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Exam 6: Inventories and Cost of Sales

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Question 81

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Identify and describe the four inventory valuation methods.

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Question 82

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Raleigh Co. has the following products in its ending inventory. Compute the lower of cost or market total for inventory applied separately to each product. $\begin{array} { | l | l | l | l | } \hline \text { Product } & \text { Quantity } & \text { Cost per unit } & \text { Market per unit } \\\hline \text { Jelly } & 150 & \$ 2.00 & 2.15 \\\hline \text { Jam } & 370 & \$ 2.65 & 2.50 \\\hline \text { Marmalade } & 260 & \$ 3.10 & 3.05 \\\hline\end{array}$

A) $2,086.50.
B) $2,053.50.
C) $2,040.50.
D) $2,018.00.
E) $2,109.00.

F) A) and B)
G) B) and E)

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Question 83

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A company had the following purchases and sales during its first year of operations: $\begin{array} { | l | l | l | } \hline & \text { Purchases } & \text { Sales } \\\hline \text { January: } & 10 \text { units at } \$ 120 & 6 \text { units } \\\hline \text { February: } & 20 \text { units at } \$ 125 & 5 \text { units } \\\hline \text { May: } & 15 \text { units at } \$ 130 & 9 \text { units } \\\hline \text { September: } & 12 \text { units at } \$ 135 & 8 \text { units } \\\hline \text { November: } & 10 \text { units at } \$ 140 & 13 \text { units } \\\hline\end{array}$ On December 31, there were 26 units remaining in ending inventory. Using the Periodic LIFO inventory valuation method, what is the cost of the ending inventory? (Assume all sales were made on the last day of the month.)

The inventory valuation method that has the advantages of assigning an amount to inventory on the balance sheet that approximates its current cost, and also mimics the actual flow of goods for most businesses is:

Whether purchase costs are rising or falling, FIFO always will yield the highest gross profit and net income.

On January 31, a company needed to estimate its ending inventory to prepare its monthly financial statements. The following information is currently available: Inventory as of January 1: $120,500 Net sales for January: $400,000 Net purchases for January: $270,500 This company typically achieves a gross profit ratio of 15%. Ending Inventory under the gross profit method would be:

In applying the lower of cost or market method to inventory valuation, market is defined as the current replacement cost.

The conservatism constraint prescribes that:

Use the following information for Davis Company to compute inventory turnover for Year 2. $\begin{array} { | l | r | r | } \hline & \text { Y ear 2 } & \text { Y ear 1 } \\\hline \text { Cost of goods sold } & 279,500 & 291,800 \\\hline \text { Ending inventory } & 47,700 & 49,350 \\\hline\end{array}$

An advantage of FIFO is that it assigns the most recent costs to cost of goods sold, and does a better job of matching current costs with revenues on the income statement.

The assignment of costs to the cost of goods sold and to ending inventory using FIFO is the same for both the perpetual and periodic inventory systems.

Buffalo Company reported a December 31 ending inventory balance of $412,000. The following additional information is also available: -The ending inventory balance of $412,000 did not include goods costing $48,000 that were purchased by Buffalo on December 28 and shipped FOB destination on that date. Buffalo did not receive the goods until January 2 of the following year. -The ending inventory balance of $412,000 included damaged goods at their original cost of $38,000. The net realizable value of the damaged goods was $10,000. Based on this information, the correct balance for ending inventory on December 31 is:

A company's warehouse contents were destroyed by a flood on September 12. The following information was the only information that was salvaged: 1. Inventory, beginning: $28,000 2. Purchases for the period: $17,000 3. Sales for the period: $55,000 4. Sales returns for the period: $700 The company's average gross profit ratio is 35%. What is the estimated cost of the lost inventory?

Goods in transit are included in a purchaser's inventory:

Salmone Company reported the following purchases and sales of its only product. Salmone uses a periodic inventory system. Determine the cost assigned to the ending inventory using FIFO. $\begin{array} { | r | l | l | l | } \hline \text { Date } & \text { Activities } & \text { Units Acquired at Cost } & \text { Units Sold at Retail } \\\hline \text { May 1 } & \text { Beginning Inventory } & 150 \text { units } @ \$ 10.00 & \\\hline 5 & \text { Purchase } & 220 \text { units } @ \$ 12.00 & \\\hline 10 & \text { Sales } & & 140 \text { units } @ \$ 20.00 \\\hline 15 & \text { Purchase } & 100 \text { units } @ \$ 13.00 & \\\hline 24 & \text { Sales } & & 90 \text { units } @ \$ 21.00 \\\hline\end{array}$

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

Hull Company reported the following income statement information for the current year: 35 $\begin{array}{|l|l|}\hline & \\\hline \text { Sales } & \$ 410,000 \\\hline \text { Cost of goods sold: } & \\\hline \text { Beginning inventory } & \$ 132,000 \\\hline\end{array}$ $\begin{array}{|l|r|}\hline \text { Beginning inventory } & \$ 132,000 \\\hline \text { Cost of goods purchased } & \underline{273,000} \\\hline \begin{array}{l}\text { Cost of goods available } \\\text { for sale }\end{array} & 405,000 \\\hline \text { Ending inventory } & \underline{144,000} \\\hline \text { Cost of goods sold } & \underline{261,000} \\\hline \text { Gross profit } & \$ 149,000 \\\hline\end{array}$ The beginning inventory balance is correct. However, the ending inventory figure was overstated by $20,000. Given this information, the correct gross profit would be:

The expense recognition (matching)principle is used to determine how much of the cost of goods available for sale is deducted from sales and how much is carried forward as inventory.

Sandoval needs to determine its year-end inventory. The warehouse contains 20,000 units, of which 3,000 were damaged by flood and are not sellable. Another 2,000 units were purchased from Markor Company, FOB shipping point, and are currently in transit. The company also consigns goods and has 4,000 units at a consignee's location. How many units should Sandoval include in its year-end inventory?

The inventory turnover ratio is computed by dividing cost of goods sold by average merchandise inventory.