stan’s Surf Shack uses the FIFO inventory cost flow method?

Answer: (I) (N) (I) (I) (I) (I) (I)

Learning Objective: 05-01

Topic Area: Effect of Cost Flow on Financial Statements

Topic Area: FIFO

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 1 Easy
Feedback: The cash sale will increase assets (cash) and increase revenue, which will increase net income and equity, by the selling price. It will also decrease assets (inventory) and increase expenses (cost of goods sold), which will decrease net income and equity, by the cost of the first book purchased. It will be reported as a cash inflow from operating activities on the statement of cash flows.

Stan’s Surf Shack uses the FIFO inventory cost flow method. When its income tax is paid, what is the effect of the entry on the financial statements? Note that no tax liability had been accrued.

Answer: (D) (N) (D) (N) (I) (D) (D)

Learning Objective: 05-01

Topic Area: Effect of Cost Flow on Financial Statements

Topic Area: FIFO

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 1 Easy
Feedback: Payment of income tax will decrease assets (cash) and increase expenses, which decreases net income and equity. It is reported as a cash outflow for operating activities.

Gladding, Inc. applies the lower-of-cost-or-market rule to its inventory in aggregate. At the end of the accounting period, it is determined that the cost of the inventory is $26,985 and the market (replacement) value is $25,886. If an adjustment is necessary, what is its effect on the financial statements?

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts.

Answer: (D) (N) (D) (N) (I) (D) (N)

Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback: Because the market value of the inventory, in aggregate, is lower than cost, the company will write down the inventory to the lower market value. The write-down will decrease assets (inventory) and increase expenses (cost of goods sold), which decreases net income and equity. It does not affect the statement of cash flows.

Steven, Inc. uses the perpetual inventory system. The company’s management, under pressure to report favorable results to shareholders, counted $15,000 of inventory that had already been sold at year-end. Compared to an accurate inventory count, what is the effect of counting this inventory on the financial statements?

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts.

Answer: (I) (N) (I) (N) (D) (I) (N)

Learning Objective: 05-03

Topic Area: Avoiding Fraud in Merchandising Businesses

AACSB: Analytical Thinking

AACSB: Ethics
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 3 Hard
Feedback: Counting inventory that does not belong to the company increases assets (inventory) and decreases expenses (cost of goods sold), which increases net income and equity. It does not affect the statement of cash flows.

On January 1, 2016, Howard Company carried inventory at the lower of cost or market on an aggregate basis. The cost of the inventory was $19,456 but the current market value is $19,950. Assuming the perpetual inventory system is used, how will the inventory adjustment, if one is necessary, affect the financial statements?

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts.

Answer: (N) (N) (N) (N) (N) (N) (N)

Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Analysis
Level of Difficulty: 2 Medium
Feedback: Because the market value is higher than the inventory’s cost, there is no adjustment necessary.

Define the terms FIFO and LIFO.

Answer: FIFO = First-in, first-out: This cost flow assumption designates the cost of the first goods purchased as the cost of the first goods sold.
LIFO = Last-in, first-out: This cost flow assumption designates cost of the last goods purchased as the cost of the first goods sold.

Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy

In an inflationary period, which cost flow method of accounting for inventory will produce the smallest amount of net income?

Answer: LIFO

Learning Objective: 05-01

Topic Area: Effect of Cost Flow on Financial Statements

Topic Area: LIFO

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy
Feedback: In an inflationary period, LIFO will produce a higher cost of goods sold, so it will result in a lower net income and a lower ending inventory.

In an inflationary period, which cost flow method, LIFO or FIFO, results in the larger dollar amount of assets on the balance sheet?

Answer: FIFO

Learning Objective: 05-01

Topic Area: Effect of Cost Flow on Financial Statements

Topic Area: FIFO

Topic Area: LIFO

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy
Feedback: In an inflationary period, FIFO reports the lowest cost of goods sold (earliest purchases) and the highest ending inventory (most recent purchases).

In an inflationary period, which inventory cost flow method, FIFO or LIFO, is more desirable from a tax standpoint? Why?

Answer: In an inflationary period, LIFO is more desirable from a tax standpoint because it will assign the smallest amount of cost to ending inventory. Cost of goods sold will be higher; consequently, net income will be lower. A smaller net income translates into paying a lesser amount of income tax.

Learning Objective: 05-01

Topic Area: Effect of Cost Flow on Financial Statements

Topic Area: FIFO

Topic Area: LIFO

AACSB: Reflective Thinking

AACSB: Communication
AICPA: BB Resource Management
AICPA: FN Decision Making
Blooms: Understand
Level of Difficulty: 2 Medium

In relation to inventory, differentiate between the flow of cost and the physical flow of goods.

Answer: Flow of cost is simply an assumption that is used to allocate the cost of merchandise between cost of goods sold and inventory when specific identification of goods is not feasible.
The physical flow of goods refers to the actual timing of when goods are purchased and sold. Many businesses seek to achieve a FIFO physical flow of goods.

Learning Objective: 05-01

Topic Area: Inventory Cost Flow Methods

AACSB: Reflective Thinking

AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium

In a world with inflation, but no income tax, how does the choice between LIFO and FIFO affect a company’s cash flows? Would the presence of an income tax system cause a difference in the amount of cash outflow when using FIFO versus LIFO?

Answer: The different cost flow assumptions do not cause a difference in cash flow except for tax consequences. Regardless of the assumption chosen, the statement of cash flows shows the amount of cash collected and paid out.
The presence of an income tax system will cause a different amount of cash outflow for the payment of income tax based on the computed net income under the different assumptions. The use of LIFO results in a lower cash flow for income taxes.

Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

AACSB: Analytical Thinking

AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Decision Making

AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 3 Hard

If Bowman Company is using FIFO, how would the accountant compute cost of goods sold when recording a sale under the perpetual inventory system?

Answer: Under FIFO, the cost of the oldest units (those acquired first) would be used in the computation of cost of goods sold. Each group (inventory layer) is considered in chronological order until the number of goods sold has been accounted for.

Learning Objective: 05-01

Topic Area: FIFO

AACSB: Reflective Thinking

AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy

If Bowman Company is using LIFO, how would the accountant compute cost of goods sold when recording a sale under the perpetual inventory system?

Answer: Under LIFO, the cost of the newest units (those acquired most recently) would be used in the computation of cost of goods sold. Each group (inventory layer) is considered in reverse chronological order until the number of goods sold has been accounted for.

Learning Objective: 05-01

Topic Area: LIFO

AACSB: Reflective Thinking

AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy

Sierra Company uses the weighted average inventory cost flow method. How would Sierra’s accountant compute cost of goods sold when recording a sale under the perpetual inventory system?

Answer: The first step is to compute average unit cost by dividing the total cost of goods available for sale by the number of units available. The average unit cost is then multiplied by the number of units sold to compute the cost of goods sold.

Learning Objective: 05-01

Topic Area: Weighted Average

AACSB: Reflective Thinking

AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy

If some inventory items have declined in value from damage or obsolescence, what effect will the lower-of-cost-or-market rule have on the amount of inventory shown on the balance sheet?

Answer: Application of the lower-of-cost-or-market rule will decrease the amount of inventory reported on the balance sheet.

Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium
Feedback: The entry that results from writing down inventory to a lower market value decreases inventory and increases cost of goods sold.

Kincaid Camera Shop applies the lower-of-cost-or-market rule to individual items of inventory. In 2016, some of Kincaid’s inventory lost value due to obsolescence. Other items increased in market value. In total, the market value of Kincaid’s inventory was higher at the end of 2016 than the cost of the inventory. Would Kincaid have an adjustment to make at the end of 2016 due to the lower-of-cost-or-market rule? Would the answer be any different if Kincaid applied the rule in aggregate rather than to individual items?

Answer: Kincaid would still have an adjustment at the end of 2016 for those items that lost value because the company applies the rule individually. However, no adjustment would be necessary if Kincaid applied the rule in aggregate because the total market value exceeded the cost.

Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Analytical Thinking

AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 3 Hard

Explain the computation of the inventory amount if the lower-of-cost-or-market rule is applied using the individual inventory item approach.

Answer: With the individual item approach, the accountant looks at each line item in the inventory and determines whether the original cost is more or less than the current market value. The lower of the two figures is then multiplied by the number of units. After performing this step for each line item in the inventory, the total of the resultant figures will be the valuation of the inventory. Each item is thus valued at the lower of cost or market.

Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Reflective Thinking

AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium

Explain the meaning of “cost” and “market” as used in the application of the lower-of-cost-or-market rule.

Answer: Cost refers to the amount computed under the selected inventory cost flow method (FIFO, LIFO, etc.). Market refers to the amount that would have to be paid to replace the inventory.

Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Remember
Level of Difficulty: 1 Easy

What accounting steps would a firm normally take when it discovers a material difference between a physical inventory count and the book inventory figure? Assume that the company uses a perpetual inventory system.

Answer: If a material difference is detected between the physical and book inventories, an inventory adjustment is normally made. For example, if the physical count is less than the book figure, cost of goods sold (or an inventory loss account) would be increased and the inventory account would be decreased.

Learning Objective: 05-03

Topic Area: Avoiding Fraud in Merchandising Businesses

AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy

Explain the effects of an understatement of ending inventory on both the present year’s net income and the following year’s net income. What is the effect of this error on the inventory balance at the end of the following year?

Answer: Understating ending inventory would cause the following effects in the first year: an overstatement of cost of goods sold and an understatement of gross margin, net income, retained earnings and total assets. In the following year the error would reverse itself. Beginning inventory would be understated, cost of goods sold would be understated and gross margin and net income would be overstated. Retained earnings and total assets would be correctly stated at the end of the second year.

Learning Objective: 05-03

Topic Area: Avoiding Fraud in Merchandising Businesses

AACSB: Reflective Thinking

AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium

What are the circumstances that might cause a company to need an estimate of the amount of its inventory?

Answer: Inventory may need to be estimated when a loss occurs due to fire or theft. Also, an estimate is helpful in determining the reasonableness of a physical inventory. In addition, firms may wish to prepare interim (monthly or quarterly) financial statements without performing a physical inventory.

Learning Objective: 05-04

Topic Area: Estimating the Ending Inventory Balance

AACSB: Reflective Thinking

AACSB: Communication
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium

List the specific steps used in computing the estimated inventory balance using the gross margin method.

Answer:

(1) Estimate the dollar amount of gross margin by multiplying the gross margin percentage by the sales.
(2) Estimate cost of goods sold by subtracting the estimated gross margin from sales.
(3) Estimate ending inventory by subtracting the estimated cost of goods sold from the amount of goods available for sale (beginning inventory plus purchases).

Learning Objective: 05-04

Topic Area: Estimating the Ending Inventory Balance

AACSB: Knowledge Application

AACSB: Communication
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium

Explain the computation of and the significance of inventory turnover.

Answer: Inventory turnover is computed by dividing cost of goods sold by inventory. This is a measure of the speed with which the inventory is sold. A high turnover is more desirable than a low turnover.

Learning Objective: 05-05

Topic Area: Inventory Turnover

AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium

Discuss the significance of the average number of days to sell inventory.

Answer: Average number of days to sell inventory gives an indication of how much stock is on hand. It shows an average of how long it would take for the average inventory item to be sold.

Learning Objective: 05-05

Topic Area: Inventory Turnover

AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Risk Analysis

AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium

What ratio (usually an average from prior periods) can be used in estimating the current period’s ending inventory?

Answer: Gross margin ratio

Learning Objective: 05-04

Topic Area: Estimating the Ending Inventory Balance

AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Measurement

AICPA: FN Risk Analysis
Blooms: Remember
Level of Difficulty: 2 Medium

Feedback: Gross margin ratio, based on past history, can be used, paired with sales of the current period, to estimate cost of goods sold, and subsequently, ending inventory.

Multiple Choice Questions

At a time of declining prices, which cost flow assumption will result in the highest ending inventory?
A.Weighted average
B. FIFO
C. LIFO
D. Either weighted average or FIFO

Answer: C
Learning Objective: 05-01

Topic Area: LIFO

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 3 Hard
Feedback: In a period of declining prices, LIFO will result in the lowest cost of goods sold (most recent purchases) and the highest ending inventory (earliest purchases).

When prices are rising, which method of inventory, if any, will result in the lowest relative net cash outflow (including the effects of taxes, if any)?
A.LIFO.
B. FIFO.
C. Weighted average
D. None of these; inventory methods cannot affect cash flows.

Answer: A
Learning Objective: 05-01

Topic Area: LIFO

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Measurement

Blooms: Analyze
Level of Difficulty: 3 Hard

Feedback: When prices are rising, LIFO will result in the highest cost of goods sold (most recent purchases), and therefore will result in the lowest income tax expense. Income tax expense is the only cash flow affected by cost flow assumption.

Which inventory costing method will produce an amount for cost of goods sold that is closest to current market value?
A.Weighted average.
B. Specific identification.
C. LIFO.
D. FIFO.

Answer: C
Learning Objective: 05-01

Topic Area: LIFO

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback: LIFO will produce cost of goods sold that is based on the most recent purchases.

Blake Company purchased two identical inventory items. The item purchased first cost $16.00, and the item purchased second cost $18.00. Blake sold one of the items for $24.00. Which of the following statements is true?
A.Ending inventory will be lower if Blake uses weighted average than if FIFO were used.
B. Cost of goods sold will be higher if Blake uses FIFO than if weighted average were used.
C. The dollar amount assigned to ending inventory will be the same no matter which cost flow method is used.
D. Gross margin will be higher if Blake uses LIFO than it would be if FIFO were used.

Answer: A
Learning Objective: 05-01

Topic Area: FIFO

Topic Area: Weighted Average

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 3 Hard
Feedback: If Blake uses weighted average, ending inventory will be $17.00. If the company uses FIFO, ending inventory will be $18.00.

When prices are falling:
A.LIFO will result in lower income and a lower inventory valuation than will FIFO.
B. LIFO will result in lower income and a higher inventory valuation than will FIFO.
C. LIFO will result in higher income and a higher inventory valuation than will FIFO.
D. LIFO will result in higher income and a lower inventory valuation than will FIFO.

Answer: C
Learning Objective: 05-01

Topic Area: LIFO

Topic Area: FIFO

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback: When prices are falling, LIFO will produce a low cost of goods sold (most recent purchases) and a high ending inventory (earliest purchases), compared to FIFO, which will produce a high cost of goods sold (earliest purchases) and low ending inventory (most recent purchases).

If prices are rising, which inventory cost flow method will produce the lowest amount of cost of goods sold?
A.LIFO
B. FIFO
C. Weighted average
D. LIFO, FIFO, and weighted average will all produce equal amounts.

Answer: B
Learning Objective: 05-01

Topic Area: FIFO

AACSB: Analytical Thinking
AICPA: BB Critical Thinking

AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 1 Easy
Feedback: When prices are rising, FIFO will produce the lowest cost of goods sold compared with other methods because it is based on the earliest, lowest priced, purchases.

Barker Company paid cash to purchase two identical inventory items. The first purchase cost $18.00 cash and the second cost $20.00 cash. Barker sold one inventory item for $30.00 cash. Based on this information alone, without considering the effect of income tax,:
A.cash flow from operating activities is $11.00 assuming a weighted average cost flow.
B. cash flow from operating activities is $12.00 assuming a FIFO cost flow.
C. cash flow from operating activities is $10.00 assuming a LIFO cost flow.
D. the amount of cash flow from operating activities is not affected by the cost flow method.

Answer: D
Learning Objective: 05-01

Topic Area: Effect of Cost Flow on Financial Statements

Topic Area: FIFO

Topic Area: LIFO

Topic Area: Weighted Average

AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium
Feedback: Regardless of the cost flow assumption, Barker reported outflow of $38.00 for the purchases of the two items and inflow of $30.00 for the sale of one item.

When the cost of purchasing inventory is declining, which inventory cost flow method will produce the highest amount of cost of goods sold?
A.Weighted average
B. LIFO
C. FIFO
D. LIFO, FIFO, and weighted average will all produce the same amount of cost of goods sold.

Answer: C
Learning Objective: 05-01

Topic Area: FIFO

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback: When prices are declining, FIFO will produce the highest cost of goods sold (earliest purchases) compared with LIFO which will be based on more recent, lower priced purchases. Weighted average will be somewhere in between.

In an inflationary environment,
A.a company’s net income will be higher if it uses LIFO than if it uses FIFO.
B. a company’s cost of goods sold will be lower if it uses LIFO as opposed to FIFO.
C. a company’s net income will be the same regardless of whether LIFO or FIFO is used.
D. a company’s assets will be lower if it uses LIFO as opposed to FIFO cost flow.

Answer: D
Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium
Feedback: In an inflationary environment, prices are rising. LIFO will produce the lowest ending inventory (earliest purchases) compared with FIFO.

Hoover Company purchased two identical inventory items. The item purchased first cost $33.00. The item purchased second cost $35.00. Then Hoover sold one of the inventory items for $62.00. Based on this information:
A.the amount of ending inventory is $35.00 if Hoover uses the LIFO cost flow method.
B. the amount of gross margin is $28.00 if Hoover uses the weighted average cost flow method.
C. the amount of cost of goods sold is $35.00 if Hoover uses the FIFO cost flow method.
D. the amount of cost of goods sold is $33.00 if Hoover uses the LIFO cost flow method.

Answer: B
Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

Topic Area: Weighted Average

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: If Hoover uses LIFO, cost of goods sold will be $35.00 (most recent purchase) and ending inventory will be $33.00, not $35.00. If Hoover uses weighted average, the weighted average cost per unit is $34.00. Therefore, gross margin will be $28.00 ($62.00 Sales – $34.00 Cost of goods sold). If Hoover uses FIFO, cost of goods sold will be $33.00 (earliest purchase), not $35.00.

Anton Co. uses the perpetual inventory method. Anton purchased 400 units of inventory that cost $12.00 each. At a later date the company purchased an additional 600 units of inventory that cost $16.00 each. If Anton uses the FIFO cost flow method and sells 700 units of inventory, the amount of cost of goods sold will be:
A.$11,200.
B. $10,400.
C. $8,400.
D. $9,600.

Answer: D
Learning Objective: 05-01

Topic Area: FIFO

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: (400 x $12.00) + (300 x $16.00) = $9,600

Use the following information for questions 40-44:

The inventory records for Radford Co. reflected the following

Determine the weighted average cost per unit (rounded) for May.
A.$4.45
B. $4.50
C. $5.12
D. $6.34

Answer: B
Learning Objective: 05-01

Topic Area: Weighted Average

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: [(100 x $4.00) + (300 x $4.40) + (500 x $4.60) + (100 x $4.80)]/1,000 units = $4.50 per unit

Determine the amount of cost of goods sold assuming the LIFO cost flow method.
A.$4,100
B. $4,320
C. $2,360
D. $3,600

Answer: A
Learning Objective: 05-01

Topic Area: LIFO

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: (100 x $4.80) + (500 x $4.60) + (300 x $4.40) = $4,100

Determine the amount of ending inventory assuming the FIFO cost flow method.
A.$480
B. $440
C. $400
D. $940

Answer: A
Learning Objective: 05-01

Topic Area: LIFO

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: 1,000 units available for sale – 900 units sold = 100 units in ending inventory; 100 x $4.80 = $480

Determine the amount of gross margin assuming the weighted average cost flow method.
A.$3,015
B. $2,412
C. $1,314
D. $2,970

Answer: D
Learning Objective: 05-01

Topic Area: Weighted Average

Determine the amount of gross margin assuming the FIFO cost flow method.
A.$2,920
B. $3,420
C. $3,000
D. $4,020

Answer: C
Learning Objective: 05-01

Topic Area: FIFO

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: (100 x $4.00) + (300 x $4.40) + (500 x $4.60) = $4,020 cost of goods sold; $7,020 sales – $4,020 cost of goods sold = $3,000

Use the following information for questions 45-47:

Glasgow Enterprises started the period with 80 units in beginning inventory that cost $7.50 each. During the period, the company purchased inventory items as follows

Glasgow sold 220 units after purchase 3 for $17.00 each.

Glasgow’s cost of goods sold under FIFO would be:
A.$1,650.
B. $1,860.
C. $2,310.
D. $2,100.

Answer: B
Learning Objective: 05-01

Topic Area: FIFO

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: (80 x $7.50) + (140 x $9.00) = $1,860

Glasgow’s ending inventory under LIFO would be:
A.$2,730.
B. $2,460.
C. $2,220.
D. $1,950.

Answer: C
Learning Objective: 05-01

Topic Area: LIFO

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: 80 units + 400 units purchased – 220 units sold = 260 units in ending inventory; (80 x $7.50) + (180 x $9.00) = $2,220

Glasgow’s ending inventory under weighted average would be approximately:
A.$2,361.
B. $2,340.
C. $1,980.
D. $1,998.

Answer: B
Learning Objective: 05-01

Topic Area: Weighted Average

[(80 x $7.50) + (200 x $9.00) + (150 x $9.30) + (50 x $10.50)]/480 = $9.00 per unit x 260 = $2,340

Poole Company purchased two identical inventory items. One of the items, purchased in January, cost $4.50. The other, purchased in February, cost $4.75. One of the items was sold in March at a selling price of $7.50. Select the correct answer assuming that Poole uses a LIFO cost flow.
A.The balance in ending inventory would be $4.75.
B. The amount of gross margin would be $2.75.
C. The amount of ending inventory would be $4.625.
D. The amount of cost of goods sold would be $4.50.

Answer: B
Learning Objective: 05-01

Topic Area: LIFO

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: $7.50 sales – $4.75 cost of goods sold = $2.75 gross margin

Koontz Company uses the perpetual inventory method. On January 1, 2016, the company’s first day of operations, Koontz purchased 400 units of inventory that cost $7.50 each. On January 10, 2016, the company purchased an additional 600 units of inventory that cost $9.00 each. If Koontz uses a weighted average cost flow method and sells 550 units of inventory, the amount of inventory appearing on balance sheet following the sale will be approximately:
A.$3,780.
B. $4,738.
C. $3,080.
D. $3,713.

Answer: A
Learning Objective: 05-01

Topic Area: Weighted Average

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 3 Hard
Feedback: 400 units + 600 units – 550 units sold = 450 units in ending inventory; [(400 x $7.50) + (600 x $9.00)]/1,000 = $8.40 per unit;

450 units x $8.40 = $3,780

Stubbs Company uses the perpetual inventory method. On January 1, 2016, Stubbs purchased 400 units of inventory that cost $8.00 each. On January 10, 2016, the company purchased an additional 600 units of inventory that cost $9.00 each. If Stubbs uses a weighted average cost flow method and sells 700 units of inventory for $16.00 each, the amount of gross margin reported on the income statement will be:
A.$5,180.
B. $5,250.
C. $5,000.
D. $6,020.

Answer: A
Learning Objective: 05-01

Topic Area: Weighted Average

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 3 Hard
Feedback: [(400 x $8.00) + (600 x $9.00)]/1,000 = $8.60 per unit; 700 x $8.60 = $6,020 cost of goods sold;

$11,200 sales – $6,020 cost of goods sold = $5,180 gross margin

Melbourne Company uses the perpetual inventory method. Melbourne purchased 500 units of inventory that cost $4.00 each. At a later date the company purchased an additional 600 units of inventory that cost $5.00 each. If Melboune uses a LIFO cost flow method, and sells 800 units of inventory, the amount of ending inventory appearing on the balance sheet will be:
A.$3,800.
B. $1.350.
C. $1,500.
D. $1,200.

Answer: D
Learning Objective: 05-01

Topic Area: LIFO

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: 500 units + 600 units – 800 units sold = 300 units in ending inventory; 300 units x $4.00 = $1,200

Vargas Company uses the perpetual inventory method. Vargas purchased 400 units of inventory that cost $15.00 each. At a later date the company purchased an additional 800 units of inventory that cost $18.00 each. Vargas sold 500 units of inventory for $27.00. If Vargas uses a FIFO cost flow method, the amount of cost of goods sold appearing on the income statement will be:
A.$7,800.
B. $6,000.
C. $4,500.
D. $5,700.

Answer: A
Learning Objective: 05-01

Topic Area: FIFO

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 1 Easy
Feedback: (400 x $15.00) + (100 x $18.00) = $7,800 cost of goods sold

Which of the following businesses is most likely to use a specific identification cost flow method?
A.Car dealership
B. Grocery store
C. Hardware store
D. Roofing company

Answer: A
Learning Objective: 05-01

Topic Area: Specific Identification

AACSB: Reflective Thinking
AICPA: BB Industry

AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy
Feedback: A car dealership sells a relatively small number of high-value items of inventory, each of which bears a unique vehicle identification number.

Tetra Company purchased 2,000 units of inventory that cost $4.00 each on January 1, 2016. An additional 3,000 units of inventory were purchased on January 12, 2016 at a cost of $4.20 each. Tetra Company sold 4,000 units of inventory on January 20, 2016. Which of the following entries would be required to recognize the cost of goods sold assuming that Tetra Co. uses the perpetual inventory method and a FIFO cost flow method?
A.
B.
C.
D.

Answer: C
Learning Objective: 05-01

Topic Area: FIFO

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: (2,000 x $4.00) + (2,000 x $4.20) = $16,400; The journal entry to recognize cost of goods sold is a debit (increase) to cost of goods sold and a credit (decrease) to inventory.
Use the following information for questions 55-57:

Chase Co. uses the perpetual inventory method. The inventory records for Chase reflected the following

Assuming Chase uses a LIFO cost flow method, the amount of cost of goods sold for the sales transaction on January 18 is (round the final result to the nearest whole dollar):
A.$1,150.
B. $1,050.
C. $1,070.
D. $1,130.

Answer: C
Learning Objective: 05-01

Topic Area: LIFO

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium

Feedback: (400 x $2.10) + (100 x $2.30) = $1,070

Assuming Chase uses a FIFO cost flow method, the cost of goods sold for the sales transaction on January 31 is:
A.$1,020.
B. $1,005.
C. $1,045.
D. $340.

Answer: A
Learning Objective: 05-01

Topic Area: FIFO

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 3 Hard
Feedback: (200 x $2.10) + (250 x $2.40) = $1,020 cost of goods sold

Assuming Chase uses a FIFO cost flow method, the ending inventory on January 31 is:
A.$345.
B. $340.
C. $330.
D. $1,020.

Answer: B
Learning Objective: 05-01

Topic Area: FIFO

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: (50 x $2.40) + (100 x $2.20) = $340 ending inventory

Rowan Company has four different categories of inventory. Quantity, cost, market value for each inventory category is shown below:
The company carries inventory at lower-of-cost-or-market applied to the inventory in aggregate. The implementation of the lower-of-cost-or-market rule would:
A. increase assets and equity by $55.50.
B. reduce assets and equity by $101.00.
C. reduce assets and equity by $79.00.
D. leave total assets and equity unchanged.

Answer: D
Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 3 Hard
Feedback: (220 x $4.40) + (130 x $6.20) + (100 x $10.00) + (25 x $20.50) = $3,286.50 Total Cost; (220 x $4.60) + (130 x $6.00) + (100 x 9.25) + (25 x $25.00) = $3,342 Total Market; Because market value, in aggregate, is higher than cost, no entry is necessary.

The lower-of-cost-or-market rule: can be applied to
A.can be applied to major classes or categories of inventory.
B. can be applied to the entire stock of inventory in aggregate.
C. can be applied to each individual inventory item.
D. can be applied to any of these answer choices.

Answer: D
Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Remember
Level of Difficulty: 1 Easy
Feedback: Companies can choose any of those methods to apply the lower-of-cost-or-market rule.

If a firm is using the lower-of-cost-or-market rule and if a write-down entry is required, which of the following effects will apply?
A.Net income will increase.
B. Gross margin will decrease.
C. Assets will decrease.
D. Ggross margin will decrease and assets will also decrease .

Answer: D
Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback: A write-down entry resulting from applying the lower-of-cost-or-market rule increases cost of goods sold, which decreases gross margin, and decreases inventory (an asset).

What is meant by “market” in lower-of-cost-or-market calculations?
A.The amount of gross margin earned by selling merchandise.
B. The amount the goods were sold for during the period.
C. The amount that would have to be paid to replace the merchandise.
D. The amount originally paid for the merchandise.

Answer: C
Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy
Feedback: Market value is the replacement value of the inventory.

Which of the following methods of applying the lower-of-cost-or-market rule will result in the fewest write-downs of inventory?
A.Each individual inventory item.
B. Average of cost of goods sold for the past three years.
C. Major classes or categories of inventory.
D. The entire stock of inventory in aggregate.

Answer: D
Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy
Feedback: When a company applies the lower-of-cost-or-market rule to the entire stock of inventory in aggregate, items that have market values that are higher than cost will cancel out others that have lower market values, resulting in fewer write-downs.

Nelson Corporation is required to record an inventory write-down of $2,500 as a result of using the lower-of-cost-or-market rule. Which of the following answers correctly shows how this entry would affect the financial statements?
A.
B.
C.
D.

Answer: A
Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback: The entry to record the write-down will decrease assets (inventory) and increase expenses (cost of goods sold), which decreases net income and equity. It does not affect the statement of cash flows.

The Bradford Company was recently required to record an inventory write-down of $5,200 because the market value of its inventory was less than cost. Assuming the amount of the write-down is not material (the total inventory was over $9,750,000), which of the following is the appropriate journal entry?

C.
D.

Answer: B
Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: The write-down, when immaterial, is a debit (increase) to cost of goods sold and a credit (decrease) to inventory.

At the end of the 2016 accounting period DeYoung Company determined that the market value of its inventory was $79,800. The historical cost of this inventory was $81,400. DeFazio uses the perpetual inventory method. The entry necessary to reduce the inventory to the lower of cost or market will
A.decrease assets and decrease gross margin.
B. decrease assets and decrease net income.
C. increase assets and increase net income.
D. decrease assets, gross margin, and net income.

Answer: D
Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback: The write-down will decrease assets (inventory) and increase expenses (cost of goods sold), which decreases both gross margin and net income.

West Corporation’s 2015 ending inventory was overstated by $20,000; however, ending inventory for 2016 was correct. Which of the following statements is correct?
A.Net income for 2015 is understated.
B. Retained earnings at the end of 2016 is overstated.
C. Cost of goods sold for 2015 is overstated.
D. Cost of goods sold for 2016 is overstated.

Answer: D
Learning Objective: 05-03

Topic Area: Avoiding Fraud in Merchandising Businesses

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 3 Hard
Feedback: Overstating inventory at the end of 2015, but correctly reporting inventory at the end of 2016 will cause cost of goods sold to be understated for 2015 and overstated for 2016. However, by the end of 2016, retained earnings will be correctly stated.

Phipps Corporation overstated its ending inventory on December 31, 2015. Which of the following answers correctly identifies the effect of the error on 2016 financial statements?
A.Cost of goods sold is overstated.
B. Gross margin overstated.
C. Ending inventory is understated.
D. Net income is overstated.

Answer: A
Learning Objective: 05-03

Topic Area: Avoiding Fraud in Merchandising Businesses

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 3 Hard
Feedback: Overstating inventory at the end of 2015, but correctly reporting inventory at the end of 2016 will cause cost of goods sold to be understated for 2015 and overstated for 2016. However, it will not necessarily impact the 2016 inventory count.

Why are the inventory and cost of goods sold accounts attractive targets for managerial fraud?
A.There are few if any procedures that can check for fraud in these accounts.
B. There are no adequate methods of record keeping for inventory.
C. These accounts are more significant than most other accounts.
D. Cost of goods sold and Inventory accounts are not attractive targets of fraud.

Answer: C
Learning Objective: 05-03

Topic Area: Avoiding Fraud in Merchandising Businesses

AACSB: Reflective Thinking

AACSB: Ethics
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Blooms: Understand
Level of Difficulty: 2 Medium
Feedback: In contrast, selling and administrative expenses are made up of many less significant expenses, and are more difficult to misstate to a great extent.

On December 31, 2015, Owings Corporation overstates the ending inventory account by $5,000. How will this affect Retained Earnings in the December 31, 2016 balance sheet?
A.Retained Earnings will be correctly stated.
B. Retained Earnings will be understated by $5,000.
C. Retained Earnings will be overstated by $5,000.
D. Cannot be determined with the above information.

Answer: A
Learning Objective: 05-03

Topic Area: Avoiding Fraud in Merchandising Businesses

AACSB: Reflective Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium
Feedback: Overstating inventory at the end of 2015, but correctly reporting inventory at the end of 2016 will cause cost of goods sold to be understated for 2015 and overstated for 2016. However, by the end of 2016, retained earnings will be correctly stated.

An overstatement of ending inventory results in which of the following in the present period?
A.Overstatement of cost of goods sold.
B. Overstatement of total assets.
C. Understatement of net income.
D. Understatement of retained earnings.

Answer: B
Learning Objective: 05-03

Topic Area: Avoiding Fraud in Merchandising Businesses

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 1 Easy
Feedback: Overstatement of inventory overstates assets (inventory) and understates expenses (cost of goods sold), which overstates net income and retained earnings, all in the current period.

Zirkle Company understated its ending inventory. Which of the following answers correctly states the effect of the error in the present period?
A.Overstatement of total assets and cost of goods sold.
B. Overstatement of cost of goods sold and retained earnings.
C. Understatement of liabilities and retained earnings.
D. Understatement of total assets and gross margin.

Answer: D
Learning Objective: 05-03

Topic Area: Avoiding Fraud in Merchandising Businesses

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback: Understating inventory understates assets (inventory) and overstates cost of goods sold, which understates gross margin, net income, and retained earnings, all in the current period.

Under the perpetual inventory system, the best estimate of the amount of inventory is:
A.shown on the previous period’s financial statements.
B. the book balance in the inventory account.
C. provided by application of the gross margin method.
D. the beginning inventory balance minus sales for the period.

Answer: B
Learning Objective: 05-04

Topic Area: Estimating the Ending Inventory Balance

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium
Feedback: In a perpetual inventory system, the balance in the inventory general ledger account should provide the best estimate of inventory on hand. The gross margin method should only be used if a book inventory and a physical inventory are unavailable.

The gross margin method requires all but which of the following elements of information?
A.Total sales for the present period.
B. The ending inventory for the present period.
C. Amount of purchases during the present period.
D. The beginning inventory for the present period.

Answer: B
Learning Objective: 05-04

Topic Area: Estimating the Ending Inventory Balance

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium
Feedback: The gross margin method is used when ending inventory for the present period is not available. It does require the beginning inventory balance and sales and purchases for the present period.

Which of the following circumstances is not a reason to compute an estimate of the amount of inventory?
A.To complete the company’s annual income tax return.
B. To evaluate the accuracy of a physical count of goods.
C. To prepare monthly or quarterly financial statements without incurring the expense of taking a physical inventory.
D. To support an insurance claim for a loss due to theft of inventory.

Answer: A
Learning Objective: 05-04

Topic Area: Estimating the Ending Inventory Balance

AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium
Feedback: Income tax returns require a physical count of inventory. The gross margin method is insufficient.

When using the gross margin method to estimate inventory, which of the following is a step in the computation?
A.Add the amount goods available for sale to estimated cost of goods sold.
B. Add estimated gross margin to sales.
C. Subtract estimated goods available for sale from beginning inventory.
D. Subtract estimated cost of goods sold from the amount of goods available for sale.

Answer: D
Learning Objective: 05-04

Topic Area: Estimating the Ending Inventory Balance

AACSB: Reflective Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 3 Hard
Feedback: When applying the gross margin method, cost of goods sold is estimated based on actual sales multiplied by estimated (historic) gross margin percentage. Gross margin is then subtracted from goods available for sale (beginning inventory plus purchases) to estimate ending inventory.

Landis Company is preparing its financial statements. Gross margin is normally 40% of sales. Information taken from the company’s records revealed sales of $25,000; beginning inventory of $2,500 and purchases of $17,500. The estimated amount of ending inventory would be:
A.$15,000.
B. $5,000.
C. $8,000.
D. $10,000.

Answer: B
Learning Objective: 05-04

Topic Area: Estimating the Ending Inventory Balance

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: $25,000 x (1 – 0.40) = $15,000 estimated cost of goods sold; $2,500 beginning inventory + $17,500 purchases = $20,000 goods available for sale; $20,000 – $15,000 cost of goods sold = $5,000 ending inventory

An error that results in overstating ending inventory would have what effect on the company’s financial statements in the current year?
A.
B.
C.
D.

Answer: A
Learning Objective: 05-04

Topic Area: Avoiding Fraud in Merchandising Businesses

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback: Overstating ending inventory will increase assets (inventory) and decreases expenses (cost of goods sold), which will increase net income and equity. It will have not affect on the statement of cash flows.

When preparing its quarterly financial statements, Pace Co. uses the gross margin method to estimate ending inventory. The following information is available for the 1st quarter of 2016:

What was Pace’s estimated inventory on March 31, 2016?
A. $236,250
B. $288,750
C. $206,250
D. $258,750

Answer: C
Learning Objective: 05-04

Topic Area: Estimating the Ending Inventory Balance

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: $525,000 x (1 – 0.45) = $288,750 estimated cost of goods sold; $110,000 beg. inventory + $385,000 purchases = $495,000 goods available for sale; $495,000 – $288,750 cost of goods sold = $206,250 estimated ending inventory

Taylor Co. had beginning inventory of $400 and ending inventory of $600. Taylor Co. had cost of goods sold amounting to $1,800. Based on this information, Taylor Co. must have purchased inventory amounting to:
A.$1,600
B. $2,800
C. $2,000
D. $2,400

Answer: C
Learning Objective: 05-04

Topic Area: Estimating the Ending Inventory Balance

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: $400 Beginning inventory + Purchases – $600 Ending inventory = $1,800 Cost of goods sold; Purchases = $1,800 – $400 + $600 = $2,000 Purchases

Use the following information for questions 80-81:

The average number of days to sell inventory for Company Y is approximately:
A.15.3
B. 24.8
C. 23.9
D. 25.6

Answer: B
Learning Objective: 05-05

Topic Area: Inventory Turnover

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Risk Analysis
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: $4,338,000/ $295,000 = 14.71 Inventory turnover; 365 Days/14.71 = 24.8 Days

Given that longer inventory holding periods act to increase expenses, which of the three companies would be expected to have the lowest inventory holding cost?
A.All three companies have equal holding costs
B. Company X
C. Company Y
D. Company Z

Answer: C
Learning Objective: 05-05

Topic Area: Inventory Turnover

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Risk Analysis
Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback: Company X inventory turnover = $1,980,000/$175,000 = 11.31 times; Avg. days in inventory = 365/11.31 = 32.3 days

Company Y inventory turnover = $4,338,000/$295,000 = 14.71 times; Avg. days in inventory = 365/14.71 = 24.8 days

Company Z inventory turnover = $3,234,000/$250,500 = 12.91 times; Avg. days in inventory = 365/12.91 = 28.3 days

Company Y, with the lowest number of days in inventory, will have the lowest inventory holding cost.

Inventory turnover is calculated by dividing:
A.cost of goods sold by inventory.
B. sales by inventory.
C. beginning inventory by the ending inventory.
D. inventory by cost of goods sold.

Answer: A
Learning Objective: 05-05

Topic Area: Inventory Turnover

AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Risk Analysis
Blooms: Remember
Level of Difficulty: 1 Easy

Carson Company has an inventory turnover of 12.75, and its inventory amounts to $2,400,000. What is the amount of cost of goods sold?
A.$30,600,000
B. $188,235
C. $26,666,667
D. $51,000

Answer: A
Learning Objective: 05-05

Topic Area: Inventory Turnover

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 1 Easy
Feedback: Cost of goods sold/$2,400,000 = 12.75; Cost of goods sold = 12.75 x $2,400,000 = $30,600,000

Misty Mountain Outfitters is a merchandiser of specialized fly fishing gear. Its cost of goods sold for 2016 was $295,000, and sales were $690,000. The amount of merchandise on hand was $50,000, and total assets amounted to $585,000. Using this information, which of the following answers correctly states the average days in inventory ratio? Round to the nearest day.
A.26 days
B. 62 days
C. 31 days
D. 40 days

Answer: B
Learning Objective: 05-05

Topic Area: Inventory Turnover

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Risk Analysis
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: $295,000 cost of goods sold/$50,000 inventory = 5.9 times; 365/5.9 times = 62 days

Which of the following statements is not correct in regard to the importance of inventory turnover to a company’s profitability?
A.Most companies prefer to have a low inventory turnover than a high inventory turnover.
B. It is sometimes more desirable to sell a large amount of merchandise with a small amount of gross margin than a small amount of merchandise with a large amount of gross margin.
C. A company’s profitability is affected by how rapidly inventory sells.
D. A company’s profitability is affected by the spread between cost and selling price.

Answer: A
Learning Objective: 05-05

Topic Area: Inventory Turnover

AACSB: Reflective Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Blooms: Understand
Level of Difficulty: 2 Medium
Feedback: High inventory is generally preferable to low inventory turnover, so answer A is incorrect.

Essay Questions

On June 1, Delaware Co. had one unit in beginning inventory that cost $10.00. During June, Delaware paid cash to purchase two additional inventory items. Delaware purchased the first item for cash at a cost of $10.00, and the second at a cost of $12.00. Delaware Co. sold two inventory items for $24.00 each, receiving cash. Based on this information alone, indicate whether each of the following items is true or false.
_____ a) The amount of ending inventory will be $10 assuming the LIFO cost flow was used.
_____ b) Cost of goods sold would be $24 assuming the weighted average cost flow was used.
_____ c) Cash flow from operating activities in June would be $28 assuming a FIFO cost flow was used.
_____ d) Cash flow from operating activities in June would be $26 independent of what cost flow assumption was used.
_____ e) The amount of gross margin would be $26 assuming the FIFO cost flow was used.

Answer: a) T b) F c) F d) T e) F

Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

Topic Area: Weighted Average

AACSB: Knowledge Application
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback:

a) This is true. LIFO will report the cost of the oldest unit of inventory (beginning inventory) as its ending inventory.
b) This is false. Weighted average cost per unit = ($10 + $10 + $12)/3 = $10.67 per unit; Cost of goods sold = 2 units x $10.67 = $21.34
c) This is false. Cash flow from operating activities = $24 inflow + $24 inflow – $10 outflow – $12 outflow = $26 inflow
d) This is true. Cash flow from operating activities = $24 inflow + $24 inflow – $10 outflow – $12 outflow = $26 inflow. This is unaffected by the cost flow assumption used.
e) This is false. $48 sales – ($10 + $10) cost of goods sold = $28 gross margin
Indicate whether each of the following statements is true or false.
_____ a) The FIFO cost flow method assumes that the company physically rotates inventory so that the oldest inventory is sold first.
_____ b) In a period of rising prices, FIFO gives higher cost of goods sold than LIFO.
_____ c) Under the weighted average cost flow method, the cost per unit of ending inventory is equal to the cost per unit of inventory sold.
_____ d) In a period of declining prices, LIFO will result in higher income tax expense than FIFO.
_____ e) In a period of rising prices, FIFO gives higher ending inventory than LIFO does.

Answer: a) F b) F c) T d) T e) T

Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

Topic Area: Weighted Average

AACSB: Reflective Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium
Feedback:

a)This is false. Although FIFO mimics the physical flow of most inventory, cost flow assumptions are not tied to physical flow.

b) This is false. In a period of rising prices the cost of the most recent purchases is higher than the cost of older inventory, so LIFO will produce a higher cost of goods sold than FIFO.
c) This is true. Weighted average cost per unit is the same for all units of inventory, whether the inventory has been sold during the period or remains in inventory.
d) This is true. In a period of declining prices the cost of the most recent purchases is lower than the cost of older inventory, so LIFO will produce a lower cost of goods sold than FIFO, resulting in a higher net income and a higher income tax expense.
e) This is true. In a period of rising prices, the cost of the most recent purchases (which remain in inventory using FIFO)is higher than the cost of older inventory.
Indicate whether each of the following statements related to inventory is true or false.
_____ a) The higher a company’s inventory turnover ratio, the higher its cost of financing inventory.
_____ b) The selling price a company charges for its goods probably will not be affected by the inventory cost flow method it uses.
_____ c) Other things being equal, if prices are rising, a company that uses the LIFO inventory method will have a higher amount of total assets than if it had used FIFO.
_____ d) A company that plans to offer a higher level of customer service than its competitors probably will have a higher gross margin percentage than its competitors.
_____ e) The lower of cost or market rule may reduce a company’s net income, but it will never increase net income.

Answer: a) F b) T c) F d) T e) T

Learning Objective: 05-01

Learning Objective: 05-02

Learning Objective: 05-04

Learning Objective: 05-05

Topic Area: FIFO

Topic Area: LIFO

Topic Area: Lower-of-Cost-or-Market

Topic Area: Estimating the Ending Inventory Balance

Topic Area: Inventory Turnover

AACSB: Analytical Thinking

AACSB: Reflective Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand

Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback:

a) This is false. The lower (not higher) the company’s inventory turnover ratio, the longer inventory remains in stock before it is sold, the higher the cost of financing inventory.
b) The decision a company makes regarding inventory cost flow is not related to decisions regarding prices.
c) This is false. If prices are rising, LIFO will produce lower ending inventory than FIFO. Although LIFO will also result in lower income tax expense (decrease in cash), that difference is not a great as the difference in inventory. Therefore, total assets for LIFO will be lower than for FIFO.
d) This is true. A company that plans to offer more customer service will typically need to mark up their inventory more than a company that offers less service. Therefore, gross margin will be higher relative to sales, resulting in a higher gross margin percentage.
e) This is true. The lower of cost or market rule may result in a write-down of inventory, and thus lower net income, but will never result in a markup of inventory.
Indicate whether each of the following statements is true or false.
_____ a) To compute cost of goods sold under the weighted average method, it is necessary to first compute the weighted-average cost per unit.
_____ b) The weighted average cost per unit is computed by dividing the total cost of goods purchased by the number of units sold.
_____ c) Under the FIFO method, each time units are sold the unit cost of the oldest inventory is applied to the number of units sold.
_____ d) Under a perpetual inventory system, it is not possible to use the LIFO method of cost flow.
_____ e) A U.S. company can use LIFO for income tax purposes only if it also uses LIFO for financial reporting purposes.

Answer: a) T b) F c) T d) F e) T

Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

Topic Area: Weighted Average

AACSB: Reflective Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Remember
Level of Difficulty: 2 Medium
Feedback:

a) This is true. The first step in applying the weighted average method is computing the weighted average cost per unit.
b) This is false. Weighted average cost per unit is calculate by dividing cost of goods available for sale by units available for sale.
c) This is true. Under the FIFO method, each time units are sold the unit cost of the oldest inventory is applied to the number of units sold.
d) This is false. LIFO is possible under perpetual inventory, although it does require a more sophisticated accounting system.
e) This is true. The U.S. Internal Revenue Service only permits LIFO for tax reporting if it is also used for financial reporting.

The Warren Company uses the perpetual inventory system and has computed the cost of its inventory to be $12,800 as follows: 200 units of Product A at a unit cost of $20; 300 units of Product B at a unit cost of $24; and 100 units of Product C at a unit cost of $16. The current replacement cost of each of the above items is $25, $22 and $14, respectively. Warren’s accountant is not sure yet whether to apply the lower-of-cost-or-market rule by individual items or by the entire stock in aggregate. Indicate whether each of the following statements pertaining to the Warren Company is true or false.
_____ a) When referring to Product B, the “cost” totals $7,200.
_____ b) If Warren selects to apply the lower-of-cost-or-market rule by individual items, Product A would be listed at $25 per unit.
_____ c) Warren would record a write-down of inventory it is uses the individual items approach, but would not have a write-down if it uses the aggregate approach.
_____ d) If Warren uses the individual items approach, $12,000 will be reported for inventory on the balance sheet.
_____ e) For Product C, the lower of cost or market is $1,600.

Answer: a) T b) F c) T d) T e) F

Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Knowledge Application
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback:

a) This is true. Product B’s cost is $24 x 300 units = $7,200.
b) This is false. If Warren selects to apply the lower-of-cost-or-market rule to individual items, Product A would be listed at the lower cost amount of $20.
c) This is true. The total market value of Warren’s inventory is $13,000 (200 units of A at $25, 300 units of B at $22, and 100 units of C at $14), so no write-down of inventory would be needed. However, if the rule were applied using the individual method, write-downs of Product B from $24 to $22 and of Product C from $16 to $14 would be needed.
d) This is true. If Warren uses the individual approach, inventory would be $12,000 (200 units of A at $20, 300 units of B at $22, and 100 units of C at $14).
e) This is false. For Product C, the lower of cost or market is $1,400 (100 units at the lower market value of $14).
On February 2, 2016, a fire destroyed the entire inventory of Orange Co. The following information was found in accounting records: Purchases, $420,000; Sales $690,000; beginning inventory, $120,000; average gross margin percentage during the past five years, 30%. Based on the above information, indicate whether each of the following statements is true or false.
_____ a) The cost of goods available for sale is $540,000.
_____ b) The cost of goods sold as a percent of sales is 70%.
_____ c) The estimated cost of goods sold is $303,000.
_____ d) Estimated inventory lost in the fire is $66,000.
_____ e) Estimated gross margin for the period up to the date of the fire was $483,000.

Answer: a) T b) T c) F d) F e) F

Learning Objective: 05-04

Topic Area: Estimating the Ending Inventory Balance

AACSB: Knowledge Application
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium

Feedback:

a) This is true. $120,000 beginning inventory + $420,000 purchases = $540,000 cost of goods available for sale
b) This is true. If average gross margin percentage is 30%, cost of goods sold percentage is 1-30%, or 70%.
c) This is false. Estimated cost of goods sold = $690,000 x 70% = $483,000
d) This is false. $120,000 beg. inventory + $420,000 purchases – $483,000 est. cost of goods sold = $57,000 estimated ending inventory
e) This is false. $690,000 sales – $483,000 est. cost of goods sold = $207,000 est. gross margin
Iona Corporation’s ending inventory as of December 31, 2015, was overstated by $28,000. Indicate whether each of the following statements relating to the above error is true or false.
_____ a) Cost of goods sold is overstated in 2015 by $28,000.
_____ b) Net Income is overstated in 2015 by $14,000.
_____ c) Retained Earnings at December 31, 2015 is overstated by $28,000.
_____ d) Beginning inventory will be understated in 2016 by $28,000.
_____ e) Retained Earnings will not be affected by this error at the end of 2016.

Answer: a) F b) F c) T d) F e) T

Learning Objective: 05-03

Topic Area: Avoiding Fraud in Merchandising Businesses

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 3 Hard
Feedback:

a) This is false. Overstating ending inventory at the end of 2015 will understate cost of goods sold by $28,000.
b) This is false. Overstating ending inventory for 2015 by $28,000 also overstates net income for 2015 by $28,000, not $14,000.
c) This is true. Overstating ending inventory for 2015 by $28,000 also overstates retained earnings for 12/31/15 by $28,000.
d) This is false. Overstating ending inventory for 2015 will also result in overstating beginning inventory for 2016.
e) This is true. By the end of 2016, the inventory error for 2015 will have been reversed, and retained earnings will be correctly stated.
Bell Company has provided the following figures as of December 31, 2016: Sales, $600,000; cost of goods sold, $320,000; net income, $120,000; inventory, $64,000. Indicate whether each of the above statements pertaining to the Bell Company is true or false.
_____ a) Bell’s inventory turnover is 5.0.
_____ b) Bell’s average number of days to sell inventory ratio is 39.5.
_____ c) Bell could increase its inventory turnover by increasing prices.
_____ d) Bell’s gross margin as a percentage of sales was 46.7%.
_____ e) A local competitor in the same line of business has an inventory turnover of 3.5. Assuming each firm has approximately the same gross margin rate, Bell Company is likely to be more profitable than the competitor.

Answer: a) T b) F c) F d) T e) T

Learning Objective: 05-05

Topic Area: Inventory Turnover

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Risk Analysis
Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback:

a) This is true. $320,000 cost of goods sold/$64,000 inventory = 5.0
b) This is false. 365 days/5.0 = 73 days
c) This is false. Inventory turnover is calculated by dividing cost of goods sold, not sales, by inventory. Furthermore, raising prices will likely cause inventory to sell more slowly.
d) This is true. $600,000 sales – $320,000 cost of goods sold = $280,000 gross margin; $280,000/$600,000 = 46.7%
e) This is false. With an inventory turnover ratio of 5.0, Bell Company turns its inventory more quickly than the competitor, and thus is likely to be more profitable than the competitor.

True / False Questions

One of the disadvantages of the specific identification inventory cost flow method is that it can allow managers of a business to manipulate the amount of income the business reports.

Answer: True
Learning Objective: 05-01

Topic Area: Specific Identification

AACSB: Ethics
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Blooms: Understand
Level of Difficulty: 1 Easy
Feedback: Managers can choose which costs to assign to cost of goods sold if specific identification is used.

The specific identification inventory method is not practical for companies that sell many low-priced, high turnover items.

Answer: True
Learning Objective: 05-01

Topic Area: Specific Identification

AACSB: Reflective Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy
Feedback: It is not cost effective for companies to track the specific costs of low-priced items.

The last-in, first-out cost flow method assigns the cost of the items purchased first to ending inventory.

Answer: True
Learning Objective: 05-01

Topic Area: LIFO

AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy
Feedback: LIFO assigns the cost of the items purchased last to cost of goods sold, so the cost of the goods purchased first is assigned to ending inventory.

Generally accepted accounting principles do not allow the cost flow pattern for merchandise inventory to differ from the physical flow of merchandise within the business.

Answer: False
Learning Objective: 05-01

Topic Area: Inventory Cost Flow Methods

AACSB: Reflective Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy
Feedback: Companies do not need to select a cost flow method that matches the physical flow of goods.

In most businesses, the physical flow of goods occurs on a FIFO basis, but a different cost flow method is allowed under generally accepted accounting principles.

Answer: True
Learning Objective: 05-01

Topic Area: Inventory Cost Flow Methods

AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy
Feedback: Most companies rotate their inventory so as to sell the oldest inventory first. However, the company is free to choose other cost flow methods.

A company’s gross margin reported on the income statement is not affected by the inventory cost flow method it uses.

Answer: False
Learning Objective: 05-01

Topic Area: Inventory Cost Flow Methods

AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium
Feedback: The selection of cost flow method impacts cost of goods sold, which impacts gross margin.

During a period of rising prices the LIFO cost flow method will result in higher total assets than FIFO.

Answer: False
Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback: FIFO will report lower cost of goods sold (older, lower prices), and higher ending inventory (newer, higher prices).

During a period of rising prices, a company’s cost of goods sold would be higher using the LIFO cost flow method than with FIFO.

Answer: True
Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 1 Easy
Feedback: During a period of rising prices, cost of goods sold will include the higher, most recent prices when LIFO is used.

During a period of declining prices, a company would report a lower gross margin using the FIFO cost flow method than with LIFO.

Answer: True
Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback: During a period of declining prices, cost of goods sold will include the lower, most recent prices when LIFO is used, resulting in higher gross margin.

A company uses a cost flow method (such as LIFO or FIFO) to allocate product costs between cost of goods sold and beginning inventory.

Answer: False
Learning Objective: 05-01

Topic Area: Inventory Cost Flow Methods

AACSB: Reflective Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium
Feedback: The selection of cost flow method allocates product costs between cost of goods sold and ending, not beginning, inventory.

During a period of rising prices, the amount of ending inventory reported on the balance sheet will be lower using the LIFO cost flow method than with FIFO.

Answer: True
Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 1 Easy
Feedback: During a period of rising prices, ending inventory will include the lower, older prices when using LIFO.

Generally accepted accounting principles would allow a company to use FIFO for part of its inventory and the weighted-average cost flow assumption for the rest of its inventory.

Answer: True
Learning Objective: 05-01

Topic Area: Inventory Cost Flow Methods

AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Remember
Level of Difficulty: 2 Medium
Feedback: GAAP allows companies to use different cost flow methods for different parts of its inventory.

In a period of rising prices, use of the FIFO cost flow method would cause a company to pay more income taxes than would use of LIFO.

Answer: True
Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 1 Easy
Feedback: In a period of rising prices, FIFO will produce the lowest cost of goods sold, resulting in the highest net income and the highest income tax expense.

If a company uses the FIFO cost flow method for its income tax return it must also use FIFO for financial reporting.

Answer: False
Learning Objective: 05-01

Topic Area: Inventory Cost Flow Methods

AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Remember
Level of Difficulty: 2 Medium
Feedback: The requirement to match cost flow for income tax reporting and financial reporting applies only to the LIFO cost flow assumption.

Generally accepted accounting principles restrict or limit a company’s freedom to change accounting methods from one year to the next.

Answer: True
Learning Objective: 05-01

Topic Area: Inventory Cost Flow Methods

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Remember
Level of Difficulty: 2 Medium
Feedback: Changes in cost flow assumption must be justified by reasons other than earnings management.
Use the following information for questions 109-111:

Singleton Company’s perpetual inventory records included the following information:

If Singleton uses the LIFO cost flow method, its ending inventory would be $1,260.

Answer: True
Learning Objective: 05-01

Topic Area: LIFO

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: 200 + 150 + 350 = 700 units available for sale – 520 units sold = 180 units in ending inventory; 180 units x $7.00 = $1,260 ending inventory

If Singleton uses the FIFO cost flow method, its cost of goods sold would be $4,490.

Answer: False
Learning Objective: 05-01

Topic Area: FIFO

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: (200 units x $7.00) + (150 x $8.00) + (170 x $9.00) = $4,130 cost of goods sold

If Singleton uses the weighted-average cost flow method, its weighted-average cost per unit would be $8.00.

Answer: False
Learning Objective: 05-01

Topic Area: Weighted Average

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: [(200 x $7.00) + (150 x $8.00) + (350 x $9.00)]/700 units = $8.21 per unit

Warner Company purchased two units of a product for $36 and later purchased one more for $40. If the company uses the weighted average cost flow method, and it sold one unit of the product for $60, its gross margin would be $22.00.

Answer: False
Learning Objective: 05-01

Topic Area: Weighted Average

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium
Feedback: [(2 x $36) + (1 x $40)]/3 units = $37.33 per unit; $60 sales – $37.33 cost of goods sold = $22.66 gross margin

The Internal Revenue Service allows a company to use LIFO for income tax purposes only if it also uses LIFO for financial reporting.

Answer: True
Learning Objective: 05-01

Topic Area: LIFO

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Remember
Level of Difficulty: 1 Easy
Feedback: This is an IRS requirement in order to use the LIFO cost flow assumption.

International Financial Reporting Standards (IFRS) do not permit the use of the LIFO cost flow assumption.

Answer: True
Learning Objective: 05-01

Topic Area: LIFO

AACSB: Reflective Thinking

AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement
Blooms: Remember
Level of Difficulty: 2 Medium
Feedback: This is a difference between IFRS and U.S. GAAP.

If a company uses the LIFO cost flow method, it is not required by generally accepted accounting principles to apply the lower-of-cost-or-market rule.

Answer: False
Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium
Feedback: Selection of cost flow assumption has no bearing on the lower-of-cost-or-market rule.

If the replacement cost of inventory is greater than its historical cost, the increase in value does not affect the company’s financial statements.

Answer: True
Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Reflective Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium
Feedback: If the replacement cost is greater than the historic cost, no entry is made. Entries are only made if the replacement cost is lower than the historic cost.

A loss resulting from application of the lower-of-cost-or-market rule is included in Cost of Goods Sold if the loss is material in amount.

Answer: False
Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 2 Medium
Feedback: The loss resulting from application of the lower-of-cost-or-market rule is only included in cost of goods sold if the amount is immaterial.

If a company applies the lower-of-cost-or-market rule on an aggregate basis, its write-down of inventory is likely to be greater than if it applies the rule to individual items of inventory.

Answer: False
Learning Objective: 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Analytical Thinking
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 3 Hard
Feedback: If a company applies the lower-of-cost-or-market rule on an aggregate basis, items of inventory with higher market values compared to cost will offset items with lower market values. As a result, the write-down is likely to be lower, if it is needed at all.

If a company overstates its Inventory balance at the end of 2015 due to an error, its Retained Earnings will also be overstated on the 2015 balance sheet.

Answer: True
Learning Objective: 05-03

Topic Area: Avoiding Fraud in Merchandising Businesses

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback: Overstating inventory will understate cost of goods sold, resulting in higher net income and higher retained earnings in the current year.

The gross margin method of estimating inventory is not useful in detecting inventory fraud.

Answer: False
Learning Objective: 05-04

Topic Area: Estimating the Ending Inventory Balance

AACSB: Analytical Thinking

AACSB: Ethics
AICPA: BB Resource Management
AICPA: FN Risk Analysis
Blooms: Understand
Level of Difficulty: 1 Easy
Feedback: The gross margin method can be used to anticipate what the ending inventory balance should be, and when compared with physical ending inventory, can detect fraud.

A discount merchandiser is likely to have a higher inventory turnover than more upscale stores with higher merchandise prices.

Answer: True
Learning Objective: 05-05

Topic Area: Inventory Turnover

AACSB: Reflective Thinking

AICPA: BB Resource Management

AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 1 Easy
Feedback: A discount merchandiser operates at lower margin, and relies on higher inventory turnover to make a profit.

Company A and Company B are similar retailing businesses. A uses FIFO, and B uses LIFO. In a period of rising prices, B should have a lower inventory turnover than A.

Answer: True
Learning Objective: 05-01

Learning Objective: 05-05

Topic Area: FIFO

Topic Area: LIFO

Topic Area: Inventory Turnover

AACSB: Analytical Thinking
AICPA: BB Resource Management

AICPA: BB Industry
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 3 Hard
Feedback: In a period of rising prices, FIFO will result in lower cost of goods sold (earlier, lower prices) and higher ending inventory (more recent, higher prices). The lower cost of goods sold divided by the higher inventory will produce a lower inventory turnover.

Problems

Singh Company sold 75 units @ $350 each on October 31, 2016. The following information is also available:

Required:

a) Determine the amount of cost of goods sold using:
FIFO
LIFO
Weighted Average
b) Determine the amount of ending inventory using:
FIFO
LIFO
Weighted Average

Answer:

a) Cost of Goods Sold: 75 units

Weighted Average:

[(25 x $175) + (20 x $180) + (45 x $200) + (30 x $220)]/120 units = $196.46/unit

$196.46 x 75 units = $14,735

b) Ending Inventory: 45 units

Weighted Average:

$196.46 x 45 units = $8,841

Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

Topic Area: Weighted Average

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium

During December 2016, Crowe Company sold 125 units @ $225 each. Cash selling and administrative expenses for the year were $11,000. All transactions were cash transactions. The following information is also available:

The company’s income tax rate is 30%.
Required:

a) Prepare an income statement for Crowe Company for 2016 assuming:
1) FIFO inventory cost flow
2) LIFO inventory cost flow
b) Prepare the operating activities section of the statement of cash flows for 2016 assuming:
1) FIFO inventory cost flow
2) LIFO inventory cost flow

Answer:

a) 1)
2)

1) FIFO

2) LIFO

Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 3 Hard

Chopin Co. sells product A. The beginning inventory for product A was 70 units @ $240 per unit. During the year, Chopin purchased 110 units of product A at $216 per unit. The company sold 140 units of product A @ $400 per unit at the end of the year.
Required: Determine the amount of product cost that would be allocated to cost of goods sold and ending inventory using (1) FIFO, (2) LIFO, and (3) weighted average.

Answer:

(1) FIFO

(2) LIFO

(3) Weighted Average

Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

Topic Area: Weighted Average

AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium

The following transactions apply to Sam’s Skateboards.

Assume the use of the perpetual inventory method and that all transactions were for cash.
Required:

a) Prepare the journal entries for the above transactions, assuming a FIFO cost flow.
b) Determine the amount of ending inventory using a FIFO cost flow.
a)

(b) FIFO Ending Inventory: 5 @ $116 = $580

Learning Objective: 05-01

Topic Area: FIFO

AACSB: Knowledge Application
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 3 Hard

Curtis Company had the following transactions for the month of January:

Assume that Curtis uses the perpetual inventory method and that all transactions were for cash.
Required:

a) Prepare journal entries for the above transactions using the FIFO cost flow method.
b) Determine the amount of ending inventory using the FIFO cost flow method.

Answer:

Learning Objective: 05-01

Topic Area: FIFO

AACSB: Knowledge Application
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 3 Hard

Max Company’s first year in operation was 2016. The following inventory purchase information comes from Max’s accounting records for the year.

In December 2016, Max sold 350 units for $480 each. Operating expenses for the year were $30,000, and the tax rate was 30%.
Required: a) Calculate the cost of goods sold by LIFO and by FIFO.
b) What amount of income tax would Max have to pay if it uses LIFO? If it uses FIFO?
c) Assuming that the results for 2016 are representative of what Max can generally expect, would you recommend that the company use LIFO or FIFO? Explain.

Answer:

a) For LIFO, cost of goods sold = (90 ´ $320) + (240 ´ $304) + (20 ´ $280) = $107,360
For FIFO, cost of goods sold = (120 ´ $280) + (230 ´ $304) = $103,520
b)
c) Based on this information, Max would be better off to use LIFO because of the lower amount of income taxes it would pay.

Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

AACSB: Knowledge Application
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement

AICPA: FN Decision Making
Blooms: Apply
Level of Difficulty: 2 Medium

Jones Company sells exercise bikes. Its beginning inventory was 100 units at $200 per unit. During the year, Jones made two purchases of the bikes: first, a 300-unit purchase at $220 per unit, and then 200 units at $250 per unit. The ending inventory for the year was 250 units.
Required: Determine the amount of product costs that would be allocated to cost of goods sold and ending inventory, assuming that Jones uses
a) FIFO
b) LIFO
c) Weighted average

Round intermediate calculations to 2 decimal places. Round final answers to whole dollars.

Answer:
Weighted average cost per unit: [(100 x $200) + (300 x $220) + (200 x $250)]/600 = $226.67

Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

AACSB: Knowledge Application
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium

Maynard Company started the year with no inventory. During the year, it purchased two identical inventory items at different times. The first unit cost $1,100 and the second, $1,200. One of the items was sold during the year. Based on this information, how much product cost would be allocated to cost of goods sold and ending inventory, assuming use of
a. LIFO
b. FIFO
c. Weighted average

Answer:

Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

Topic Area: Weighted Average

AACSB: Knowledge Application
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 1 Easy

The following information is for Choi Company for 2016:
Beginning inventory 120 units @$100
Units purchased 180 units @ $112
Choi sold 250 units for $190 each.
Required:
a) Calculate gross margin assuming Choi uses FIFO, LIFO, Weighted average.
b) Disregarding the effect of income taxes, what would be the dollar amount of difference in net income between FIFO and LIFO?
c) Calculate the 2016 cash flow from operating activities assuming that Choi uses LIFO, FIFO. Again, disregard the effect of income taxes.

Answer:

a) FIFO
Cost of goods sold = (120 ´ $100) + (130 ´ $112) = $26,560
Gross margin = $47,500 – 26,560 = $20,940
LIFO
Cost of goods sold = (180 ´ $112) + (70 ´ $100) = $27,160
Gross margin = $47,500 – 27,160 = $20,340
Weighted Average
Average cost per unit = [(120 ´ $100) + (180 ´ $112)]/300 = $107.20
Cost of goods sold = 250 ´ $107.20 = $26,800
Gross margin = $47,500 – 26,800 = $20,700
b) By FIFO, net income will be $600 higher than by LIFO, ignoring the effect of income taxes.
c) FIFO cash flow from operating activities = $47,500 – (180 ´ $112) = $27,340
Results by LIFO would be the same, ignoring the effect of income taxes.

Learning Objective: 05-01

Topic Area: FIFO

Topic Area: LIFO

Topic Area: Weighted Average

AACSB: Knowledge Application
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium

The Curtis Company’s inventory records reflects the following for the month of October 2016:

Assuming that Curtis Company uses the FIFO cost flow method in a perpetual inventory system:
(a) Calculate the cost of goods sold and the ending inventory for the month ending October 31, 2016.
(b) Prepare the journal entry for the sale of inventory on October 31, 2016.

Answer:

(a)

(b)

Learning Objective: 05-01

Topic Area: FIFO

AACSB: Knowledge Application
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium

Diaz Company’s first year in operation was 2016. For 2016, its cost of goods sold using FIFO was $240,000, and its ending inventory was $58,400. If Diaz had used the LIFO cost flow method, its ending inventory would have been $56,000.
Required: a) What would the cost of goods sold have been with LIFO?
b) Based on this information, was 2016 a period of rising prices or falling prices?

Answer:

a) Cost of goods available for sale = $240,000 + 58,400 = $298,400
Cost of goods sold using LIFO = $298,400 – 56,000 = $242,400
b) 2016 must have been a year of rising prices because LIFO gives a lower ending inventory and higher cost of goods sold than FIFO.

Learning Objective: 05-01

Topic Area: LIFO

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 3 Hard

The Atkins Company had the following beginning inventory, purchases, and sales of inventory during the first quarter of 2016:

Required: Determine the value of the company’s cost of goods sold and ending inventory at the end of March, assuming a perpetual inventory method and FIFO cost flow. Show all calculations.

Answer:

Learning Objective: 05-01

Topic Area: FIFO

AACSB: Knowledge Application
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium

The Rowe Company has six different categories of inventory. Quantity, cost, market value for each inventory category is shown below

Required:

a) Determine the value of ending inventory after applying the lower-of-cost-or-market rule to each individual category of inventory.
b) Determine the value of ending inventory after applying the lower-of-cost-or-market rule to inventory in aggregate.
c) Prepare the journal entry, if required, to adjust inventory for part a above.
d) Prepare the journal entry, if required, to adjust inventory for part b above.

Answer:

d) No entry is required because total market value is higher than total cost.

LO 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium

Burton Supply uses the perpetual inventory method. At the end of the year Burton Supply had the following items in inventory.

Required:

a) Determine the amount of inventory Burton Supply is showing on its books before any adjustment.
b) Determine the amount of ending inventory using lower of cost or market applied to each individual item.
c) Prepare the journal entry necessary to adjust inventory.
d) Determine the amount of ending inventory using lower of cost or market applied to total inventory in aggregate.
e) Which method (individual items or aggregate) produces the smallest amount of total assets?

Answer:

a) $18,860.00
b) Individual item lower of cost or market: $18,340.00
c)

d) $18,620.00 (total market)
e) Applying the lower of cost or market to individual items results in the smallest total assets.

LO 05-02

Topic Area: Lower-of-Cost-or-Market

AACSB: Knowledge Application
AICPA: BB Critical Thinking

AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium

The accountant for the Bay Company made an error, which understated the ending inventory for 2015 by $7,000. Bay Company uses the periodic inventory system. Assuming that this error is not caught and corrected, indicate the effect of the error on each of the following items. Write U (understated), O (overstated) or N (not affected) next to each item.
a. 2016 Beginning Inventory: _________
b. 2016 Purchases: __________
c. 2015 Goods Available for Sale: ________
d. 2015 Net Income: ________
e. 2015 Retained Earnings ending balance: __________
f. 2015 Total Assets at end of year: ___________
g. 2016 Net Income: _________
h. 2016 Retained Earnings ending balance: _________
i. 2015 Cost of Goods Sold: ___________
j. 2015 Gross Margin: _________

Answer:

2016 Beginning Inventory: U
b. 2016 Purchases: N
c. 2015 Goods Available for Sale: N
d. 2015 Net Income: U
e. 2015 Retained Earnings ending balance: U
f. 2015 Total Assets at end of year: U
g. 2016 Net Income: O
h. 2016 Retained Earnings ending balance: N
i. 2015 Cost of Goods Sold: O
j. 2015 Gross Margin: U

Learning Objective: 05-03

Topic Area: Avoiding Fraud in Merchandising Businesses

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

Blooms: Analyze
Level of Difficulty: 3 Hard

The Byrne Company had its entire inventory destroyed when a fire swept through the company’s warehouse on April 30, 2016. Fortunately, the accounting records were locked in a fireproof safe and were not damaged. The following information for the period up to the date of the fire was taken from the accounting records:

Required: Assuming that the gross margin has averaged 35 percent of selling price, what is the estimated value of the inventory destroyed in the fire? Show all calculations in good form.

Answer:

Inventory lost is computed by plugging the missing figure: $212,500 – $178,750 = $33,750

Learning Objective: 05-04

Topic Area: Estimating the Ending Inventory Balance

AACSB: Knowledge Application
AICPA: BB Resource Management

AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium

The Prince Company had its entire inventory destroyed when a tornado destroyed the company’s warehouse on April 30, 2016. The following information for the period up to the date of the tornado was taken from the accounting records

Required: Assuming that the gross margin has averaged 35 percent of selling price, what is the estimated value of the inventory destroyed in the fire? Show all calculations in good form.

Inventory lost is computed by plugging the missing figure: $178,750 – $212,500 = $33,750

Learning Objective: 05-04

Topic Area: Estimating the Ending Inventory Balance

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium

The following information is for Lattimer Company for 2016:

Required: Assuming that Lattimer uses the LIFO cost flow method,
a) How much product cost would be allocated to Cost of Goods Sold?
b) How much product cost would be allocated to Merchandise Inventory at the end of the year?
c) Calculate the average number of days to sell inventory for the year.

a) Cost of Goods Sold = (150 ´ $132) + (100 ´ $130) + (110 ´ $108) = $44,680
b) Ending Merchandise Inventory = 90 ´ $108 = $9,720
c) Average number of days to sell inventory = 365/Inventory turnover
Inventory turnover = $44,680 cost of goods sold/$9,720 ending inventory = 4.60
Average number of days to sell inventory = 365/4.60 = 79.3 days, or 79 days

Learning Objective: 05-01
Learning Objective: 05-05

Topic Area: LIFO

Topic Area: Inventory Turnover

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium

The following information is for Poole Company for 2016:

Required: a) Assuming that Poole uses the LIFO cost flow method, determine how much product cost would be allocated to Cost of Goods Sold, and how much to Merchandise Inventory at the end of the year.
b) Based on your results from part a, calculate inventory turnover and average number of days to sell inventory.
c) Assuming that Poole uses the FIFO cost flow method, determine how much product cost would be allocated to Cost of Goods sold, and how much to Merchandise Inventory at the end of the year.
d) Based on your results from part c, calculate inventory turnover and average number of days to sell inventory.
e) Compare your results from parts b and d. Do LIFO and FIFO give the same results for inventory turnover? Which is higher, and why?

Answer:

a) – d)
e) LIFO and FIFO do not give the same results for inventory turnover. In this case, LIFO gave a higher inventory turnover. The higher turnover occurred because LIFO gave a higher amount for Cost of Goods Sold and a lower amount for ending Merchandise Inventory.

Learning Objective: 05-01

Learning Objective: 05-05

Topic Area: FIFO

Topic Area: LIFO

Topic Area: Inventory Turnover

AACSB: Knowledge Application
AICPA: BB Critical Thinking

AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 3 Hard

The following information is for Benitez Company for 2016:
Required: Assuming that Benitez uses the FIFO cost flow method,
a) How much product cost would be allocated to Cost of Goods Sold?
b) How much product cost would be allocated to Merchandise Inventory at the end of the year?
c) Calculate the average number of days to sell inventory for the year.

Answer:

a) Cost of Goods Sold = (300 ´ $25) + (150 ´ $30) + (140 ´ $34) = $16,760
b) Ending Merchandise Inventory = 110 ´ $34 = $3,740
c) Average number of days to sell inventory = 365/Inventory turnover
Inventory turnover = $16,760/$3,740 = 4.48
Average number of days to sell inventory = 365/4.48 = 81 days

Learning Objective: 05-01

Learning Objective: 05-05

Topic Area: FIFO

Topic Area: Inventory Turnover

AACSB: Knowledge Application
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply
Level of Difficulty: 2 Medium

Fundamental Financial Accounting Concepts Thomas Edmonds 9e - Test Bank

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Fundamental Financial Accounting Concepts Thomas Edmonds 9e - Test Bank

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