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Exam 6: Inventories and Cost of Sales

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Question 21

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Evaluate each inventory error separately and determine whether it overstates or understates cost of goods sold and net income. $\begin{array} { | l | l | l | } \hline \text { Inventory error: } & \text { Cost af good sold is: } & \text { Net income is: } \\\hline \text { Understatement of beginging inventory } & & \\\hline \text { Understatement of ending inventory } & & \\\hline \text { Overstatement of begining inventory } & & \\\hline \text { Overstatement of ending inventory } & & \\\hline\end{array}$

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\[\begin{array} { | l | c | c | }
\hlin...

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Question 22

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Match the inventory valuation method from the list below that is being described in each situation in letters a-e. In all cases, assume a period of rising prices. $\begin{array} { | l | l | } \hline \text { FIFO } & \text { First in, first out } \\\hline \text { LIFO } & \text { Last in, first out } \\\hline \text { WA } & \text { Weighted average } \\\hline \text { SI } & \text { Specific identification } \\\hline\end{array}$ a. The method that is used if each inventory item can be matched with a specific purchase and invoice. ________ b. The method that will cause the company to have the lowest income taxes. ________ c. The method that will cause the company to have the lowest cost of goods sold. ________ d. The method that will assign a value to inventory that approximates current cost. ________ e. The method that will tend to smooth out erratic changes in costs.

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a. SI; b. ...

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Question 23

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A company sells garden hoses and uses the perpetual inventory system to account for its merchandise. The beginning balance of the inventory and its transactions during September were as follows: September 1: Beginning balance of 18 units at $13 each September 12: Purchased 30 units at $14 each September 19: Sold 24 units at $30 selling price each September 20: Purchased 24 units at $17 each September 27: Sold 27 units at $30 selling price each If the ending inventory is reported at $276, what inventory method was used?

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

If obsolete or damaged goods can be sold, they will be included in inventory at their original cost.

When purchase costs regularly rise, the ________ method of inventory valuation yields the highest gross profit and net income.

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.

The understatement of the ending inventory balance causes:

To avoid the time-consuming process of taking an inventory each year, most companies use the gross profit method to estimate ending inventory.

When costs to purchase inventory regularly decline, which method of inventory costing will yield the lowest gross profit and income?

A company reported the following data related to its ending inventory: $\begin{array} { | l | l | r | r | } \hline \text { Product } & \text { Units Available } & \text { Cost } & \text { Market } \\\hline 849 & 100 & \$ 10 & \$ 11 \\\hline 842 & 75 & 16 & 14 \\\hline 847 & 60 & 14 & 13 \\\hline 860 & 40 & 16 & 20 \\\hline\end{array}$ Calculate the lower-of-cost-or-market on the inventory applied separately to each product.

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.

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

Interim financial statements:

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?

Regardless of the inventory costing system used, cost of goods available for sale must be allocated at the end of the period between

Perfection Company had cost of goods sold of $853,000, ending inventory of $70,500, and average inventory of $71,600. Its inventory turnover equals:

The ________ method of assigning costs to inventory and cost of goods sold assumes that the inventory items are sold in the order acquired.

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. $\begin{array}{|c|l|l|l|}\hline\text { Date } & \text { Activities } & \text { Units Acquired at Cost } & \text { Units Sold at Retail } \\\hline \text { May 1 } & \text { Beginning Inventory } & 150 \text { units @ } \$ 10.00 & \\ \hline 5 & \text { Purchase } & 220 \text { units @\$12.00 } & \\\hline 10 & \text { Sales } & & 140 \text { units @ } \$ 20.00 \\\hline 15 & \text { Purchase } & 100 \text { units @ \$13.00 } & \\\hline 24 & \text { Sales } & & 90 \text { units @ \$21.00 } \\\hline \end{array}$

Match the inventory valuation method from the list below. In all cases, assume a period of rising prices