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chapter 6

Terms in this set (40)

Which of the following is not an inventory account?
equipment
-equip consists of teams used in production of income and aren't for sale. inventory includes raw materials, work in progress, and finished goods.
If goods in transit are shipped FOB shipping point...
the buyer has title once the goods are given to the transportation company.
-in FOB shipping point, ownership of the goods passes to the buyer when public carrier accepts the goods from seller.
Which of the following should not be included in the inventory of a company?
Goods held on consignment from another company.
-do not include these in inventory: 1. FOB destination purchases not yet received 2. FOB shipping post goods sold and shipped 3. Goods help on consignment
At December 31, Moore Company's inventory records indicated a balance of $400,000. Upon further investigation it was determined that this amount included the following:
(1) $56,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB destination, but not due to be received until January 2.
(2) $23,000 in inventory purchases made by Moore shipped from the seller December 27 terms FOB shipping point, but not due to be received until January 3.
(3) $6,000 in goods sold by Moore with terms FOB shipping point on December 27. The goods are not expected to reach their destination until January 4.
(4) $8,000 in goods sold by Moore with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6.
(5) $13,000 of goods owned by Moore Company held on consignment by Dollywood Company.
What is Moore's correct ending inventory balance at December 31?
$338,000
- do not include the following in a company's inventory: 1. FOB destination purchases not yet received ($56,000) 2. FOB shipping point goods sold and shipped ($6,000) 3.Goods held on consignment (none).... ending inventory= $400,000 - 56,000 - 6,000= $338,000
Which of the following statements is true?
Specific identification method inventory valuation requires physical flow of goods to be representative of the cost flow.
-the specific identification method has this constraint-- the physical flow of goods must represent. There is no requirement for the physical flow of goods under the LIFO or FIFO inventory valuation concepts to match cost flow.
Inventory costing methods place primary reliance on assumptions about the flow of
costs
- the inventory costing methods place primary reliance on assumptions about the costs of inventory to cost of goods sold and ending inventory.
Sales revenue is $1,000,000, cost of goods purchased is $620,000, ending inventory is $60,000, and cost of goods sold is $650,000. How much is beginning inventory?
$90,000
-beginning inventory + purchases - ending inventory= cost of goods sold ... beginning inventory + 620,000 - 60,000= 650,000 ... beginning inventory= 650,000 - 620,000 + 60,000 => 90,000
A company has the following inventory data:
July 1 Beginning inventory 20 units at $19 $ 380
7 Purchases 70 units at $20 1,400
22 Purchases 10 units at $22 220
$2,000
A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the FIFO inventory method and a periodic inventory system, the amount allocated to cost of goods sold for July is
$1,340
-Goods available for sale is $2,000 (100 units)Ending inventory = 32 unitsCost of goods sold = goods available for sale - ending inventory = 100 units - 32 units = 68 unitsUsing FIFO & periodic, the cost of goods sold includes the oldest 68 units and ending inventory includes the 32 newest units.Cost of goods sold = 20 units at $19/unit + (68 units - 20 units) x $20/unit = $380 + 960 = $1,340
A company has the following data:
Dec. 1 Beginning inventory 20 units at $20 $ 400
Dec. 7 Purchases 70 units at $21 1,470
Dec. 22 Purchases 10 units at $22 220
$ 2,090
There are 25 units of ending inventory on hand at December 31. What is the company's cost of goods sold using LIFO and a periodic inventory system?
$1,585
-Goods available for sale is $2,090 (i.e., 100 units)Ending inventory = 25 unitsCost of goods sold = goods available for sale - ending inventory = 100 units - 25 units = 75 unitsUsing LIFO & periodic, the cost of goods sold includes the newest 75 units and ending inventory includes the 25 oldest units.Cost of goods sold = $220 + [(100 - 25 - 10) x $21] = $1,585
A company has the following data:
Dec. 1, beg. bal. 150 units $ 780
Dec. 10, purchase 200 units 1,170
Dec. 15, purchase 200 units 1,260
Dec. 28, purchase 150 units 990
$4,200
A physical count of merchandise inventory on December 31 reveals that there are 210 units on hand. Using the average cost method and a periodic inventory system, the amount allocated to the ending inventory on December 31 is
$1,260
-ending inventory equals the average cost per unit times the number of units of inventory in ending inventory. the average cost per unit equals the total cost of all inventory divided by the number of inventory units. Average cost pr unit= $42,000/700 units= $6 per unit
ending inventory= $6/unit x 210 units= $1,260
In periods of deflation, what will LIFO produce?
Higher net income than FIFO
-LIFO (last in first out) uses the cost of the most recently purchased inventory to determine cost of goods sold. LIFO and deflation produces the lowest cost of goods sold (low expenses). low cost of goods sold produces high gross profit, high net income, high retained earnings, high ending inventory, and high total assets.
In a period of declining inventory costs, which inventory flow assumption will result in the highest net income?
LIFO
-FIFO considers the oldest inventory to be sold. LIFO considers the newest inventory to be sold. highest net income occurs when the least expensive inventory is considered to be sold. When prices are declining, the least expensive inventory is the newest inventory. LIFO produces the highest net income when prices are declining.
A company has the following:
Units Cost per unit
Dec. 1 Beginning balance 36 $45
Dec. 14 Purchase 62 $47
Dec. 21 Purchase 44 $49
The company sold 102 units at $63 per unit. Assuming that a periodic inventory system is used, what is the company's gross profit using LIFO? (rounded to whole dollars)
$1,544
-sales= (102 x 63)= $6,426
cost of goods sold= (44 x $49) + [102 - 44) x 47]= 4,882
gross margin= 6,426 - 4,882= 1,544
What is the underlying rationale for the lower-of-cost-or-market rule?
conservatism
-conservatism dictates the lower-of-cost-or-market inventory valuation. conservatism means that accounting rules are designed to report assets, income, etc. on a conservative basis -- that financial reports should not overstate a company assets, profits, etc. The lower-of-cost-or-market principle avoids overstating ending inventory on a company's balance sheet
A company has the following:
Cost Data Market DataTin $22,000 $19,600Steel 17,000 18,500Aluminum 26,500 28,600
Using the lower-of-cost-or-market, how much is the value of the ending inventory?
$63,100
-Cost is compared to market for each inventory category as follows:
Tin = $19,600
Steel = $17,000
Aluminum = $26,500
Total = $63,100
A company has the following:
2022 2021
Ending inventory $32,650 $30,490
Cost of goods sold 178,000 174,200
Sales revenue 245,000 233,000
Net income 50,000 40,000
What is the company's inventory turnover for 2022? (rounded)
5.6 times
-Inventory turnover = Cost of goods sold/average inventory
Inventory turnover = $178,000/[($32,650 + $30,490)/2] = 5.6382
A company has the following:
2022 2021
Ending inventory $37,650 $30,490
Cost of goods sold 225,250 261,300
Sales revenue 480,000 500,000
Net income 100,000 80,000
What is the company's days in inventory for 2022? (rounded)
55.1 days
-Inventory turnover = Cost of goods sold/average inventory
Inventory turnover = $225,250/[($37,650 + $30,490)/2] = 6.611
Days in inventory = 365/inventory turnover
Days inventory = 365/6.626 = 55.2
A company uses the LIFO to measure ending inventory and cost of goods sold. It reported $8,000 of beginning inventory and $11,000 of ending inventory using LIFO. It also reports a LIFO reserve of $2,500 at the end of the year. The companyoperates in an inflationary environment. If the company used FIFO instead of LIFO, its ending inventory would be
$13,500
-The LIFO reserve is the difference between inventory using LIFO and inventory using FIFO. If the company operates in an inflationary environment (i.e., rising prices), then the LIFO reserve is a positive number.FIFO ending inventory = LIFO ending inventory + ending LIFO reserve FIFO ending inventory = 11,000 + 2,500 = 13,500.
A company uses the periodic inventory method. Beginning inventory is overstated by $10,000 because the prior's year's ending inventory was overstated by $10,000. The company's ending inventory for this period is correct. The current period's gross profit is _________________ and this year's ending retained earnings is ___________________.
(i) understated; (ii) neither overstated nor understated
-Overstating the prior year's ending inventory in the prior year led to an understated cost of goods sold in the prior year and it overstated the prior year's gross profit and net income.
The error that occurred in the prior year (e.g., overstated net income) lead to retained earnings being overstated at the end of the prior year. The error in the current year added too much to retained earnings but it added too much by the amount of the shortage from the prior year. At the end of the second year, retained earnings has the correct balance.
A company uses the periodic inventory method. An understatement of ending inventory in one period results in
an overstatement of net income of the next period.
-chapter 6 learning objective 8
terminology:
1. an inventory costing method that assumes that the costs of the latest goods purchased are the first to be allocated to costs of goods sold.
LIFO method
2. measure of the average number of days inventory is held; calculated as 365 divided by inventory turnover ratio.
days in inventory
3. goods held for sale by one party although ownership of the goods is retained by another party.
consigned goods
4. inventory cost method where the oldest inventory is considered to be sold first.
FIFO method
5. a basis whereby inventory is stated at the lower of either cost or market (current replacement cost).
LCM (lower-of-cost-or-market) basis
6. freight terms indicating that the goods are placed free on board at the seller's place of business, and the buyer pays the freight cost; goods belong to the buyer while in transit.
FOB shipping point
7. freight terms indicating that the goods are placed free on board at the buyer's place of business, and the seller pays the freight cost; goods belong to the seller while in transit.
FOB destination
8. a measure of cost of goods sold divided by average inventory.
inventory turnover
9. an inventory costing method that uses the weighted-average unit cost to allocate the cost of goods available for sale to ending inventory and cost of goods sold.
average-cost method
10. for a company usingLIFO, the difference between inventory using LIFO and inventory using FIFO.
LIFO reserve
exercises:
1. At June 30, Johnson Incorporated's financial records report that it has $550,000 of inventory. It was also determined that this amount included the following:
$30,000 in goods sold by Johnson Inc. with terms FOB shipping point on June 29. The goods were delivered to the customer on July 1.
$10,000 of goods received from a Kennedy Company that Johnson Inc. holds on consignment.
$40,000 in inventory purchased by Johnson that were shipped from the seller on June 27 with terms FOB destination, but the inventory was not received by Johnson until July 2.
What's the company's correct amount of ending inventory as of the end of June?
$470,000
-correct inventory= reported inventory + inventory it owns but did not include - inventory it included but it does not own.
correct inventory= 550,000 - 30,000 - 10,000 - 40,000= 470,000
2. Carter Incorporated reports the following:
Beginning inventory, June 1: number of units 200; cost per unit $1.20...
Purchase on June 7: number of units 400; cost per unit 1.30...
Purchase on June 21: number of units 250; cost per unit 1.40

The company sold 550 units of inventory for $2.00 per unit during June. The company uses the period inventory system and the FIFO cost flow method. Determine the gross margin for the month of June.
a. $405
- Revenue (550 units x $2.00 per unit) Cost of goods sold using FIFO:200 units x $1.20/unit350 units x $1.30/unit
1,100
( 240) ( 455)
[ 1,100 - 240 - 455= 405 ]
Gross margin 405
3. Carter Incorporated reports the following:
The company sold 550 units of inventory for $2.00 per unit during June. The company uses the
Item
Number of units
Cost per unit
Beginning inventory, June 1
200
$1.20
Purchase on June 7
400
1.30
Purchase on June 21
250
1.40
period inventory system and the LIFO cost flow method. Determine the ending inventory as of the end of June.
d. $370
-goods available for sale [ 200 + 400 + 250= 850], from purchase june 7 [ (LIFO) 850 - 550 = 300 ], 300 x 1.30 = 390.....

$1,100 - 350 - 390 = $370
4. (same numbers from tables as 2&3) The company sold 550 units of inventory for $2.00 per unit during June. The company uses the period inventory system and the average cost flow method. Determine the cost of goods sold for June.
c. $728.24
-average cost per unit = $1,100/850 units = $1.30588
cost of goods sold = number of units sold x average cost per unit = 550 x $1.30588 = $728.24
5. (same numbers from tables as 2&3) The company sold 550 units of inventory for $2.00 per unit during June. The company uses the period inventory system and the average cost flow method. Determine its LIFO reserve at the end of June.
a. $45
-LIFO Reserve: Companies using LIFO are required to report the difference between inventory
based on LIFO and inventory based on FIFO. This amount is referred to as the LIFO reserve.
Ending inventory using LIFO is $370 as shown by question no. 3 (see above). Ending inventory using FIFO is $415 (see below). So, the LIFO reserve is $45 (i.e., $415 - 370 = $45).
6. In a period of inflation, the costs allocated to ending inventory will approximate their current cost if...
a. the FIFO method is used
- Ending inventory approximates the current cost of inventory if ending inventory includes the most recently purchased inventory. Ending inventory includes the most recently purchased inventory is FIFO is used and the company assumes it sells the oldest inventory.
7. In a period of inflation, the cost flow method that results in the lowest income taxes is
the...
b. LIFO method
- Taxes are low when income before taxes is low, and taxes are low when expenses (e.g., cost of goods sold) are high. Cost of goods sold is high in periods of inflation when the company uses LIFO (i.e., the company assumes it sells the recently purchased, expensive inventory).
8. A company had the following:
ending inventory: 2021> 34,000; 2020> 32,000
cost of goods sold: 2021> 182,000; 2020> 263,500
sales revenue: 2021> 240,000; 2020> 233,000
What is the company's days in inventory for 2021? (rounded)
66.2
- Inventory turnover = Cost of goods sold/Ave. inventory = 182,000/[(34,000 + 32,000)/2] = 5.515 Days in inventory = 365/Inventory turnover = 365/5.515 = 66.2 days
9. Understating ending inventory will overstate the following:
d. cost of goods sold
- effect of inventory errors on the balance sheet is determined by using the basic accounting equation.
10. Roosevelt Company maintains three categories of inventory. Its records report the following:
Product A
B C D
Cost Market $55,000 $60,000 42,000 39,000 70,000 76,000 100,000 95,000
Use the lower‐of‐cost‐or‐market method to determine the amount it should report as its ending inventory.
$259,000
- Lower‐of‐cost‐or‐market ending inventory equals the low of cost or market value for each category of inventory.
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