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Exam 6: Inventories and Cost of Sales

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Question 61

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Some companies choose to avoid assigning incidental costs of acquiring merchandise to inventory by recording them as expenses when incurred. The argument that supports this is called:

A) The matching principle.
B) The materiality constraint.
C) The cost principle.
D) The conservation constraint principle.
E) The lower of cost or market principle.

F) All of the above
G) D) and E)

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Question 62

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Using the retail inventory method, if the cost to retail ratio is 60% and ending inventory at retail is $45,000, then estimated ending inventory at cost is $27,000. $45,000 * .60 = $27,000

A) True
B) False

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Question 63

Multiple Choice

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

A company that has operated with a 30% average gross profit ratio for a number of years had $100,000 in sales during the first quarter of this year. If it began the quarter with $18,000 of inventory at cost and purchased $72,000 of inventory during the quarter, its estimated ending inventory by the gross profit method is:

A company reported the following data: Required: 1. Calculate the company's merchandise inventory turnover for each year. 2. Comment on the company's efficiency in managing its inventory.

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

Thelma Company reported cost of goods sold for Year 1 and Year 2 as follows: Thelma Company made two errors: 1) ending inventory at the end of Year 1 was understated by $15,000 and 2) ending inventory at the end of Year 2 was overstated by $6,000. Given this information, the correct cost of goods sold figure for Year 2 would be:

On December 31, a company needed to estimate its ending inventory to prepare its fourth quarter financial statements. The following information is currently available: Inventory as of October 1: $12,500 Net sales for fourth quarter: $40,000 Net purchases for fourth quarter: $27,500 This company typically achieves a gross profit ratio of 15%. Ending Inventory under the gross profit method would be:

An advantage of the _________________ method of inventory valuation is that it tends to smooth out the effect of erratic changes in costs.

When purchase costs of inventory regularly decline, which method of inventory costing will yield the lowest cost of goods sold?

When units are purchased at different costs over time, determining the cost per unit assigned to inventory items is simple.

An overstated beginning inventory will ______________ cost of goods sold and _____________ net income.

Net realizable value for damaged or obsolete goods is sales price plus the cost of making the sale.

The _____________________ is a measure of how quickly a merchandiser sells its merchandise inventory.

In a period of rising purchase costs, FIFO usually gives a lower taxable income and therefore, yields a tax advantage.

A company reported the current month purchase and sales data for its only product and uses the perpetual inventory system. Determine the cost assigned to ending inventory and cost of goods sold using LIFO.

Using the information given below, prepare the general journal entry to record the March 16 sale assuming a cash sale and the LIFO method is used:

If a period-end inventory amount is reported in error, it can cause a misstatement in all of the following except:

LIFO 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.

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