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Exam 5: Inventories and Cost of Sales

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Question 1

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Incidental costs for acquiring merchandise inventory, such as import duties, freight, storage, and insurance, should not be added to the cost of inventory.

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B) False

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Question 2

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Patrick Randall of Sports Supplies finds that maintaining appropriate levels of inventories while controlling costs is a major challenge. What are the challenges Patrick refers to?

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Any entrepreneur who sells inventory mus...

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Question 3

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The consistency concept allows a company use different accounting methods from period to period in order to maximize profits.

How do the consistency concept and the full disclosure principle affect inventory valuation?

On April 24 of the current year, The Memphis Pecan Company experienced a tornado that destroyed the company's entire inventory. At the beginning of April, the company reported beginning inventory of $226,750. Inventory purchased during April (until the date of the tornado) was $197,800. Sales for the month of April through April 24 were $642,500. Assuming the company's typical gross profit ratio is 50%, estimate the amount of inventory destroyed in the tornado.

Generally accepted accounting principles require that the inventory of a company be reported at:

Decisions management must make in accounting for inventory cost include all of the following except:

Given the following information, determine the cost of the inventory at June 30 using the LIFO perpetual inventory method. $\begin{array} { | l | l | l | } \hline \text { June 1 } & \text { Beginning inventory } & \begin{array} { l } 15 \text { units at } \$ 20 \\\text { ead }\end{array} \\\hline \text { June 15 } & \begin{array} { l } \text { Sale of } 6 \text { units for } \$ 50 \\\text { each }\end{array} & \\\hline \begin{array} { l } \text { June } \\29\end{array} & \text { Purchase } & \begin{array} { l } 8 \text { units at } \$ 25 \\\text { ead }\end{array} \\\hline\end{array}$ The cost of the ending inventory is:

LIFO assumes that inventory costs flow in the order incurred.

The lower of cost or market requiring inventory to be reported at market value if it is lower than cost is an example of applying the conservatism constraint.

The lower of cost or market rule for inventory valuation is always applied to individual units separately rather than to major categories of inventory or to the entire inventory.

Grays Company has inventory of 10 units at a cost of $10 each on August 1. On August 3, it purchased 20 units at $12 each. 12 units are sold on August 6. Using the FIFO perpetual inventory method, what amount will be reported in cost of goods sold for the 12 units that were sold?

One application of internal control when taking a physical count of inventory is the use of pre-numbered inventory tickets.

The full disclosure principle requires that the notes to the financial statements report any change in the method of accounting for inventory.

Avanti purchases inventory from overseas and incurs the following costs: the merchandise cost is $50,000, credit terms 2/10, n/30 that apply only to the $50,000; FOB shipping point freight charges are $1,500; insurance during transit is $500; and import duties are $1,000. Avanti paid within the discount period and incurred additional costs of $1,200 for advertising and $5,000 for sales commissions. Compute the cost that should be assigned to the inventory.

According to IRS guidelines, companies may use FIFO for financial reporting and LIFO for tax reporting.

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

FIFO is preferred when purchase costs are rising and managers have incentives to report higher income for reasons such as bonus plans, job security, and reputation.

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

A company reports the following information regarding its inventory. Beginning inventory: cost is $80,000; retail is $130,000 Net purchases: cost is $65,000; retail is $120,000 Sales at retail: $145,000 The year-end inventory shows $135,000 worth of merchandise available at retail prices. What is the cost of the ending inventory calculated using the retail inventory method?