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Exam 6: Inventories and Cost of Sales

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Question 91

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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 Perpetual LIFO inventory valuation method, what is the cost of the ending inventory? (Assume all sales were made on the last day of the month.)

A) $3,200.
B) $3,405.
C) $5,400.
D) $3,364.
E) $3,270.

F) C) and D)
G) C) and E)

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Question 92

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On September 1 of the current year, Scots Company experienced a flood that destroyed the company's entire inventory. Because the company had not completed its month end reporting for August, it must estimate the amount of inventory lost using the gross profit method. At the beginning of August, the company reported beginning inventory of $215,450. Inventory purchased during August was $192,530. Sales for the month of August were $542,500. Assuming the company's typical gross profit ratio is 40%, estimate the amount of inventory destroyed in the flood.

A) $81,480
B) $87,480
C) $134,520
D) $109,980
E) $82,480

F) A) and D)
G) A) and B)

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Question 93

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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.

A company has the following per unit original costs and replacement costs for its inventory. LCM is applied to individual items. Part A: 50 units with a cost of $5, and replacement cost of $4.50 Part B: 75 units with a cost of $6, and replacement cost of $6.50 Part C: 160 units with a cost of $3, and replacement cost of $2.50 Under the lower of cost or market method, the total value of this company's ending inventory is:

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

A company had beginning inventory of 10 units at a cost of $20 each on March 1. On March 2, it purchased 10 units at $22 each. On March 6 it purchased 6 units at $25 each. On March 8, it sold 22 units for $54 each. Using the FIFO perpetual inventory method, what was the cost of the 22 units sold?

Underwood had cost of goods sold of $8 million and its ending inventory was $2 million. Therefore, its days' sales in inventory equals 25 days.

McCarthy Company has inventory of 8 units at a cost of $200 each on October 1. On October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the FIFO perpetual inventory method, what amount will be reported as cost of goods sold for the 11 units that were sold?

Eastview Company uses a periodic LIFO inventory system, and has the following purchases and sales: $\begin{array} { | l | l | } \hline \text { January 1 } & 150 \text { units were purchased at } \$ 9 \text { per unit. } \\\hline \text { January } 17 & 120 \text { units were sold. } \\\hline \text { January 20 } & 160 \text { units were purchased at } \$ 11 \text { per unit. } \\\hline \text { January 29 } & 150 \text { units were sold. } \\\hline\end{array}$ What is the value of cost of goods sold?

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

All of the following statements related to goods on consignment are true except:

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.

An inventory error is sometimes said to be self-correcting because it yields an offsetting error in the next period.

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

Sarbanes Oxley (SOX)demands that companies safeguard inventory and properly report it. List methods that companies should use to safeguard inventory and accounting procedures that should be used to properly report inventory.

Damaged and obsolete goods that can be sold:

The consistency concept:

Eastview Company uses a perpetual LIFO inventory system, and has the following purchases and sales: $\begin{array} { | l | l | } \hline \text { January 1 } & 150 \text { units were purchased at } \$ 9 \text { per unit. } \\\hline \text { January } 17 & 120 \text { units were sold. } \\\hline \text { January 20 } & 160 \text { units were purchased at } \$ 11 \text { per unit. } \\\hline \text { January 29 } & 150 \text { units were sold. } \\\hline\end{array}$ What is the value of cost of goods sold?

An advantage of the weighted average inventory method is that it tends to smooth out erratic changes in costs.

A company's cost of inventory was $219,500. Due to phenomenal demand the market value of its inventory increased to $221,700. This company should record the inventory at its market value.