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Exam 5: Accounting for Inventories

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Question 21

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

A) True
B) False

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Question 22

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Merchandise inventory includes:

A) All goods owned by a company and held for sale.
B) All goods in transit.
C) All goods on consignment.
D) Only damaged goods.
E) Only items that are on the shelf.

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

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Question 23

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In the retail inventory method of inventory valuation, the retail amount of inventory refers to the dollar amount measured by looking at the selling prices of inventory items.

If damaged goods can be sold at a reduced price, they are included in inventory at their ________________________.

The days' sales in inventory ratio is computed by dividing ending inventory by cost of goods sold and multiplying the result by 365.

The ______________________ method of assigning costs to inventory and cost of goods sold is usually only practical for companies with expensive, custom-made inventory.

What is the effect of an error in the ending inventory balance on the income statement?

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

A company reported the following data: $\begin{array}{|l|r|r|r|}\hline &{\text { Year 1 }} &{\text { Year 2 }} &{\text { Year 3 }} \\\hline \text { Cost of goods sold } & \$ 347,600 & \$ 379,650 & \$ 443,900 \\\hline \text { Average inventory } & 85,000 & 91,050 & 98,350\\\hline\end{array}$ Required: 1. Calculate the company's merchandise inventory turnover for each year. 2. Comment on the company's efficiency in managing its inventory.

The lower of cost or market rule for inventory valuation must be applied to each individual unit separately and not to major categories of inventory or to the entire inventory.

Explain the effects of inventory valuation methods on the cost of ending inventory, income, and income taxes.

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 The company typically achieves a gross profit ratio of 15%. Ending Inventory under the gross profit method would be:

A company had gross profit of $134,200 on net sales of $205,000. If ending inventory was $8,000 and average inventory was $7,080, what is the company's inventory turnover?

A company made the following merchandise purchases and sales during the month of May: $\begin{array}{|l|l|l|l|}\hline \text { May 1 purchased } & 380 & \text { units at } & \$ 15 \text { each } \\\hline \text { May 5 purchased } & 270 & \text { units at } & \$ 17 \text { each } \\\hline \text { May 10 sold } & 400 & \text { units at } & \$ 50 \text { each } \\\hline \text { May 20 purchased } & 300 & \text { units at } & \$ 22 \text { each } \\\hline \text { May 25 sold } & 400 & \text { units at } & \$ 50 \text { each } \\\hline\end{array}$ There was no beginning inventory. If the company uses the weighted-average perpetual inventory method, what would be the cost of its ending inventory?

If damaged and obsolete goods cannot be sold, they are not included in inventory.

GAAP and IFRS differ on the rules regarding LIFO as GAAP allows LIFO to assign costs to inventory and IFRS does not.

The inventory turnover ratio:

Describe the internal controls that must be applied when taking a physical count of inventory.

Toys "R" Us had cost of goods sold of $9,421 million, ending inventory of $2,089 million, and average inventory of $1,965 million. The inventory turnover equals:

The inventory turnover ratio is calculated as: