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Exam 5: Inventories and Cost of Sales

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Question 51

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

A) True
B) False

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Question 52

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

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Question 53

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A company made the following purchases during the year: $\begin{array} { | l | l | } \hline \text { Jan.10 } & 15 \text { units @ \$360 each } \\\hline \text { Mar.15 } & 25 \text { units @ \$390 each } \\\hline \text { Apr.25 } & 10 \text { units @ \$420 each } \\\hline \text { July 30 } & 20 \text { units @ 450 each } \\\hline \text { Oct.10 } & 15 \text { units @ \$480 each } \\\hline\end{array}$ On December 31,there were 28 units in ending inventory.These 28 units consisted of 2 from the January 10 purchase,3 from the March 15 purchase,4 from the April 25 purchase,11 from the July 30 purchase,and 8 from the October 10 purchase.Using specific identification,calculate the cost of the ending inventory.

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

Starlight 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 LIFO perpetual inventory method,what is the value of inventory after the October 4 sale?

A company's store was destroyed by an earthquake on February 10 of the current year.The only information for the current period that could be salvaged included the following: $\begin{array} { | l | r | } \hline \text { Beginning inventory, January 1: } & \$ 44,000 \\\hline \text { Purchases to date: } & \$ 198,000 \\\hline \text { Sales to date: } & \$ 310,000 \\\hline\end{array}$ Historically,the company's gross profit ratio has been 30%.Estimate the value of the destroyed inventory using the gross profit method.

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

A company's inventory records indicate the following data for the month of July: $\begin{array} { | l | l | l | } \hline \text { July 1 } & \text { Beginning } & 380 \text { units at } \$ 15 \text { each } \\\hline \text { July 5 } & \text { Purchased } & 270 \text { units at } \$ 17 \text { each } \\\hline \text { July 10 } & \text { Sold } & 400 \text { units at } \$ 50 \text { each } \\\hline \text { July 20 } & \text { Purchased } & 300 \text { units at } \$ 22 \text { each } \\\hline \text { July 25 } & \text { Sold } & 400 \text { units at } \$ 50 \text { each } \\\hline\end{array}$ If the company uses the weighted average inventory valuation method and the perpetual inventory system,what would be the cost of its ending inventory? (Round average cost per unit to 2 decimals,and final answer to the nearest dollar.)

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

An advantage of FIFO is that it assigns the most recent costs to cost of goods sold,and does a better job of matching current costs with revenues on the income statement.

Use the information below to determine the sales revenue,cost of goods sold and gross profit that would be reported for the company related to the March 16 sale assuming the company uses FIFO inventory valuation and a perpetual inventory system. $\begin{array} { | l | l | } \hline \text { January 1: } & \text { Purchased } 100 \text { units at } \$ 10 \text { per unit. } \\\hline \text { February 5: } & \text { Purchased } 60 \text { units at } \$ 12 \text { per unit. } \\\hline \text { March 16: } & \text { Sold } 40 \text { units for } \$ 16 \text { per unit. } \\\hline\end{array}$

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

A company reports the following information regarding its inventory. Beginning inventory: cost is $80,000; retail is $130,000 Net purchases: cost is $65,000; retail is $120,000 Sales at retail: $145,000 The year-end inventory shows $135,000 worth of merchandise available at retail prices.What is the cost of the ending inventory calculated using the retail inventory method?

Calculate the ending inventory using FIFO for a company that uses a perpetual inventory system,using the information given below. $\begin{array} { | l | c | c | } \hline & \text { Units } & \text { Unit Cost } \\\hline \text { Beginning inventory } & 100 & \$ 10 \\\hline \text { Aug. 5 purchased } & 40 & 12 \\\hline \text { Aug. 10 sold } & 60 & - \\\hline \text { Aug. 15 purchased } & 70 & 13 \\\hline \text { Aug. 25 sold } & 50 & - \\\hline\end{array}$

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

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

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.)

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.

A company must disclose any change in its inventory costing method in its financial statements.

The expense recognition (matching)principle is used to determine how much of the cost of goods available for sale is deducted from sales and how much is carried forward as inventory.