Introductory Financial Accounting for Business Thomas Edmonds 1e - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Introductory Financial Accounting for Business, 1e (Edmonds) Chapter 5 Accounting for Inventories Use the following information for questions 1-5: Stan's Surf Shack purchased five surfboards for …
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Introductory Financial Accounting for Business Thomas Edmonds 1e – Test Bank
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Sample Questions Are Posted Below
Introductory Financial Accounting for Business, 1e (Edmonds)
Chapter 5 Accounting for Inventories
Use the following information for questions 1-5:
Stan’s Surf Shack purchased five surfboards for $200 each. Later it purchased two additional surfboards for $250 each. Stan’s sold a total of six surfboards during the period for $350 cash each. The company uses the perpetual inventory system and has not yet accrued any income taxes for the period.
Indicate how the event described in the question affects the elements of the financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. (Note that “Not Affected” means that the event does not affect that element of the financial statements or the event causes an increase in that element that is offset by a decrease in the same element.)
Increase = I Decrease = D Not Affected = NA
1) Stan’s purchased the first five surfboards on account.
| Assets | Liabilities | Stk. Equity | Revenues | Expenses | Net Income | Stmt of Cash Flows |
Answer: (I) (I) (NA) (NA) (NA) (NA) (NA)
The purchase of inventory on account increases assets (inventory) and increases liabilities (accounts payable). It does not affect stockholders’ equity or net income. Because the purchase was made on account, this transaction does not affect the statement of cash flows.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement
2) Stan’s Surf Shack made the second purchase of two additional surfboards for cash.
| Assets | Liabilities | Stk. Equity | Revenues | Expenses | Net Income | Stmt of Cash Flows |
Answer: (NA) (NA) (NA) (NA) (NA) (NA) (D)
The purchase of inventory for cash increases one asset (inventory) and decreases another asset (cash). It does not affect stockholders’ equity or net income. It is reported as a cash outflow for operating activities.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement
3) Stan’s sold the six surfboards for cash. The company uses the LIFO inventory cost flow method. (Consider the effects of both parts of this event.)
| Assets | Liabilities | Stk. Equity | Revenues | Expenses | Net Income | Stmt of Cash Flows |
Answer: (I) (NA) (I) (I) (I) (I) (I)
Recording the sale increases assets (cash) and stockholders’ equity (retained earnings) by the selling price of the surfboards. It increases revenue, which increases net income by the same amount. Recording the cost of the merchandise sold decreases assets (inventory) and stockholders’ equity (retained earnings). The expense (cost of goods sold) increases and net income decreases by the same amount. The net effect on assets and stockholders’ equity is an increase to each by the difference between the selling price and the cost of the six surfboards. The cash received from the sale will be reported as a cash inflow from operating activities on the statement of cash flows.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement
4) Stan’s sold the six surfboards for cash. The company uses the FIFO inventory cost flow method. (Consider the effects of both parts of this event.)
| Assets | Liabilities | Stk. Equity | Revenues | Expenses | Net Income | Stmt of Cash Flows |
Answer: (I) (NA) (I) (I) (I) (I) (I)
Recording the sale increases assets (cash) and stockholders’ equity (retained earnings) by the selling price of the surfboards. It increases revenue, which increases net income by the same amount. Recording the cost of the merchandise sold decreases assets (inventory) and stockholders’ equity (retained earnings). The expense (cost of goods sold) increases and net income decreases by the same amount. The net effect on assets and stockholders’ equity is an increase to each by the difference between the selling price and the cost of the six surfboards. The cash received from the sale will be reported as a cash inflow from operating activities on the statement of cash flows.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement
5) Stan’s pays the income taxes incurred for the current accounting period.
| Assets | Liabilities | Stk. Equity | Revenues | Expenses | Net Income | Stmt of Cash Flows |
Answer: (D) (NA) (D) (NA) (I) (D) (D)
Payment of income tax will decrease assets (cash) and stockholders’ equity (retained earnings). Expenses (income tax expense) increase, which decreases net income. It is reported as a cash outflow for operating activities.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement
6) Gladding, Inc. applies the lower-of-cost-or-market rule to the entire stock of its inventory in the 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. Indicate how the required adjustment affects the elements of the financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. Note that “Not Affected” means that the event does not affect that element of the financial statements or the event causes an increase in that element that is offset by a decrease in the same element.
Increase = I Decrease = D Not Affected = NA
| Assets | Liabilities | Stk. Equity | Revenues | Expenses | Net Income | Stmt of Cash Flows |
Answer: (D) (NA) (D) (NA) (I) (D) (NA)
Because the market value of the entire stock of inventory in the 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 stockholders’ equity (retained earnings). It increases expenses [cost of goods sold (if material) or operating expenses (if immaterial)], which decreases net income. It does not affect the statement of cash flows.
Difficulty: 2 Medium
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement
7) Steven, Inc. uses the perpetual inventory system. The company’s management, under pressure to report favorable results to shareholders, included $15,000 of inventory that had already been sold in its ending inventory. Indicate whether this misstatement would overstate (O), understate (U), or not affect (NA) each of the elements of the financial statements. You do not need to enter amounts.
| Assets | Liabilities | Stk. Equity | Revenues | Expenses | Net Income | Stmt of Cash Flows |
Answer: (O) (NA) (O) (NA) (U) (O) (NA)
Counting inventory that does not belong to the company overstates assets (inventory) and stockholders’ equity (retained earnings). It understates expenses (cost of goods sold), which overstates net income. It does not affect the statement of cash flows.
Difficulty: 3 Hard
Topic: Avoiding Fraud in Merchandising Businesses
Learning Objective: 05-03 Show how fraud can be avoided through inventory control.
Bloom’s: Analyze
AACSB: Analytical Thinking; Ethics
AICPA: BB Resource Management; FN Measurement
8) Howard Company uses the perpetual inventory system. The company applies the lower-of-cost-or-market rule to the entire stock of inventory in the aggregate. At the end of the current year, the cost of the inventory was $19,456 and its current market value is $19,950. Indicate how the required adjustment affects the elements of the financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. Note that “Not Affected” means that the event does not affect that element of the financial statements or the event causes an increase in that element that is offset by a decrease in the same element.
Increase = I Decrease = D Not Affected = NA
| Assets | Liabilities | Stk. Equity | Revenues | Expenses | Net Income | Stmt of Cash Flows |
Answer: (NA) (NA) (NA) (NA) (NA) (NA) (NA)
Because the market value is higher than the inventory’s cost, there is no adjustment necessary.
Difficulty: 2 Medium
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement
9) Define the terms FIFO and LIFO.
Answer: The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold. The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
10) In an inflationary environment, which inventory cost flow method, FIFO or LIFO, reports the lowest amount of net income?
Answer: LIFO
The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold. The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold. In an inflationary environment, LIFO will produce a higher cost of goods sold, so it will result in the lowest net income and the smallest balance in ending inventory.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
11) In an inflationary environment, which inventory cost flow method, FIFO or LIFO, results in the largest balance in ending inventory?
Answer: FIFO
The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold. The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold. In an inflationary period, FIFO reports the lowest cost of goods sold (earliest purchases) and the largest balance in ending inventory (most recent purchases).
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
12) In an inflationary period, which inventory cost flow method, FIFO or LIFO, is more desirable from a tax standpoint? Why?
Answer: The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold. The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold. So, LIFO results in recognizing the lowest gross margin, lowest net income, and the lowest income tax expense.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Resource Management; FN Decision Making
13) How does the physical flow of goods differ from the flow of costs?
Answer: Goods usually move physically on a FIFO basis, which means that the first items of merchandise acquired by a company (first-in) are the first items sold to its customers (first-out). The inventory items on hand at the end of the accounting period are typically the last items in (the most recently acquired goods). If companies did not sell their oldest inventory items first, inventories would include dated, less marketable merchandise. Cost flow, however, can differ from physical flow. For example, a company may use LIFO or weighted average for financial reporting even if its goods flow physically on a FIFO basis.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Measurement
14) Ignoring the impact of income tax, how does the choice between FIFO and LIFO affect a company’s cash flows in an inflationary environment? How does income tax impact your answer? Why?
Answer: If the impact of income tax is ignored, the cash flow from operating activities on the statement of cash flows is identical under all three methods. Regardless of the cost flow reporting method, the company pays the same amount of cash to purchase inventory and receives the same amount of cash when it sells inventory. However, income tax does have an impact on this decision. FIFO produces the highest gross margin; it also produces the highest net income and the highest income tax expense. In contrast, LIFO results in recognizing the lowest gross margin, lowest net income, and the lowest income tax expense. The use of LIFO results in a lower cash outflow for income taxes.
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking; Communication
AICPA: BB Critical Thinking; FN Decision Making; FN Measurement
15) If Bowman Company is using FIFO and sales and purchases occur intermittently, how is cost of goods sold computed when recording a sale under the perpetual inventory system?
Answer: The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold. The inventory records are maintained in layers. Each time a transaction occurs, the cost per unit in the first layer of inventory is assigned to the items sold. If the number of items sold exceeds the number of items in the first layer, the cost per unit of the next layer is assigned to the remaining number of units sold, and so on.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Measurement
16) When maintaining perpetual inventory records, what difficulties arise when the LIFO cost flow method is used and sales and purchases occur intermittently? How can accountants deal with these difficulties?
Answer: When maintaining perpetual inventory records, using the LIFO cost flow methods leads to timing difficulties. The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold. When sales and purchases occur intermittently, the cost of the last items purchased isn’t known at the time earlier sales occur. Accountants can solve cost flow timing problems by keeping perpetual records of the quantity (number of units) of items purchased and sold separately from the related costs.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Measurement
17) Sierra Company uses the perpetual inventory system. How would the company calculate the cost of goods sold when recording a sale under the weighted-average cost flow method?
Answer: When weighted-average is used, first, the average cost per unit is calculated by dividing the total cost of goods available for sale by the total number of units available. Then, cost of goods sold is calculated by multiplying the average cost per unit by the number of units sold.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Measurement
18) If the company’s 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? Why?
Answer: If the company’s inventory items have declined in value from damage or obsolescence, the market value of the inventory, in aggregate, will be lower than its cost and the company will write down the inventory to the lower market value. The write-down will decrease assets (inventory) and stockholders’ equity (retained earnings).
Difficulty: 2 Medium
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
19) Kincaid Camera Shop applies the lower-of-cost-or-market rule to individual items of inventory. During the year, some of Kincaid’s inventory items decreased in market value due to obsolescence. Other items increased in market value during the year. In total, the market value of Kincaid’s inventory was higher at the end of the year than the cost of the inventory. Would Kincaid have an adjustment to make at the end of the year due to the lower-of-cost-or-market rule? Why or why not? Would the answer be any different if Kincaid applied the rule to the entire stock of inventory in the aggregate rather than to individual items?
Answer: Kincaid would still have an adjustment at the end of the year for those items that lost value because the company applies the rule individually. However, no adjustment would be necessary if Kincaid applied the rule to the entire stock of inventory in the aggregate because the total market value of the inventory exceeded the total cost of the inventory.
Difficulty: 3 Hard
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Analyze
AACSB: Analytical Thinking; Communication
AICPA: BB Critical Thinking; FN Measurement
20) How is the lower-of-cost-or-market rule applied to each individual inventory item?
Answer: When the lower-of-cost-or-market rule is applied to each individual inventory item, 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.
Difficulty: 2 Medium
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Measurement
21) Explain the meaning of the terms, cost and market, as used in the application of the lower-of-cost-or-market rule.
Answer: Cost is determined using the FIFO, LIFO, weighted average, or specific identification cost flow method. Market is defined as the amount the company would have to pay to replace the merchandise.
Difficulty: 1 Easy
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
22) 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.
Difficulty: 1 Easy
Topic: Avoiding Fraud in Merchandising Businesses
Learning Objective: 05-03 Show how fraud can be avoided through inventory control.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement
23) 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.
Difficulty: 2 Medium
Topic: Avoiding Fraud in Merchandising Businesses
Learning Objective: 05-03 Show how fraud can be avoided through inventory control.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Critical Thinking; FN Measurement
24) 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.
Difficulty: 2 Medium
Topic: Estimating the Ending Inventory Balance
Learning Objective: 05-04 Use the gross margin method to estimate ending inventory.
Bloom’s: Understand
AACSB: Reflective Thinking; Communication
AICPA: BB Resource Management; FN Measurement
25) 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).
Difficulty: 2 Medium
Topic: Estimating the Ending Inventory Balance
Learning Objective: 05-04 Use the gross margin method to estimate ending inventory.
Bloom’s: Apply
AACSB: Knowledge Application; Communication
AICPA: BB Resource Management; FN Measurement
26) 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.
Difficulty: 2 Medium
Topic: The Financial Analyst
Learning Objective: 05-05 Calculate and interpret the inventory turnover ratio.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement
27) 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.
Difficulty: 2 Medium
Topic: The Financial Analyst
Learning Objective: 05-05 Calculate and interpret the inventory turnover ratio.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Risk Analysis; FN Measurement
28) What ratio (usually an average from prior periods) can be used in estimating the current period’s ending inventory?
Answer: Gross margin ratio
Gross margin ratio, based on history, can be used, paired with sales of the current period, to estimate cost of goods sold, and subsequently, ending inventory.
Difficulty: 2 Medium
Topic: Estimating the Ending Inventory Balance
Learning Objective: 05-04 Use the gross margin method to estimate ending inventory.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement; FN Risk Analysis
29) At a time of declining prices, which inventory cost flow method will result in the highest ending inventory?
Answer: C
Explanation: 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).
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
30) 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)?
Answer: A
Explanation: 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 the choice of an inventory cost flow method
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement
31) Which inventory costing method will produce an amount for cost of goods sold that is closest to current market value?
Answer: C
Explanation: LIFO will produce cost of goods sold that is based on the most recent purchases.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
32) 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?
Answer: A
Explanation: If Blake uses the weighted-average inventory cost flow method, ending inventory will be $17.00. If the company uses FIFO, ending inventory will be $18.00.
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
33) What happens when prices are falling?
Answer: C
Explanation: 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).
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
34) If prices are rising, which inventory cost flow method will produce the lowest amount of cost of goods sold?
Answer: B
Explanation: 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.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
35) 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 taxes, which of the following statements is correct?
Answer: D
Explanation: Regardless of the inventory cost flow method, Barker reported outflow of $38.00 for the purchases of the two items and inflow of $30.00 for the sale of one item.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement
36) When the cost of purchasing inventory is declining, which inventory cost flow method will produce the highest amount of cost of goods sold?
Answer: C
Explanation: 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.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
37) What happens when a company is operating in an inflationary environment?
Answer: D
Explanation: In an inflationary environment, prices are rising. LIFO will produce the lowest ending inventory (earliest purchases) compared with FIFO.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
38) 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, which of the following statements is true?
Answer: B
Explanation: Using weighted average, cost of goods sold is calculated by multiplying the average cost per unit by the number of units sold. If Hoover uses weighted-average, the average cost per unit is $34.00. Therefore, gross margin will be $28.00 (or Sales of $62.00 – Cost of goods sold of $34.00).
The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold. If Hoover uses FIFO, cost of goods sold will be $33.00 (earliest purchase) rather than $35.00.
The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold. If Hoover uses LIFO, cost of goods sold will be $35.00 (most recent purchase) and ending inventory will be $33.00 rather than $35.00.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; FN Measurement
39) Anton Co. uses the perpetual inventory system and FIFO cost flow method. During the year, Anton purchased 400 units of inventory that cost $12.00 each and then purchased an additional 600 units of inventory that cost $16.00 each. If Anton sells 700 units of inventory, what is the amount of cost of goods sold?
Answer: D
Explanation: The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold.
Cost of goods sold = (400 × $12.00) + (300 × $16.00) = $9,600
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; FN Measurement
[The following information applies to the questions displayed below.]
The inventory records for Radford Co. reflected the following:
| Beginning inventory @ May 1 | 100 units @ $4.00 |
| First purchase @ May 7 | 300 units @ $4.40 |
| Second purchase @ May 17 | 500 units @ $4.60 |
| Third purchase @ May 23 | 100 units @ $4.80 |
| Sales @ May 31 | 900 units @ $7.80 |
40) If the company uses the weighted-average inventory cost flow method, what is the average cost per unit (rounded) for May?
Answer: B
Explanation: Average cost per unit = Total cost of the inventory available ÷ Total number of units available
Average cost per unit = [(100 × $4.00) + (300 × $4.40) + (500 × $4.60) + (100 × $4.80)] ÷ 1,000 units = $4.50 per unit
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
41) What is the amount of cost of goods sold assuming the LIFO cost flow method?
Answer: A
Explanation: The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold.
Cost of goods sold = (100 × $4.80) + (500 × $4.60) + (300 × $4.40) = $4,100
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
42) What is the amount of ending inventory assuming the FIFO cost flow method?
Answer: A
Explanation: The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold.
Ending inventory units = 1,000 units available for sale − 900 units sold = 100 units in ending inventory
Ending inventory = 100 units × $4.80 per unit = $480
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
43) What is the amount of gross margin assuming the weighted-average inventory cost flow method?
Answer: D
Explanation: Average cost per unit = Total cost of the inventory available ÷ Total number of units available
Average cost per unit = [(100 × $4.00) + (300 × $4.40) + (500 × $4.60) + (100 × $4.80)] ÷ 1,000 units = $4.50 per unit
Cost of goods sold = Average cost per unit × Number of units sold
Cost of goods sold = 900 units × $4.50 per unit = $4,050
Gross margin = Sales − Cost of goods sold
Gross margin = (900 × $7.80) − $4,050 = $2,970
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
44) What is the amount of gross margin assuming the FIFO cost flow method?
Answer: C
Explanation: The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold.
Cost of goods sold = (100 × $4.00) + (300 × $4.40) + (500 × $4.60) = $4,020
Gross margin = Sales − Cost of goods sold
Gross margin = $7,020 − $4,020 = $3,000
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
[The following information applies to the questions displayed below.]
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:
| Purchase | No. of Items | Cost | ||||
| 1 | 200 | $ | 9.00 | |||
| 2 | 150 | $ | 9.30 | |||
| 3 | 50 | $ | 10.50 | |||
Glasgow sold 220 units after purchase 3 for $17.00 each.
45) What is Glasgow’s cost of goods sold under FIFO?
Answer: B
Explanation: The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold.
Cost of goods sold = (80 × $7.50) + (140 × $9.00) = $1,860
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
46) What is Glasgow’s ending inventory under LIFO?
Answer: C
Explanation: The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold.
Units in ending inventory = 80 units + 400 units purchased − 220 units sold = 260
Cost of goods sold = (80 × $7.50) + (180 × $9.00) = $2,220
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
47) What is Glasgow’s ending inventory under weighted-average (rounded)?
Answer: B
Explanation: Units in ending inventory = 80 units + 400 units purchased − 220 units sold = 260
Average cost per unit = Total cost of the inventory available ÷ Total number of units available
Average cost per unit = [(80 × $7.50) + (200 × $9.00) + (150 × $9.30) + (50 × $10.50)] ÷ 480 units = $9.00 per unit
Ending inventory = Average cost per unit × Number of units in ending inventory
Ending inventory =$9.00 per unit × 260 = $2,340
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
48) 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. Poole uses LIFO. Which of the following statements is true?
Answer: B
Explanation: The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold.
Ending inventory = $4.50 (earliest purchase)
Gross margin = Sales − Cost of goods sold
Gross margin = $7.50 − $4.75 = $2.75
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
49) Koontz Company uses the perpetual inventory method and the weighted-average method. On January 1, Year 1, the company’s first day of operations, Koontz purchased 400 units of inventory that cost $7.50 each. On January 10, Year 1, the company purchased an additional 600 units of inventory that cost $9.00 each. If the company sells 550 units of inventory, what is the amount of inventory that would appear on the balance sheet immediately following the sale?
Answer: A
Explanation: Ending inventory units = 400 units + 600 units − 550 units sold = 450
Average cost per unit = Total cost of the inventory available ÷ Total number of units available
Average cost per unit = [(400 × $7.50) + (600 × $9.00)] ÷ 1,000 = $8.40 per unit
Cost of goods sold = Average cost per unit × Number of units sold
Cost of goods sold = $8.40 per unit × 450 units = $3,780
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
50) Stubbs Company uses the perpetual inventory method and the weighted-average cost flow method. On January 1, Year 2, Stubbs purchased 400 units of inventory that cost $8.00 each. On January 10, Year 2, the company purchased an additional 600 units of inventory that cost $9.00 each. If the company sells 700 units of inventory for $16.00 each, what is the amount of gross margin reported on the income statement?
Answer: A
Explanation: Average cost per unit = Total cost of the inventory available ÷ Total number of units available
Average cost per unit = [(400 × $8.00) + (600 × $9.00)] ÷ 1,000 = $8.60 per unit
Cost of goods sold = 700 × $8.60 = $6,020
Gross margin = Sales − Cost of goods sold
Gross margin = $11,200 − $6,020 = $5,180
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
51) Melbourne Company uses the perpetual inventory system and LIFO cost flow 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 the company sells 800 units of inventory, what amount of ending inventory will appear on a balance sheet prepared immediately after the sale?
Answer: D
Explanation: The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold.
Ending inventory units = 500 units + 600 units − 800 units sold = 300 units
Ending inventory = 300 units × $4.00 (earliest purchase) = $1,200
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
52) Vargas Company uses the perpetual inventory system and the FIFO cost flow method. During the current year, Vargas purchased 400 units of inventory that cost $15.00 each. At a later date during the year, the company purchased an additional 800 units of inventory that cost $18.00 each. Vargas sold 500 units of inventory for $27.00. What is the amount of cost of goods sold that will appear on the current year’s income statement?
Answer: A
Explanation: The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be charged to cost of goods sold.
Cost of goods sold = (400 × $15.00) + (100 × $18.00) = $7,800
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
53) Which of the following businesses is most likely to use a specific identification cost flow method?
Answer: A
Explanation: Specific identification is frequently used for high-priced, low-turnover inventory items such as automobiles. For big ticket items like cars, customer demands for specific products limit management’s ability to select which merchandise is sold, and volume is low enough to manage the recordkeeping.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement; BB Industry
[The following information applies to the questions displayed below.]
Chase Co. uses the perpetual inventory method. The inventory records for Chase reflected the following information:
| Jan 1 | Beginning Inventory | 300 units @ $2.30 |
| Jan 12 | Purchase | 400 units @ $2.10 |
| Jan 18 | Sales | 500 units @ $3.80 |
| Jan 21 | Purchase | 300 units @ $2.40 |
| Jan 25 | Purchase | 100 units @ $2.20 |
| Jan 31 | Sales | 450 units @ $3.80 |
54) Assuming Chase uses a LIFO cost flow method, what is the amount of cost of goods sold for the sales transaction on January 18?
Answer: C
Explanation: The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold.
Cost of goods sold = (400 × $2.10) + (100 × $2.30) = $1,070
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
55) Assuming Chase uses a FIFO cost flow method, what is the cost of goods sold for the sales transaction on January 31?
Answer: A
Explanation: The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold.
Cost of goods sold = (200 × $2.10) + (250 × $2.40) = $1,020
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
56) Assuming Chase uses a FIFO cost flow method, what is the ending inventory on January 31?
Answer: B
Explanation: The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold.
Ending inventory = (50 × $2.40) + (100 × $2.20) = $340
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
57) Rowan Company has four different categories of inventory. The quantity, cost, and market value for each of the inventory categories are as follows:
| Item |
Quantity |
Cost
Per Unit |
Market Value
Per Unit |
||||||
| 1 | 220 | $ | 4.40 | $ | 4.60 | ||||
| 2 | 130 | $ | 6.20 | $ | 6.00 | ||||
| 3 | 100 | $ | 10.00 | $ | 9.25 | ||||
| 4 | 25 | $ | 20.50 | $ | 25.00 | ||||
The company carries inventory at lower-of-cost-or-market applied to the entire stock of inventory in the aggregate. How would the implementation of the lower-of-cost-or-market rule impact the elements of the company’s financial statements?
Answer: D
Explanation: Total cost = (220 × $4.40) + (130 × $6.20) + (100 × $10.00) + (25 × $20.50) = $3,286.50
Total market value = (220 × $4.60) + (130 × $6.00) + (100 × 9.25) + (25 × $25.00) = $3,342
Because the total market value is higher than total cost, no write-down is necessary.
Difficulty: 3 Hard
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; FN Measurement
58) The lower-of-cost-or-market rule can be applied to which of the following?
Answer: D
Explanation: The lower-of-cost-or-market rule can be applied to (1) each individual inventory item, (2) major classes or categories of inventory, or (3) the entire stock of inventory in the aggregate.
Difficulty: 1 Easy
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement
59) If a company is using the lower-of-cost-or-market rule and a write-down is required, how will that write-down affect the elements of the company’s financial statements?
Answer: D
Explanation: A write-down resulting from applying the lower-of-cost-or-market rule decreases total assets (inventory) and stockholders’ equity (retained earnings). It increases expenses [cost of goods sold (if material) or operating expenses (if immaterial)], which decreases net income and gross margin.
Difficulty: 2 Medium
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking
60) What is meant by “market” in the lower-of-cost-or-market rule?
Answer: C
Explanation: Market is defined as the amount the company would have to pay to replace the merchandise.
Difficulty: 1 Easy
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement
61) Which of the following methods of applying the lower-of-cost-or-market rule will result in the fewest number of inventory write-downs?
Answer: D
Explanation: The lower-of-cost-or-market rule can be applied to (1) each individual inventory item, (2) major classes or categories of inventory, or (3) the entire stock of inventory in the aggregate. When a company applies the lower-of-cost-or-market rule to the entire stock of inventory in the aggregate, items that have market values that are higher than cost will cancel out others that have market values that are lower than cost, resulting in fewer write-downs.
Difficulty: 1 Easy
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement
62) 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 shows how this business event would affect the financial statements?
| Assets | = | Liab. | + | Stk.
Equity |
Rev. | – | Exp. | = | Net Inc. | Stmt of
Cash Flows |
|
| A. | (2,500) | NA | (2,500) | NA | 2,500 | (2,500) | NA | ||||
| B. | (2,500) | (2,500) | NA | NA | NA | NA | NA | ||||
| C. | NA | (2,500) | 2,500 | 2,500 | NA | 2,500 | NA | ||||
| D. | (2,500) | NA | (2,500) | NA | 2,500 | (2,500) | (2,500) |
Answer: A
Explanation: The business event will decrease assets (inventory) and stockholders’ equity (retained earnings). It increases expenses [cost of goods sold (if material) or operating expenses (if immaterial)], which decreases net income. It does not affect the statement of cash flows.
Difficulty: 2 Medium
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement
63) At the end of the Year 2 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. Assuming the amount is material, how will the necessary write-down to reduce the inventory to the lower-of-cost-or-market affect the elements of the company’s financial statements?
Answer: D
Explanation: The write-down will decrease assets (inventory) and stockholders’ equity (retained earnings). It increases expenses (cost of goods sold), which decreases both gross margin and net income.
Difficulty: 2 Medium
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
64) West Corporation’s Year 1 ending inventory was overstated by $20,000; however, ending inventory for Year 2 was correct. Which of the following statements is correct?
Answer: D
Explanation: Overstating inventory at the end of Year 1, but correctly reporting inventory at the end of Year 2 will cause cost of goods sold to be understated for Year 1 and overstated for Year 2. However, by the end of Year 2, retained earnings will be correctly stated.
Difficulty: 3 Hard
Topic: Avoiding Fraud in Merchandising Businesses
Learning Objective: 05-03 Show how fraud can be avoided through inventory control.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
65) Phipps Corporation overstated its ending inventory on December 31, Year 1. Which of the following correctly identifies the effect of the error on Year 2 financial statements?
Answer: A
Explanation: Overstating inventory at the end of Year 1, but correctly reporting inventory at the end of Year 2, will cause cost of goods sold to be understated for Year 1 and overstated for Year 2. This error will not impact the amount of inventory reported at the end of Year 2.
Difficulty: 3 Hard
Topic: Avoiding Fraud in Merchandising Businesses
Learning Objective: 05-03 Show how fraud can be avoided through inventory control.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
66) Why are the inventory and cost of goods sold accounts attractive targets for managerial fraud?
Answer: C
Explanation: Because the inventory and cost of goods sold accounts are so significant, they are attractive targets for concealing fraud.
Difficulty: 1 Easy
Topic: Avoiding Fraud in Merchandising Businesses
Learning Objective: 05-03 Show how fraud can be avoided through inventory control.
Bloom’s: Remember
AACSB: Ethics; Reflective Thinking
AICPA: BB Critical Thinking; FN Risk Analysis
67) On December 31, Year 1, Owings Corporation overstates the ending inventory by $5,000. How will this affect the amount of retained earnings shown on the balance sheet at December 31, Year 2?
Answer: A
Explanation: Overstating inventory at the end of Year 1 will cause cost of goods sold to be understated for Year 1, which causes net income to be overstated. Since the Year 1 ending inventory becomes the Year 2 beginning inventory, cost of goods sold will be overstated for Year 2, which will cause net income to be understated. The overstatement of Year 1 net income will be offset by the understatement of Year 2 net income and retained earnings will be correctly stated at the end of Year 2.
Difficulty: 2 Medium
Topic: Avoiding Fraud in Merchandising Businesses
Learning Objective: 05-03 Show how fraud can be avoided through inventory control.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
68) What effect will an overstatement of ending inventory at the end of Year 1 have on the amounts reported on the Year 1 financial statements?
Answer: B
Explanation: An overstatement of inventory at the end of Year 1 overstates assets (inventory) and stockholders’ equity (retained earnings) at the end of Year 1. The overstatement also understates expenses (cost of goods sold), which overstates the amount of net income reported for Year 1.
Difficulty: 1 Easy
Topic: Avoiding Fraud in Merchandising Businesses
Learning Objective: 05-03 Show how fraud can be avoided through inventory control.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
69) Zinke Company understated its ending inventory at the end of Year 1. Which of the following correctly states the effect of the error on the amounts shown on the Year 1 financial statements?
Answer: D
Explanation: Understating inventory at the end of Year 1 understates assets (inventory) and stockholders’ equity (retained earnings). It also overstates the cost of goods sold, which understates gross margin and net income for Year 1.
Difficulty: 2 Medium
Topic: Avoiding Fraud in Merchandising Businesses
Learning Objective: 05-03 Show how fraud can be avoided through inventory control.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
70) When the perpetual inventory system is used, where can the best estimate of the amount of inventory on hand be found?
Answer: B
Explanation: 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.
Difficulty: 2 Medium
Topic: Estimating the Ending Inventory Balance
Learning Objective: 05-04 Use the gross margin method to estimate ending inventory.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
71) Which of the following is not required to apply the gross margin method?
Answer: B
Explanation: The gross margin method is used when ending inventory amount at the end of the current period is not available. The beginning inventory balance, sales, and purchases for the current period are required to use this method to estimate the amount of inventory on hand.
Difficulty: 2 Medium
Topic: Estimating the Ending Inventory Balance
Learning Objective: 05-04 Use the gross margin method to estimate ending inventory.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
72) Which of the following circumstances would be a valid reason to estimate the amount of inventory that is on hand at the end of the period?
Answer: C
Explanation: Auditors and financial analysts have developed tools to test for financial statement manipulation. The gross margin method of estimating the ending inventory balance is such a tool.
Difficulty: 2 Medium
Topic: Estimating the Ending Inventory Balance
Learning Objective: 05-04 Use the gross margin method to estimate ending inventory.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement
73) When using the gross margin method to estimate inventory, which of the following is a step in the computation?
Answer: D
Explanation: When applying the gross margin method, the estimated cost of the ending inventory is computed as follows: (1) Calculate the expected gross margin ratio using financial statement data from prior periods. (2) Multiply the expected gross margin ratio by the current period’s sales. (3) Subtract the estimated gross margin from sales to estimate the amount of cost of goods sold. (4) Subtract the estimated cost of goods sold from the amount of goods available for sale to estimate the amount of ending inventory.
Difficulty: 3 Hard
Topic: Estimating the Ending Inventory Balance
Learning Objective: 05-04 Use the gross margin method to estimate ending inventory.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
74) 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. What is the estimated amount of ending inventory at the end of the period?
Answer: B
Explanation: Estimated gross margin = Sales × Estimated gross margin percentage
Estimated gross margin = $25,000 × 0.40 = $10,000
Estimated cost of goods sold = Sales − Estimated gross margin
Estimated cost of goods sold = $25,000 − $10,000 = $15,000
Cost of goods available for sale = Beginning inventory + Purchases
Cost of goods available for sale = $2,500 + $17,500 = $20,000
Ending inventory = Estimated cost of goods available for sale − Estimated cost of goods sold
Ending inventory = $20,000 − $15,000 = $5,000
Difficulty: 2 Medium
Topic: Estimating the Ending Inventory Balance
Learning Objective: 05-04 Use the gross margin method to estimate ending inventory.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; FN Measurement
75) How does an error that results in an overstatement of ending inventory affect the elements of the company’s financial statements in the current year?
| Assets | = | Liab. | + | Equity | Rev. | – | Exp. | = | Net Inc. | Cash Flow | |
| A. | + | NA | + | NA | – | + | NA | ||||
| B. | – | NA | – | NA | + | – | NA | ||||
| C. | + | NA | + | NA | NA | NA | +OA | ||||
| D. | + | + | NA | NA | + | – | +OA |
Answer: A
Explanation: Overstating ending inventory will increase assets (inventory) and decreases expenses (cost of goods sold), which will increase net income and stockholders’ equity. It will not affect the statement of cash flows.
Difficulty: 2 Medium
Topic: Avoiding Fraud in Merchandising Businesses
Learning Objective: 05-03 Show how fraud can be avoided through inventory control.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
76) When preparing its quarterly financial statements, Pace Co. uses the gross margin method to estimate ending inventory. The following information is available for the quarter ending March 31, Year 2:
| Beginning inventory | $ | 110,000 | |
| Purchases | $ | 385,000 | |
| Sales | $ | 525,000 | |
| Estimated gross margin percentage | 45 | % |
What is the estimated amount of inventory that is on hand on March 31, Year 2?
Answer: C
Explanation: Estimated gross margin = Sales × Estimated gross margin percentage
Estimated gross margin = $525,000 × 0.45 = $236,250
Estimated cost of goods sold = Sales − Estimated gross margin
Estimated cost of goods sold = $525,000 − $236,250 = $288,750
Cost of goods available for sale = Beginning inventory + Purchases
Cost of goods available for sale = $110,000 + $385,000 = $495,000
Ending inventory = Cost of goods available for sale − Estimated cost of goods sold
Ending inventory = $495,000 − $288,750 = $206,250
Difficulty: 2 Medium
Topic: Estimating the Ending Inventory Balance
Learning Objective: 05-04 Use the gross margin method to estimate ending inventory.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; FN Measurement
77) Taylor Co. had beginning inventory of $400 and ending inventory of $600. Taylor Co. had cost of goods sold amounting to $1,800. What is the amount of inventory that was purchased during the period?
Answer: C
Explanation: Beginning inventory + Purchases − Ending inventory = Cost of goods sold
$400 + Purchases − $600 = $1,800
Purchases = $1,800 − $400 + $600 = $2,000
Difficulty: 2 Medium
Topic: Estimating the Ending Inventory Balance
Learning Objective: 05-04 Use the gross margin method to estimate ending inventory.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; FN Measurement
[The following information applies to the questions displayed below.]
| Account | Company X | Company Y | Company Z | ||||||
| Cost of goods sold | $ | 1,980,000 | $ | 4,338,000 | $ | 3,234,000 | |||
| Inventory | $ | 175,000 | $ | 295,000 | $ | 250,500 | |||
78) What is the average number of days to sell inventory for Company Y?
Answer: B
Explanation: Inventory turnover = Cost of goods sold ÷ Inventory
Inventory turnover = $4,338,000 ÷ $295,000 = 14.71
Average number of days to sell inventory = 365 ÷ Inventory turnover
Average number of days to sell inventory = 365 ÷ 14.71 = 24.8 Days
Difficulty: 2 Medium
Topic: The Financial Analyst
Learning Objective: 05-05 Calculate and interpret the inventory turnover ratio.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; FN Risk Analysis
79) Assuming that longer inventory holding periods act to increase expenses, which of the three companies would be expected to have the lowest inventory holding costs?
Answer: C
Explanation: Inventory turnover = Cost of goods sold ÷ Inventory
Average days to sell inventory = 365 ÷ Inventory turnover
Company X:
Inventory turnover = Cost of goods sold ÷ Inventory
$1,980,000 ÷ $175,000 = 11.31 times
Average days to sell inventory = 365 ÷ 11.31 = 32.3 days
Company Y:
Inventory turnover = Cost of goods sold ÷ Inventory
$4,338,000 ÷ $295,000 = 14.71 times
Average days to sell inventory = 365 ÷ 14.71 = 24.8 days
Company Z:
Inventory turnover = Cost of goods sold ÷ Inventory
$3,234,000 ÷ $250,500 = 12.91 times
Average days to sell inventory = 365 ÷ 12.91 = 28.3 days
Company Y, with the lowest number of days to sell inventory, will have the lowest inventory holding cost.
Difficulty: 2 Medium
Topic: The Financial Analyst
Learning Objective: 05-05 Calculate and interpret the inventory turnover ratio.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Risk Analysis
80) How is inventory turnover calculated?
Answer: A
Explanation: Inventory turnover = Cost of goods sold ÷ Inventory
Difficulty: 1 Easy
Topic: The Financial Analyst
Learning Objective: 05-05 Calculate and interpret the inventory turnover ratio.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Risk Analysis
81) 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?
Answer: A
Explanation: Inventory turnover = Cost of goods sold ÷ Inventory
12.75 = Cost of goods sold ÷ $2,400,000
Cost of goods sold = 12.75 × $2,400,000 = $30,600,000
Difficulty: 3 Hard
Topic: The Financial Analyst
Learning Objective: 05-05 Calculate and interpret the inventory turnover ratio.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Critical Thinking
82) Misty Mountain Outfitters is a merchandiser of specialized fly fishing gear. Its cost of goods sold for Year 2 was $295,000, and sales were $690,000. The amount of merchandise on hand was $50,000, and total assets amounted to $585,000. What is the average number of days to sell inventory? (Round to the nearest day.)
Answer: B
Explanation: Inventory turnover = Cost of goods sold ÷ Inventory
Inventory turnover = $295,000 ÷ $50,000 = 5.9 times
Average number of days to sell inventory = 365 ÷ Inventory turnover
Average number of days to sell inventory = 365 ÷ 5.9 times = 62 days
Difficulty: 2 Medium
Topic: The Financial Analyst
Learning Objective: 05-05 Calculate and interpret the inventory turnover ratio.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; FN Risk Analysis
83) Which of the following statements is not correct regarding the importance of inventory turnover to a company’s profitability?
Answer: A
Explanation: Overall profitability depends upon two elements: gross margin and inventory turnover. The most profitable combination would be to carry high margin inventory that turns over rapidly (meaning a high inventory turnover). To be competitive, however, companies must often concentrate on one or the other of the elements. Different companies use different business strategies to achieve their objectives.
Difficulty: 2 Medium
Topic: The Financial Analyst
Learning Objective: 05-05 Calculate and interpret the inventory turnover ratio.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; BB Critical Thinking; FN Risk Analysis
84) 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 method was used.
________ b) Cost of goods sold would be $24 assuming the weighted-average cost flow method was used.
________ c) Cash flow from operating activities in June would be $28 assuming a FIFO cost flow method was used.
________ d) Cash flow from operating activities in June would be $26 independent of what cost flow method was used.
________ e) The amount of gross margin would be $26 assuming the FIFO cost flow method was used.
Answer: a) T b) F c) F d) T e) F
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; BB Critical Thinking; FN Measurement
85) 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 inventory prices, FIFO gives higher cost of goods sold than LIFO.
________ c) Under the weighted-average cost flow method, the average cost per unit equals the cost of goods available for sale divided by the number of units available for sale.
________ d) In a period of declining inventory prices, LIFO will result in higher income tax expense than FIFO.
________ e) In a period of rising inventory prices, FIFO gives higher ending inventory than LIFO does.
Answer: a) F b) F c) T d) T e) T
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; BB Critical Thinking; FN Measurement
86) 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 inventory 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 decrease a company’s net income, but it will never increase net income.
Answer: a) F b) T c) F d) T e) T
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods; Lower-of-Cost-or-Market Rule; Estimating the Ending Inventory Balance; The Financial Analyst
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.; 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.; 05-04 Use the gross margin method to estimate ending inventory.; 05-05 Calculate and interpret the inventory turnover ratio.
Bloom’s: Understand; Analyze
AACSB: Analytical Thinking; Reflective Thinking
AICPA: BB Resource Management; BB Critical Thinking; FN Measurement
87) 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 average cost per unit.
________ b) The 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 cost per unit of the oldest inventory is applied to the number of units sold.
________ d) If a company uses the perpetual inventory system and sales and purchases occur intermittently, the company will not be able 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
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Resource Management; BB Critical Thinking; FN Measurement
88) 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 cost per unit of $20; 300 units of Product B at a cost per unit of $24; and 100 units of Product C at a cost per unit 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 to each individual item or to the entire stock of inventory in the 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 applies the lower-of-cost-or-market rule to each individual inventory item, Product A would be listed at $25 per unit.
________ c) Warren would record a write-down of inventory if it applies this rule to each individual inventory item, but would not have a write-down if it applies the rule to the entire stock of inventory in the aggregate.
________ d) If Warren applies this rule to each individual inventory item, inventory of $12,000 will be shown on the balance sheet.
________ e) The lower of cost or market is $1,600 for the 100 units of Product C.
Answer: a) T b) F c) T d) T e) F
Difficulty: 2 Medium
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; BB Critical Thinking; FN Measurement
89) On February 2, Year 2, a fire destroyed the entire inventory of Orange Co. The following information was found in accounting records: purchases of $420,000, sales of $690,000, beginning inventory of $120,000, and average gross margin percentage of 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
Difficulty: 2 Medium
Topic: Estimating the Ending Inventory Balance
Learning Objective: 05-04 Use the gross margin method to estimate ending inventory.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; BB Critical Thinking; FN Measurement
90) Iona Corporation’s ending inventory as of December 31, Year 1, 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 Year 1 by $28,000.
________ b) Net Income is overstated in Year 1 by $14,000.
________ c) Retained Earnings at December 31, Year 1 is overstated by $28,000.
________ d) Beginning inventory will be understated in Year 2 by $28,000.
________ e) Retained Earnings will not be affected by this error at the end of Year 2.
Answer: a) F b) F c) T d) F e) T
Difficulty: 3 Hard
Topic: Avoiding Fraud in Merchandising Businesses
Learning Objective: 05-03 Show how fraud can be avoided through inventory control.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; BB Critical Thinking; FN Measurement
91) Bell Company has provided the following figures as of December 31, Year 2: sales of $600,000, cost of goods sold of $320,000, net income of $120,000, and ending inventory of $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
Difficulty: 2 Medium
Topic: The Financial Analyst
Learning Objective: 05-05 Calculate and interpret the inventory turnover ratio.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Risk Analysis
92) 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
Explanation: Managers can choose which costs to assign to cost of goods sold if specific identification is used.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Ethics
AICPA: BB Critical Thinking; FN Risk Analysis
93) The specific identification inventory method is not practical for companies that sell many low-priced, high turnover items.
Answer: TRUE
Explanation: It is not cost effective for companies to track the specific costs of low-priced items.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
94) The last-in, first-out cost flow method assigns the cost of the items purchased first to ending inventory.
Answer: TRUE
Explanation: 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.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement
95) 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
Explanation: Companies do not need to select a cost flow method that matches the physical flow of goods.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
96) 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
Explanation: Most companies rotate their inventory so as to sell the oldest inventory first. However, the company is free to choose other cost flow methods.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement
97) A company’s gross margin reported on the income statement is not affected by the inventory cost flow method it uses.
Answer: FALSE
Explanation: The selection of cost flow method impacts cost of goods sold, which impacts gross margin.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement
98) During a period of rising inventory prices the LIFO cost flow method will result in higher total assets than FIFO.
Answer: FALSE
Explanation: FIFO will report lower cost of goods sold (older, lower prices), and higher ending inventory (newer, higher prices).
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement
99) During a period of rising inventory prices, a company’s cost of goods sold would be higher using the LIFO cost flow method than with FIFO.
Answer: TRUE
Explanation: During a period of rising inventory prices, cost of goods sold will include the higher, most recent prices when LIFO is used.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
100) 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
Explanation: 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.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
101) 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
Explanation: The selection of cost flow method allocates product costs between cost of goods sold and ending, not beginning, inventory.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
102) During a period of rising inventory 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
Explanation: During a period of rising inventory prices, ending inventory will include the lower, older prices when using LIFO.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
103) Generally accepted accounting principles often allow companies to account for the same types of events in different ways.
Answer: TRUE
Explanation: The different cost flow methods—FIFO, LIFO, weighted average, and specific identification—are examples of alternative accounting procedures allowed by GAAP.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement
104) In a period of rising inventory prices, use of the FIFO cost flow method would cause a company to pay more income taxes than would use of LIFO.
Answer: TRUE
Explanation: In a period of rising inventory prices, FIFO will produce the lowest cost of goods sold, resulting in the highest net income and the highest income tax expense.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
105) If a company uses the FIFO cost flow method for its income tax return it must also use FIFO for financial reporting.
Answer: FALSE
Explanation: The requirement to match cost flow for income tax reporting and financial reporting applies only to the LIFO inventory cost flow method.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement
106) Generally accepted accounting principles restrict or limit a company’s freedom to change inventory cost flow methods from one year to the next.
Answer: TRUE
Explanation: A change in inventory cost flow method must be justified by reasons other than earnings management.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
[The following information applies to the questions displayed below.]
Singleton Company’s perpetual inventory records included the following information:
| Date | Number of units and unit cost | Total cost | ||||
| January 1 | Beginning inventory | 200 units @ $7.00 | $ | 1,400 | ||
| March 4 | Purchase | 150 units @ $8.00 | $ | 1,200 | ||
| September 28 | Purchase | 350 units @ $9.00 | $ | 3,150 | ||
| Number of units sold during the year: 520 | ||||||
107) If Singleton uses the LIFO cost flow method, its ending inventory would be $1,260.
Answer: TRUE
Explanation: The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold.
Units in ending inventory = Units available for sale of (200 + 150 + 350) − Units sold of 520 = 180
Ending inventory = 180 units × January 1 unit cost of $7.00 = $1,260
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; FN Measurement
108) If Singleton uses the FIFO cost flow method, its cost of goods sold would be $4,490.
Answer: FALSE
Explanation: The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold.
Cost of goods sold = (200 units × $7.00 per unit) + (150 × $8.00 per unit) + (170 × $9.00 per unit) = $4,130
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; FN Measurement
109) If Singleton uses the weighted-average cost flow method, its average cost per unit would be $8.00.
Answer: FALSE
Explanation: Average cost per unit = Cost of goods available for sale of [(200 × $7.00) + (150 × $8.00) + (350 × $9.00)] ÷ Units available for sale of 700 = $8.21 per unit
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; FN Measurement
110) 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
Explanation: Average cost per unit = Cost of goods available for sale of [(2 × $36) + (1 × $40)] ÷ Units available for sale of 3 = $37.33 per unit
Selling price of $60 − Cost of goods sold of $37.33 = $22.66
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; FN Measurement
111) 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
Explanation: The Internal Revenue Service requires that companies using LIFO for income tax purposes must also use LIFO for financial reporting.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
112) International Financial Reporting Standards (IFRS) do not permit the use of the LIFO inventory cost flow method.
Answer: TRUE
Explanation: This is a difference between IFRS and U.S. GAAP.
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Remember
AACSB: Reflective Thinking; Diversity
AICPA: FN Measurement; BB Global
113) 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
Explanation: The lower-of-cost-or-market rule must be applied regardless of the inventory cost flow method in use.
Difficulty: 2 Medium
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking
114) 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
Explanation: If the replacement cost is greater than the historic cost, no adjustment is made. Adjustments are only made if the replacement cost is lower than the historic cost.
Difficulty: 2 Medium
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
115) 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
Explanation: 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.
Difficulty: 2 Medium
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement
116) If a company applies the lower-of-cost-or-market rule to the entire stock of inventory in the aggregate, its write-down of inventory is likely to be greater than if it applies the rule to individual items of inventory.
Answer: FALSE
Explanation: If a company applies the lower-of-cost-or-market rule to the entire stock of inventory in the aggregate, 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.
Difficulty: 3 Hard
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement
117) If a company overstates its Inventory balance at the end of Year 1 due to an error, its Retained Earnings will also be overstated on the Year 1 balance sheet.
Answer: TRUE
Explanation: Overstating inventory will understate cost of goods sold, resulting in higher net income and higher retained earnings in the current year.
Difficulty: 2 Medium
Topic: Avoiding Fraud in Merchandising Businesses
Learning Objective: 05-03 Show how fraud can be avoided through inventory control.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Critical Thinking
118) The gross margin method of estimating inventory is not useful in detecting inventory fraud.
Answer: FALSE
Explanation: 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.
Difficulty: 1 Easy
Topic: Estimating the Ending Inventory Balance
Learning Objective: 05-04 Use the gross margin method to estimate ending inventory.
Bloom’s: Understand
AACSB: Analytical Thinking; Ethics
AICPA: BB Resource Management; FN Risk Analysis
119) A discount merchandiser is likely to have a higher inventory turnover than more upscale stores with higher merchandise prices.
Answer: TRUE
Explanation: A discount merchandiser operates at lower margin, and relies on higher inventory turnover to make a profit.
Difficulty: 1 Easy
Topic: The Financial Analyst
Learning Objective: 05-05 Calculate and interpret the inventory turnover ratio.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement; BB Industry
120) The cost flow method chosen by a company will impact its inventory turnover ratio.
Answer: TRUE
Explanation: Because the amounts of ending inventory and cost of goods sold are affected by the cost flow method (FIFO, LIFO, etc.) a company uses, the gross margin and inventory turnover ratios are also affected by the cost flow method used.
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods; The Financial Analyst
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.; 05-05 Calculate and interpret the inventory turnover ratio.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Resource Management; FN Measurement; BB Industry
121) Singh Company sold 75 units @ $350 each on October 31, Year 2. The following information is also available:
Beginning inventory 25 units @ $175
Feb. 2 purchase 20 units @ $180
June 15 purchase 45 units @ 200
Oct. 1 purchase 30 units @ $220
Required:
1) FIFO
2) LIFO
3) Weighted Average
1) FIFO
2) LIFO
3) Weighted Average
Answer: Cost of Goods Sold:
Ending Inventory:
Cost of goods sold using FIFO and LIFO:
Cost of goods sold using weighted average:
Average cost per unit = Cost of goods available for sale of [(25 × $175) + (20 × $180) + (45 × $200) + (30 × $220)] ÷ Units available for sale of 120 units = $196.46 per unit
Cost of goods sold = Average cost of $196.46 × 75 units = $14,735
Ending inventory using FIFO and LIFO:
Ending inventory using weighted average:
Average cost of $196.46 per unit × 45 units = $8,841
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
122) During December Year 2, 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:
Beginning inventory 60 units @ $100
April 18 purchase 90 units @ $115
August 5 purchase 30 units @ 120
The company’s income tax rate is 30%.
Required:
1) FIFO inventory cost flow
2) LIFO inventory cost flow
1) FIFO inventory cost flow
2) LIFO inventory cost flow
Answer:
FIFO
Income Statement
For the Year Ended December 31, Year 2
Sales (125 @ $225) $ 28,125
Cost of goods sold 13,475
Gross margin 14,650
Selling and administrative expense 11,000
Net income before taxes 3,650
Income tax expense 1,095
Net income $ 2,555
2)
LIFO
Income Statement
For the Year Ended December 31, Year 2
Sales (125 @ $225) $ 28,125
Cost of goods sold 14,450
Gross margin 13,675
Selling and administrative expense 11,000
Net income before taxes 2,675
Income tax expense 803
Net income $ 1,872
b)
1) FIFO
FIFO
Cash Flow from Operating Activities
Cash received from sales $ 28,125
Cash payment for inventory (13,950)
Cash payment for selling and administrative expense (11,000)
Cash payment for income tax expense (1,095)
Net cash flow from operating activities $ 2,080
2) LIFO
LIFO
Cash Flow from Operating Activities
Cash received from sales $ 28,125
Cash payment for inventory (13,950)
Cash payment for selling and administrative expense (11,000)
Cash payment for income tax expense (803)
Net cash flow from operating activities $ 2,372
Cost of goods sold:
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
123) 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:
Cost of goods sold = $31,920
Ending inventory = $8,640
(2) LIFO: Cost of goods sold = $30,960
Ending inventory = $9,600
(3) Weighted Average:
Cost of goods sold = $40,560
Ending inventory = $9,013
(1) FIFO
(2) LIFO
(3) Weighted Average
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
124) The following transactions apply to Sam’s Skateboards.
1-Jan Beginning inventory 50 units @ $120
12-Jan Purchase 30 units @ $104
19-Mar Sales 60 units @ $190
8-Jun Purchase 20 units @ $116
4-Nov Sales 35 units @ $200
Assume the use of the perpetual inventory method and that all transactions were for cash.
Required:
Determine the amount of ending inventory using a FIFO cost flow.
Answer: $580
FIFO Ending Inventory: 5 units × $116 per unit = $580
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; BB Critical Thinking; FN Measurement
125) Curtis Company had the following transactions for the month of January:
1-Jan Beginning inventory 30 units @ $150
6-Jan Purchase 40 units @ $160
8-Jan Sales 50 units @ $260
19-Jan Purchase 20 units @ $164
22-Jan Sales 30 units @ $260
30-Jan Purchase 15 units @ $156
Assume that Curtis uses the perpetual inventory method and that all transactions were for cash.
Required:
Answer:
a)
b)
Ending inventory:
10 units @ $164 = $ 1,640
15 units @ $156 = 2,340
$ 3,980
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; BB Critical Thinking; FN Measurement
126) Max Company’s first year in operation was Year 1. The following inventory purchase information comes from Max’s accounting records for the year:
19-Jan 120 units @ $ 280
20-Apr 240 units @ $ 304
15-Oct 90 units @ $ 320
In December Year 1, Max sold 350 units for $480 each. Operating expenses for the year were $30,000, and the tax rate was 30%.
Required:
Answer:
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; BB Critical Thinking; FN Measurement; FN Decision Making
127) 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 each of the following inventory cost flow methods:
(Round intermediate calculations to two decimal places. Round final answers to whole dollars.)
| Cost of Goods Sold | Ending Inventory | |
| a) FIFO | ||
| b) LIFO | ||
| c) Weighted Average |
Answer:
| Cost of Goods Sold | Ending Inventory | |
| a) FIFO | $75,000 | $61,000 |
| b) LIFO | $83,000 | $53,000 |
| c) Weighted Average | $79,335 | $56,668 |
| Cost of Goods Sold | Ending Inventory | |
| a) FIFO | $75,000 (100 × $200) +
(250 × $220) |
$61,000 (200 × $250) +
(50 × $220) |
| b) LIFO | $83,000 (200 × $250) +
(150 × $220) |
$53,000 (100 × $200) +
(150 × $220) |
| c) Weighted Average | $79,335 (350 × $226.67) | $56,668 (250 × $226.67) |
Average cost per unit: [(100 × $200) + (300 × $220) + (200 × $250)] ÷ 600 = $226.67
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; BB Critical Thinking; FN Measurement
128) Maynard Company started the year with no inventory. During the year, it purchased two identical inventory items at different times. The first cost per unit $1,100 and the second, $1,200. One of the items was sold during the year.
Required:
Based on this information, how much product cost would be allocated to cost of goods sold and ending inventory using each of the following inventory cost flow methods:
| Cost of Goods Sold | Ending Inventory | |
| a) FIFO | ||
| b) LIFO | ||
| c) Weighted Average |
Answer:
| Cost of Goods Sold | Ending Inventory | |
| a) FIFO | $1,100 | $1,200 |
| b) LIFO | $1,200 | $1,100 |
| c) Weighted Average | $1,150 | $1,150 |
The first-in, first-out (FIFO) cost flow method requires that the cost of the items purchased first be assigned to cost of goods sold. The last-in, first-out (LIFO) cost flow method requires that the cost of the items purchased last be charged to cost of goods sold. The weighted-average method first determines the average cost per unit as the total cost of the inventory available divided by the total number of units available, and then multiplies that result by the number of units.
Difficulty: 1 Easy
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; BB Critical Thinking; FN Measurement
129) The following information is for Choi Company for Year 2:
Beginning inventory 120 units @ $100
Units purchased 180 units @ $112
Choi sold 250 units for $190 each.
Required:
1) FIFO.
2) LIFO.
3) Weighted average.
1) LIFO.
2) FIFO.
Answer:
Cost of goods sold = (120 @ $100) + (130 @ $112) = $26,560
Gross margin = $47,500 − 26,560 = $20,940
Cost of goods sold = (180 @ $112) + (70 @ $100) = $27,160
Gross margin = $47,500 − 27,160 = $20,340
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
By FIFO, net income will be $600 higher than by LIFO, ignoring the effect of income taxes.
c (2) LIFO cash flow from operating activities = $47,500 − (180 units @ $112 per unit) = $27,340
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; BB Critical Thinking; FN Measurement
130) Curtis Company’s inventory records reflect the following for the month of October, Year 2:
1-Oct Beginning inventory 950 units @ $17.00
12-Oct First purchase 800 units @ $19.00
18-Oct Cash sales 1,500 units @ $36.00
21-Oct Second purchase 600 units @ $16.40
25-Oct Third purchase 300 units @ $17.40
31-Oct Cash sales 1,000 units @ $38.00
Assuming that Curtis Company uses the FIFO cost flow method in a perpetual inventory system.
Required:
(a) Calculate the cost of goods sold for the month ending October 31, Year 2
(b) Calculate the ending inventory at October 31, Year 2.
Answer:
(a) $43,800
(b) $2,610
(a) and (b)
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; BB Critical Thinking; FN Measurement
131) Diaz Company’s first year in operation was Year 1. For Year 1, 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:
Answer: a) $242,400
Cost of goods sold = $298,400 − 56,000 = $242,400
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
132) The Atkins Company uses the FIFO cost flow method. The company had the following beginning inventory, purchases, and sales of inventory during the first quarter of Year 2:
| Units | Cost per unit | ||
| 1-Jan | Beg. Inventory | 1,200 | $ 60 |
| 2-Jan | Purchase | 500 | $ 64 |
| 25-Jan | Sale | 700 | |
| 5-Feb | Purchase | 600 | $ 68 |
| 18-Feb | Sale | 800 | |
| 15-Mar | Purchase | 600 | $ 64 |
Required:
1) Determine the cost of goods sold during the first quarter of Year 2
2) Determine the ending inventory at Year 2.
Answer:
1) $91,200
2) $92,000
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; BB Critical Thinking; FN Measurement
133) Rowe Company has six different categories of inventory. Quantity, cost, and market value information for each inventory category is shown below:
| Item | Quantity | Cost per Unit | Mkt. Value per Unit |
| A | 700 | $ 10.90 | $ 10.75 |
| B | 950 | $ 3.65 | $ 4.00 |
| C | 520 | $ 15.00 | $ 13.90 |
| D | 115 | $ 23.30 | $ 21.50 |
| E | 400 | $ 44.25 | $ 47.60 |
| F | 90 | $ 89.10 | $ 91.55 |
Required:
Answer
a)
b)
Difficulty: 2 Medium
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; FN Measurement
134) Burton Supply uses the perpetual inventory method. At the end of the year Burton Supply had the following items in inventory.
| Item | Quantity | Cost per Unit | Mkt. Value per Unit |
| A1 | 40 | $ 120.00 | $ 124.00 |
| A2 | 30 | $ 84.00 | $ 80.00 |
| A3 | 50 | $ 170.00 | $ 162.00 |
| A4 | 20 | $ 152.00 | $ 158.00 |
Required:
Answer:
a), b), c), and d)
Difficulty: 2 Medium
Topic: Lower-of-Cost-or-Market Rule
Learning Objective: 05-02 Apply the lower-of-cost-or-market rule to inventory valuation.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; BB Resource Management; FN Measurement
135) The accountant for the Bay Company made an error, which understated the ending inventory for Year 1 by $7,000. Bay Company uses the perpetual 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.
Answer:
Effect of error on elements of Year 1 financial statements:
Understating ending inventory understates total assets (inventory) and stockholders’ equity (retained earnings). It overstates expenses (since ending inventory is subtracted in the calculation of cost of goods sold), which understates gross margin and net income. It does not affect purchases or the statement of cash flows.
Effect of error on elements of Year 2 financial statements:
The Year 1 ending inventory becomes the Year 2 beginning inventory. Understating beginning inventory does not impact total assets or stockholders’ equity (retained earnings). It understates expenses (since beginning inventory is added in the calculation of cost of goods sold), which overstates gross margin and net income. It does not affect the statement of cash flows.
Difficulty: 3 Hard
Topic: Avoiding Fraud in Merchandising Businesses
Learning Objective: 05-03 Show how fraud can be avoided through inventory control.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
136) Byrne Company had its entire inventory destroyed when a fire swept through the company’s warehouse on April 30, Year 2. 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:
Sales $ 275,000
Purchases 190,000
Beginning inventory 22,500
Required:
Assuming that the gross margin has averaged 35%, what is the estimated value of the inventory destroyed in the fire?
Answer: $33,750
Inventory lost is computed by plugging the missing figure: $212,500 − $178,750 = $33,750
Difficulty: 2 Medium
Topic: Estimating the Ending Inventory Balance
Learning Objective: 05-04 Use the gross margin method to estimate ending inventory.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; BB Critical Thinking; FN Measurement
137) The following information is for Lattimore Company for Year 2:
Beginning inventory 200 units @ $108
Purchase May 12 100 units @ $130
Purchase October 9 150 units @ $132
Sales 360 units @ $180
Required:
Assuming that Lattimore uses the LIFO cost flow method:
Answer:
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 (rounds to 79 days)
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods; The Financial Analyst
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.; 05-05 Calculate and interpret the inventory turnover ratio.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; FN Measurement
138) The following information relating to the current year was taken from the records of Poole Company:
Beginning inventory 200 units @ $110
Purchase May 12 100 units @ $120
Purchase October 9 150 units @ $125
Sales 360 units @ $180
Required:
| LIFO | FIFO | |
| Cost of goods sold | ||
| Inventory balance at end of year | ||
| Inventory turnover | ||
| Avg. # of days to sell inventory |
Answer:
| LIFO | FIFO | |
| Cost of goods sold | (150 × $125) + (100 × $120) + (110 × $110) = $42,850 | (200 × $110) + (100 × $120) + (60 × $125) = $41,500 |
| Inventory balance at end of year | 90 × $110 = $9,900 | 90 × $125 = $11,250 |
| Inventory turnover | $42,850/$9,900 = 4.33 | $41,500/$11,250 = 3.69 |
| Avg. # of days to sell inventory | 365/4.33 = 84 days | 365/3.69 = 99 days |
Difficulty: 3 Hard
Topic: Inventory Cost Flow Methods; The Financial Analyst
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.; 05-05 Calculate and interpret the inventory turnover ratio.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; BB Resource Management; FN Measurement
139) The following information is for Benitez Company for Year 2:
Beginning inventory 300 units @ $25
Purchase April 8 150 units @ $30
Purchase September 12 250 units @ $34
Sales 590 units @ $50
Required:
Assuming that Benitez uses the FIFO cost flow method,
Answer:
Feedback: a) Cost of goods sold = (300 × $25) + (150 × $30) + (140 × $34) = $16,760
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
Difficulty: 2 Medium
Topic: Inventory Cost Flow Methods; The Financial Analyst
Learning Objective: 05-01 Determine the amount of cost of goods sold and ending inventory using the specific identification, FIFO, LIFO, and weighted average cost flow methods.; 05-05 Calculate and interpret the inventory turnover ratio.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Resource Management; FN Measurement
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
