Financial Accounting Testbank Part 2

INVENTORIES

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY

^sg This question also appears in the Assignment Guide.

^st This question also appears in a self-test at the student companion website.

^a This question covers a topic in an appendix to the chapter.

Challenge Exercises: 206-208, Matching Question: 219, IFRS Questions: 228-247

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Note: TF = True-False BE = Brief Exercise C = Completion

MC = Multiple Choice Ex = Exercise MA = Matching

SA = Short-Answer Essay CE = Challenge Exercise

Challenge Exercises: 206-208

Matching Question: 219

IFRS Questions: 228-247

CHAPTER LEARNING OBJECTIVES

1. Describe the steps in determining inventory quantities. The steps are (1) take a physical inventory of goods on hand and (2) determine the ownership of goods in transit or on consignment.

2. Explain the accounting for inventories and apply the inventory cost flow methods. The primary basis of accounting for inventories is cost. Cost of goods available for sale includes (a) cost of beginning inventory and (b) the cost of goods purchased. The inventory cost flow methods are: specific identification and three assumed cost flow methods—FIFO, LIFO, and average-cost.

3. Explain the financial effects of the inventory cost flow assumptions. Companies may allocate the cost of goods available for sale to cost of goods sold and ending inventory by specific identification or by a method based on an assumed cost flow. When prices are rising, the first-in, first-out (FIFO) method results in lower cost of goods sold and higher net income than the other methods. The reverse is true when prices are falling. In the balance sheet, FIFO results in an ending inventory that is closest to current value, inventory under LIFO is the farthest from current value. LIFO results in the lowest income taxes.

4. Explain the lower-of-cost-or-market basis of accounting for inventories. Companies may use the lower-of-cost-or-market (LCM) basis when the current replacement cost (market) is less than cost. Under LCM, companies recognize the loss in the period in which the price decline occurs.

5. Indicate the effects of inventory errors on the financial statements. In the income statement of the current year: (a) An error in beginning inventory will have a reverse effect on net income. (b) An error in ending inventory will have a similar effect on net income. In the following period, its effect on net income for that period is reversed, and total net income for the two years will be correct. In the balance sheet: Ending inventory errors will have the same effect on total assets and total stockholders’ equity and no effect on liabilities.

6. Compute and interpret the inventory turnover ratio. The inventory turnover ratio is cost of goods sold divided by average inventory. To convert it to average days in inventory, divide 365 days by the inventory turnover ratio.

^a 7. Apply the inventory cost flow methods to perpetual inventory records. Under FIFO and a perpetual inventory system, companies charge to cost of goods sold the cost of the earliest goods on hand prior to each sale. Under LIFO and a perpetual system, companies charge to cost of goods sold the cost of the most recent purchase prior to sale. Under the moving-average (average cost) method and a perpetual system, companies compute a new average cost after each purchase.

^a 8. Describe the two methods of estimating inventories. The two methods of estimating inventories are the gross profit method and the retail inventory method. Under the gross profit method, companies apply a gross profit rate to net sales to determine estimated cost of goods sold. They then subtract estimated cost of goods sold from cost of goods available for sale to determine the estimated cost of the ending inventory. Under the retail inventory method, companies compute a cost-to-retail ratio by dividing the cost of goods available for sale by the retail value of the goods available for sale. They then apply this ratio to the ending inventory at retail to determine the estimated cost of the ending inventory.

TRUE-FALSE STATEMENTS

1. Transactions that affect inventories on hand have an effect on both the balance sheet and the income statement.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

2. Manufacturers usually classify inventory into two categories: finished goods and work in process.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economic

3. Raw materials inventories are the goods that a manufacturer has completed and are ready to be sold to customers.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic

4. Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

5. Work in process is that portion of manufactured inventory that has been placed into the production process but is not yet complete.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

6. The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

7. Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

8. The first-in, first-out (FIFO) inventory method results in an ending inventory valued at the most recent cost.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

9. The expense recognition principle requires that the cost of goods sold be matched against the ending merchandise inventory in order to determine income.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

10. The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

11. If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

12. If the unit price of inventory is increasing during a period, a company using the LIFO inventory method will show less gross profit for the period, than if it had used the FIFO inventory method.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

13. If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

14. A company may use more than one inventory costing method concurrently.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15. Use of the LIFO inventory valuation method enables a company to report paper or phantom profits.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

16. If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

17. Under the lower-of-cost-or-market basis, market is defined as current replacement cost.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

18. Accountants believe that the write down from cost to market should not be made in the period in which the price decline occurs.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

19. An error that overstates the ending inventory will also cause net income for the period to be overstated.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

20. If inventories are valued using the LIFO cost assumption, they should not be classified as a current asset on the balance sheet.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

21. Inventory turnover is calculated as cost of goods sold divided by ending inventory.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

22. Inventory turnover measures the number of times on average the inventory sold during the period.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

23. Days in inventory is calculated as the inventory turnover ratio dividend by 365.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 24. The average-cost method in a perpetual inventory system is called the moving-average method.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 25. If a company uses the FIFO cost assumption, the cost of goods sold for the period will be the same under a perpetual or periodic inventory system.

Ans: T, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

^a 26. In applying the LIFO assumption in a perpetual inventory system, the cost of the units most recently purchased prior to sale is allocated first to the units sold.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

^a 27. Under generally accepted accounting principles, management has the choice of physically counting inventory on hand at the end of the year or using the gross profit method to estimate the ending inventory.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 28. The retail inventory method requires a company to value its inventory on the balance sheet at retail prices.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

29. Finished goods are a classification of inventory for a manufacturer that are completed and ready for sale.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

30. Under the FIFO method, the costs of the earliest units purchased are the first charged to cost of goods sold.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

31. The cost of goods available for sale consists of the beginning inventory plus the cost of goods purchased.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

32. In a period of falling prices, the LIFO method results in a lower cost of goods sold than the FIFO method.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

33. The lower-of-cost-or-market basis is an example of the accounting concept of conservatism.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

34. Inventories are reported in the current assets section of the balance sheet immediately below receivables.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 35. In a perpetual inventory system, the cost of goods sold under the FIFO method is based on the cost of the latest goods on hand during the period.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 36. The gross profit method is based on the assumption that the rate of gross profit remains constant from one year to the next.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

37. Inventories affect

a. only the balance sheet.

b. only the income statement.

c. both the balance sheet and the income statement.

d. neither the balance sheet nor the income statement.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

38. Inventory is

a. reported under the classification of Property, Plant, and Equipment on the balance sheet.

b. often reported as a miscellaneous expense on the income statement.

c. reported as a current asset on the balance sheet.

d. generally valued at the price for which the goods can be sold.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

39. Items waiting to be used in production are considered to be

a. raw materials.

b. work in process.

c. finished goods.

d. merchandise inventory.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

40. In a manufacturing company, inventory that is ready for sale is called

a. raw materials inventory.

b. work in process inventory.

c. finished goods inventory.

d. store supplies inventory.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

41. The factor which determines whether or not goods should be included in a physical count of inventory is

a. physical possession.

b. legal title.

c. management's judgment.

d. whether or not the purchase price has been paid.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

42. If goods in transit are shipped FOB destination

a. the seller has legal title to the goods until they are delivered.

b. the buyer has legal title to the goods until they are delivered.

c. the transportation company has legal title to the goods while the goods are in transit.

d. no one has legal title to the goods until they are delivered.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

43. An auto manufacturer would classify vehicles in various stages of production as

a. finished goods.

b. merchandise inventory.

c. raw materials.

d. work in process.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

44. Which of the following should be included in the physical inventory of a company?

a. Goods held on consignment from another company.

b. Goods in transit to another company shipped FOB shipping point.

c. Goods in transit from another company shipped FOB shipping point.

d. Both b and c above.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls

45. Manufacturers usually classify inventory into all the following general categories except:

a. work in process

b. finished goods

c. merchandise inventory

d. raw materials

Ans: C, LO: 1, Blooms Taxonomy: C, Difficulty: Easy, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

46. Freight terms of FOB shipping point mean that the

a. seller must debit freight out.

b. buyer must bear the freight costs.

c. goods are placed free on board at the buyer's place of business.

d. seller must bear the freight costs.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls

47. For companies that use a perpetual inventory system, all of the following are purposes for taking a physical inventory except:

a. to check the accuracy of the records.

b. to determine the amount of wasted raw materials.

c. to determine losses due to employee theft.

d. to determine ownership of the goods.

Ans: D, LO: 1, Blooms Taxonomy: C, Difficulty: Easy, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem solving, IMA: Internal Controls

48. Fetherston Company's goods in transit at December 31 include:

sales madepurchases made

(1) FOB destination (3) FOB destination

(2) FOB shipping point (4) FOB shipping point

Which items should be included in Fetherston's inventory at December 31?

a. (2) and (3)

b. (1) and (4)

c. (1) and (3)

d. (2) and (4)

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

49. The term "FOB" denotes

a. free on board.

b. freight on board.

c. free only (to) buyer.

d. freight charge on buyer.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economic

50. Under a consignment arrangement, the

a. consignor has ownership until goods are sold to a customer.

b. consignor has ownership until goods are shipped to the consignee.

c. consignee has ownership when the goods are in the consignee's possession.

d. consigned goods are included in the inventory of the consignee.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic

51. As a result of a thorough physical inventory, Horace Company determined that it had inventory worth $270,000 at December 31, 2012. This count did not take into consideration the following facts: Herschel Consignment currently has goods worth $47,000 on its sales floor that belong to Horace but are being sold on consignment by Herschel. The selling price of these goods is $75,000. Horace purchased $22,000 of goods that were shipped on December 27. FOB destination, that will be received by Horace on January 3. Determine the correct amount of inventory that Horace should report.

a. $270,000.

b. $290,000.

c. $317,000.

d. $337,000.

Ans: C, LO: 1, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

52. Partridge Bookstore had 500 units on hand at January 1, costing $18 each. Purchases and sales during the month of January were as follows:

DatePurchasesSales

Jan. 14 375 @ $28

17 250 @ $20

25 250 @ $22

29 260 @ $32

Partridge does not maintain perpetual inventory records. According to a physical count, 365 units were on hand at January 31.

The cost of the inventory at January 31, under the FIFO method is:

a. $6,570.

b. $7,300.

c. $7,800.

d. $8,030.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

53. Partridge Bookstore had 500 units on hand at January 1, costing $18 each. Purchases and sales during the month of January were as follows:

DatePurchasesSales

Jan. 14 375 @ $28

17 250 @ $20

25 250 @ $22

29 260 @ $32

Partridge does not maintain perpetual inventory records. According to a physical count, 365 units were on hand at January 31.

The cost of the inventory at January 31, under the LIFO method is:

a. $6,570.

b. $7,300.

c. $7,800.

d. $8,030.

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

54. Nick's Place recorded the following data:

Units Unit

DateReceivedSoldOn HandCost

1/1 Inventory 600 $2.00

1/8 Purchased 1,000 1,600 2.40

1/12 Sold 1,200 300

The weighted average unit cost of the inventory at January 31 is:

a. $2.00.

b. $2.20.

c. $2.25.

d. $2.40.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

55. Inventoriable costs include all of the following except the

a. freight costs incurred when buying inventory.

b. costs of the purchasing and warehousing departments.

c. cost of the beginning inventory.

d. cost of goods purchased.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

56. Beginning inventory plus the cost of goods purchased equals

a. cost of goods sold.

b. cost of goods available for sale.

c. net purchases.

d. total goods purchased.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

57. Cost of goods sold is computed from the following equation:

a. beginning inventory – cost of goods purchased + ending inventory.

b. sales – cost of goods purchased + beginning inventory – ending inventory.

c. sales + gross profit – ending inventory + beginning inventory.

d. beginning inventory + cost of goods purchased – ending inventory.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

58. A company just starting in business purchased three merchandise inventory items at the following prices. First purchase $80; Second purchase $95; Third purchase $85. If the company sold two units for a total of $250 and used FIFO costing, the gross profit for the period would be

a. $70.

b. $75.

c. $77.

d. $85.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

59. The LIFO inventory method assumes that the cost of the latest units purchased are

a. the last to be allocated to cost of goods sold.

b. the first to be allocated to ending inventory.

c. the first to be allocated to cost of goods sold.

d. not allocated to cost of goods sold or ending inventory.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

60. A company just starting business made the following four inventory purchases in June:

June 1 150 units $ 390

June 10 200 units 585

June 15 200 units 630

June 28 150 units 510

$2,115

A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is

a. $536.

b. $668.

c. $1,447.

d. $1,564.

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

61. A company just starting business made the following four inventory purchases in June:

June 1 150 units $ 390

June 10 200 units 585

June 15 200 units 630

June 28 150 units 510

$2,115

A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for June is

a. $536.

b. $668.

c. $1,447.

d. $1,564.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

62. A company just starting business made the following four inventory purchases in June:

June 1 150 units $ 390

June 10 200 units 585

June 15 200 units 630

June 28 150 units 510

$2,115

A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the average-cost method, the amount allocated to the ending inventory on June 30 is

a. $536.

b. $604.

c. $668.

d. $1,511.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

63. A company just starting business made the following four inventory purchases in June:

June 1 150 units $ 390

June 10 200 units 585

June 15 200 units 630

June 28 150 units 510

$2,115

A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand.

The inventory method which results in the highest gross profit for June is

a. the FIFO method.

b. the LIFO method.

c. the weighted average unit cost method.

d. not determinable.

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

64. A company purchased inventory as follows:

150 units at $10

350 units at $12

The average unit cost for inventory is

a. $10.00.

b. $11.00.

c. $11.40.

d. $12.00.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

65. Which of the following items will increase inventoriable costs for the buyer of goods?

a. Purchase returns and allowances granted by the seller

b. Purchase discounts taken by the purchaser

c. Freight charges paid by the seller

d. Freight charges paid by the purchaser

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

66. Inventoriable costs may be thought of as a pool of costs consisting of which two elements?

a. The cost of beginning inventory and the cost of ending inventory

b. The cost of ending inventory and the cost of goods purchased during the year

c. The cost of beginning inventory and the cost of goods purchased during the year

d. The difference between the costs of goods purchased and the cost of goods sold during the year

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

67. The cost of goods available for sale is allocated between

a. beginning inventory and ending inventory.

b. beginning inventory and cost of goods on hand.

c. ending inventory and cost of goods sold.

d. beginning inventory and cost of goods purchased.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

68. Indrisano's Used Cars uses the specific identification method of costing inventory. During March, Indrisano purchased three cars for $6,000, $7,200, and $9,600, respectively. During March, two cars are sold for a total of $17,300. Indrisano determines that at March 31, the $7,200 car is still on hand. What is Indrisano’s gross profit for March?

a. $500.

b. $1,700.

c. $2,100.

d. $4,100.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

69. Of the following companies, which one would not likely employ the specific identification method for inventory costing?

a. Music store specializing in organ sales

b. Farm implement dealership

c. Antique shop

d. Hardware store

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

70. A problem with the specific identification method is that

a. inventories can be reported at actual costs.

b. management can manipulate income.

c. matching is not achieved.

d. the lower-of-cost-or-market basis cannot be applied.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economic

71. The selection of an appropriate inventory cost flow assumption for an individual company is made by

a. the external auditors.

b. the SEC.

c. the internal auditors.

d. management.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic

72. Which one of the following inventory methods is often impractical to use?

a. Specific identification

b. LIFO

c. FIFO

d. Average cost

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economic

73. Which of the following is not a common cost flow assumption used in costing inventory?

a. First-in, first-out

b. Middle-in, first-out

c. Last-in, first-out

d. Average cost

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

74. The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is

a. called the expense recognition principle.

b. called the consistency principle.

c. nonexistent; that is, there is no accounting requirement.

d. called the physical flow assumption.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

75. Which of the following statements is true regarding inventory cost flow assumptions?

a. A company may use more than one costing method concurrently.

b. A company must comply with the method specified by industry standards.

c. A company must use the same method for domestic and foreign operations.

d. A company may never change its inventory costing method once it has chosen a method.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

76. Which of the following statements is correct with respect to inventories?

a. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold.

b. It is generally good business management to sell the most recently acquired goods first.

c. Under FIFO, the ending inventory is based on the latest units purchased.

d. FIFO seldom coincides with the actual physical flow of inventory.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

77. The cost of goods available for sale is allocated to the cost of goods sold and the

a. beginning inventory.

b. ending inventory.

c. cost of goods purchased.

d. gross profit.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

78. At May 1, 2013, Kibbee Company had beginning inventory consisting of 100 units with a unit cost of $7. During May, the company purchased inventory as follows:

400 units at $7

300 units at $8

The company sold 500 units during the month for $12 per unit. Kibbee uses the average cost method. The average cost per unit for May is

a. $7.000.

b. $7.375.

c. $7.500.

d. $8.000.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

79. At May 1, 2013, Kibbee Company had beginning inventory consisting of 100 units with a unit cost of $7. During May, the company purchased inventory as follows:

400 units at $7

300 units at $8

The company sold 500 units during the month for $12 per unit. Kibbee uses the average cost method. The value of Kibbee’s inventory at May 31, 2013 is

a. $1,500.00.

b. $2,212.50.

c. $2,250.00.

d. $3,750.00.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

80. At May 1, 2013, Kibbee Company had beginning inventory consisting of 100 units with a unit cost of $7. During May, the company purchased inventory as follows:

200 units at $7

300 units at $8

The company sold 500 units during the month for $12 per unit. Kibbee uses the average cost method. Kibbee’s gross profit for the month of May is

a. $2,250.00.

b. $3,750.00.

c. $3,787.50.

d. $4,500.00.

Ans: A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

81. Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2013 are as follows:

UnitsPer unit priceTotal

Balance, 1/1/13 200 $5.00 $1,000

Purchase, 1/15/13 100 5.30 530

Purchase, 1/28/13 100 5.50 550

An end of the month (1/31/13) inventory showed that 140 units were on hand. How many units did the company sell during January, 2013?

a. 60

b. 140

c. 200

d. 260

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

82. Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2013 are as follows:

UnitsPer unit priceTotal

Balance, 1/1/13 200 $5.00 $1,000

Purchase, 1/15/13 100 5.30 530

Purchase, 1/28/13 100 5.50 550

An end of the month (1/31/13) inventory showed that 140 units were on hand. If the company uses FIFO, what is the value of the ending inventory?

a. $700

b. $728

c. $742

d. $762

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

83. Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2013 are as follows:

UnitsPer unit priceTotal

Balance, 1/1/13 200 $5.00 $1,000

Purchase, 1/15/13 100 5.30 530

Purchase, 1/28/13 100 5.50 550

An end of the month (1/31/13) inventory showed that 140 units were on hand. If the company uses LIFO, what is the value of the ending inventory?

a. $700

b. $728

c. $742

d. $762

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

84. Effie Company uses a periodic inventory system. Details for the inventory account for the month of January, 2013 are as follows:

UnitsPer unit priceTotal

Balance, 1/1/13 200 $5.00 $1,000

Purchase, 1/15/13 100 5.30 530

Purchase, 1/28/13 100 5.50 550

An end of the month (1/31/13) inventory showed that 140 units were on hand. If the company uses FIFO and sells the units for $10 each, what is the gross profit for the month?

a. $1,220

b. $1,282

c. $1,838

d. $1,900

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

85. Eneri Company's inventory records show the following data:

UnitsUnit Cost

Inventory, January 1 5,000 $9.20

Purchases: June 18 4,500 8.00

November 8 3,000 7.00

A physical inventory on December 31 shows 2,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method.

Under the FIFO method, the December 31 inventory is valued at

a. $14,000.

b. $16,133.

c. $16,480.

d. $18,400.

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

86. Eneri Company's inventory records show the following data:

UnitsUnit Cost

Inventory, January 1 5,000 $9.20

Purchases: June 18 4,500 8.00

November 8 3,000 7.00

A physical inventory on December 31 shows 2,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. What is the cost of goods available for sale?

a. $84,600

b. $89,000

c. $103,000

d. $162,500

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

87. Eneri Company's inventory records show the following data:

UnitsUnit Cost

Inventory, January 1 5,000 $9.20

Purchases: June 18 4,500 8.00

November 8 3,000 7.00

A physical inventory on December 31 shows 2,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. Under the LIFO method, cost of goods sold is

a. $14,000.

b. $84,600.

c. $86,520.

d. $89,000.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

88. Eneri Company's inventory records show the following data:

UnitsUnit Cost

Inventory, January 1 5,000 $9.20

Purchases: June 18 4,500 8.00

November 8 3,000 7.00

A physical inventory on December 31 shows 2,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. The weighted-average cost per unit is

a. $8.00.

b. $8.01.

c. $8.24.

d. $9.30.

Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

89. Eneri Company's inventory records show the following data:

UnitsUnit Cost

Inventory, January 1 5,000 $9.20

Purchases: June 18 4,500 8.00

November 8 3,000 7.00

A physical inventory on December 31 shows 2,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. If the company uses FIFO, what is the gross profit for the period?

a. $47,500

b. $49,633

c. $49,980

d. $51,900

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

90. Eneri Company's inventory records show the following data:

UnitsUnit Cost

Inventory, January 1 5,000 $9.20

Purchases: June 18 4,500 8.00

November 8 3,000 7.00

A physical inventory on December 31 shows 2,000 units on hand. Eneri sells the units for $13 each. The company has an effective tax rate of 20%. Eneri uses the periodic inventory method. What is the difference in taxes if LIFO rather than FIFO is used?

a. $880 additional taxes

b. $496 additional taxes

c. $384 additional taxes

d. $496 tax savings

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

91. Priscilla has the following inventory information.

July 1 Beginning Inventory 20 units at $19 $ 380

7 Purchases 70 units at $20 1,400

22 Purchases 10 units at $23 230

$2,010

A physical count of merchandise inventory on July 31 reveals that there are 30 units on hand. Using the average-cost method, the value of ending inventory is

a. $580.

b. $603.

c. $620.

d. $630.

Ans: B, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

92. Priscilla has the following inventory information.

July 1 Beginning Inventory 20 units at $19 $ 380

7 Purchases 70 units at $20 1,400

22 Purchases 10 units at $23 230

$2,010

A physical count of merchandise inventory on July 31 reveals that there are 30 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is

a. $1,380.

b. $1,390.

c. $1,407.

d. $1,430.

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

93. Priscilla has the following inventory information.

July 1 Beginning Inventory 20 units at $19 $ 380

7 Purchases 70 units at $20 1,400

22 Purchases 10 units at $23 230

$2,010

A physical count of merchandise inventory on July 31 reveals that there are 30 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is

a. $1,380.

b. $1,390.

c. $1,407.

d. $1,430.

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

94. Moroni Industries has the following inventory information.

July 1 Beginning Inventory 10 units at $120

5 Purchases 60 units at $112

14 Sale 40 units

21 Purchases 30 units at $115

30 Sale 35 units

Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a LIFO basis?

a. $2,875

b. $2,880

c. $8,490

d. $8,495

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

95. Moroni Industries has the following inventory information.

July 1 Beginning Inventory 10 units at $120

5 Purchases 60 units at $112

14 Sale 40 units

21 Purchases 30 units at $115

30 Sale 35 units

Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis?

a. $2,875

b. $2,880

c. $8,490

d. $8,495

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

96. Netta Shutters has the following inventory information.

Nov. 1 Inventory 15 units @ $8.00

8 Purchase 60 units @ $8.30

17 Purchase 30 units @ $8.40

25 Purchase 45 units @ $8.80

A physical count of merchandise inventory on November 30 reveals that there are 45 units on hand. Assume a periodic inventory system is used. Cost of goods sold (rounded to the nearest dollar) under the average-cost method is

a. $870.

b. $886.

c. $889.

d. $897.

Ans: B, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

97. Netta Shutters has the following inventory information.

Nov. 1 Inventory 15 units @ $8.00

8 Purchase 60 units @ $8.30

17 Purchase 30 units @ $8.40

25 Purchase 45 units @ $8.80

A physical count of merchandise inventory on November 30 reveals that there are 45 units on hand. Assume a periodic inventory system is used. Ending inventory under FIFO is

a. $369.

b. $396.

c. $870.

d. $897.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

98. Netta Shutters has the following inventory information.

Nov. 1 Inventory 15 units @ $8.00

8 Purchase 60 units @ $8.30

17 Purchase 30 units @ $8.40

25 Purchase 45 units @ $8.80

A physical count of merchandise inventory on November 30 reveals that there are 45 units on hand. Assume a periodic inventory system is used. Ending inventory under LIFO is

a. $369.

b. $396.

c. $870.

d. $897.

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

99. Netta Shutters has the following inventory information.

Nov. 1 Inventory 15 units @ $8.00

8 Purchase 60 units @ $8.30

17 Purchase 30 units @ $8.40

25 Purchase 45 units @ $8.80

A physical count of merchandise inventory on November 30 reveals that there are 45 units on hand. Assume a periodic inventory system is used. Assuming that the specific identification method is used and that ending inventory consists of 10 units from each of the three purchases and 15 units from the November 1 inventory, cost of goods sold is

a. $870.

b. $886.

c. $891.

d. $897.

Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

100. The specific identification method of costing inventories is used when the

a. physical flow of units cannot be determined.

b. company sells large quantities of relatively low cost homogeneous items.

c. company sells large quantities of relatively low cost heterogeneous items.

d. company sells a limited quantity of high-unit cost items.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

101. The specific identification method of inventory costing

a. always maximizes a company's net income.

b. always minimizes a company's net income.

c. has no effect on a company's net income.

d. may enable management to manipulate net income.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

102. Romanoff Industries had the following inventory transactions occur during 2013:

UnitsCost/unit

2/1/13 Purchase 18 $45

3/14/13 Purchase 31 $47

5/1/13 Purchase 22 $49

The company sold 50 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to whole dollars)

a. $1,106

b. $1,184

c. $2,316

d. $2,394

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

103. Romanoff Industries had the following inventory transactions occur during 2013:

UnitsCost/unit

2/1/13 Purchase 18 $45

3/14/13 Purchase 31 $47

5/1/13 Purchase 22 $49

The company sold 50 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s after-tax income using LIFO? (rounded to whole dollars)

a. $774

b. $829

c. $1,106

d. $1,184

Ans: A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

104. Romanoff Industries had the following inventory transactions occur during 2013:

UnitsCost/unit

2/1/13 Purchase 18 $45

3/14/13 Purchase 31 $47

5/1/13 Purchase 22 $49

The company sold 50 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to whole dollars)

a. $1,106

b. $1,184

c. $2,316

d. $2,394

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

105. Romanoff Industries had the following inventory transactions occur during 2013:

UnitsCost/unit

2/1/13 Purchase 18 $45

3/14/13 Purchase 31 $47

5/1/13 Purchase 22 $49

The company sold 50 units at $70 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s after-tax income using FIFO? (rounded to whole dollars)

a. $774

b. $829

c. $1,106

d. $1,184

Ans: B, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

106. Companies adopt different cost flow methods for each of the following reasons except

a. balance sheet effects.

b. cost effects.

c. income statements effects.

d. tax effects.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

107. In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the

a. FIFO method.

b. LIFO method.

c. average-cost method.

d. tax method.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

108. Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using

a. LIFO will have the highest ending inventory.

b. FIFO will have the highest cost of good sold.

c. FIFO will have the highest ending inventory.

d. LIFO will have the lowest cost of goods sold.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

109. If companies have identical inventoriable costs but use different inventory flow assumptions when the price of goods have not been constant, then the

a. cost of goods sold of the companies will be identical.

b. cost of goods available for sale of the companies will be identical.

c. ending inventory of the companies will be identical.

d. net income of the companies will be identical.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

110. In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense?

a. FIFO

b. LIFO

c. Average Cost

d. Income tax expense for the period will be the same under all assumptions.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

111. The managers of Constantine Company receive performance bonuses based on the net income of the firm. Which inventory costing method are they likely to favor in periods of declining prices?

a. LIFO

b. Average Cost

c. FIFO

d. Physical inventory method

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

112. In periods of inflation, phantom or paper profits may be reported as a result of using the

a. perpetual inventory method.

b. FIFO costing assumption.

c. LIFO costing assumption.

d. periodic inventory method.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

113. Selection of an inventory costing method by management does not usually depend on

a. the fiscal year end.

b. income statement effects.

c. balance sheet effects.

d. tax effects.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

114. In a period of rising prices, the costs allocated to ending inventory may be understated in the

a. average-cost method.

b. FIFO method.

c. gross profit method.

d. LIFO method.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

115. The accountant at Almira Company is figuring out the difference in income taxes the company will pay depending on the choice of either FIFO or LIFO as an inventory costing method. The tax rate is 30% and the FIFO method will result in income before taxes of $5,460. The LIFO method will result in income before taxes of $4,860. What is the difference in tax that would be paid between the two methods?

a. $180.

b. $420.

c. $600.

d. Cannot be determined from the information provided.

Ans: A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

116. The accountant at Cedric Company has determined that income before income taxes amounted to $7,000 using the FIFO costing assumption. If the income tax rate is 30% and the amount of income taxes paid would be $225 greater if the LIFO assumption were used, what would be the amount of income before taxes under the LIFO assumption?

a. $6,250

b. $7,000

c. $7,225

d. $7,750

Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitative Methods

117. The manager of Brick Company is given a bonus based on income before income taxes. Net income, after taxes, is $5,600 for FIFO and $4,900 for LIFO. The tax rate is 30%. The bonus rate is 20%. How much higher is the manager's bonus if FIFO is adopted instead of LIFO?

a. $42

b. $1,400

c. $200

d. $210

Ans: C, LO: 3, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

118. The consistent application of an inventory costing method is essential for

a. conservatism.

b. accuracy.

c. comparability.

d. efficiency.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

119. Which costing method cannot be used to determine the cost of inventory items before lower-of-cost-or-market is applied?

a. Specific identification

b. FIFO

c. LIFO

d. All of these methods can be used.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

120. Inventory is reported in the financial statements at

a. cost.

b. market.

c. the higher-of-cost-or-market.

d. the lower-of-cost-or-market.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

121. The lower-of-cost-or-market basis of valuing inventories is an example of

a. comparability.

b. the cost principle.

c. conservatism.

d. consistency.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

122. Under the lower-of-cost-or-market basis in valuing inventory, market is defined as

a. current replacement cost.

b. selling price.

c. historical cost plus markup.

d. selling price less markup.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

123. The lower-of-cost-or-market (LCM) basis may be used with all of the following methods except

a. average cost.

b. FIFO.

c. LIFO.

d. The LCM basis may be used with all of these.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

124. Alfalfa Company developed the following information about its inventories in applying the lower-of-cost-or-market (LCM) basis in valuing inventories:

Product Cost Market

A $110,000 $120,000

B 80,000 76,000

C 155,000 162,000

If Alfalfa applies the LCM basis, the value of the inventory reported on the balance sheet would be

a. $341,000.

b. $345,000.

c. $358,000.

d. $362,000.

Ans: A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

125. Switzer, Inc. has 5 computers which have been part of the inventory for over two years. Each computer cost $600 and originally retailed for $900. At the statement date, each computer has a current replacement cost of $400. What value should Switzer, Inc., have for the computers at the end of the year?

a. $1,500.

b. $2,000.

c. $3,000.

d. $4,500.

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

126. Switzer, Inc. has 5 computers which have been part of the inventory for over two years. Each computer cost $600 and originally retailed for $900. At the statement date, each computer has a current replacement cost of $400. How much loss should Switzer, Inc., record for the year?

a. $1,000.

b. $1,500.

c. $2,000.

d. $2,500.

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

127. Othello Company understated its inventory by $20,000 at December 31, 2012. It did not correct the error in 2012 or 2013. As a result, Othello's owner's equity was:

a. understated at December 31, 2012, and overstated at December 31, 2013.

b. understated at December 31, 2012, and properly stated at December 31, 2013.

c. overstated at December 31, 2012, and overstated at December 31, 2013.

d. understated at December 31, 2012, and understated at December 31, 2013.

Ans: B, LO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

128. Understating beginning inventory will understate

a. assets.

b. cost of goods sold.

c. net income.

d. owner's equity.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

129. An error in the physical count of goods on hand at the end of a period resulted in a $15,000 overstatement of the ending inventory. The effect of this error in the current period is

Cost of Goods SoldNet Income

a. Understated Understated

b. Overstated Overstated

c. Understated Overstated

d. Overstated Understated

Ans: C, LO: 5, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

130. If beginning inventory is understated by $13,000, the effect of this error in the current period is

Cost of Goods SoldNet Income

a. Understated Understated

b. Overstated Overstated

c. Understated Overstated

d. Overstated Understated

Ans: C, LO: 5, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

131. A company uses the periodic inventory method and the beginning inventory is overstated by $7,000 because the ending inventory in the previous period was overstated by $7,000. The amounts reflected in the current end of the period balance sheet are

Assets Owner’s Equity

a. Overstated Overstated

b. Correct Correct

c. Understated Understated

d. Overstated Correct

Ans: B, LO: 5, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

132. Overstating ending inventory will overstate all of the following except

a. assets.

b. cost of goods sold.

c. net income.

d. owner's equity.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

133. On July 31, Tractor Supplies sold merchandise to J. Robson on account. The sales price was $8,400, and the cost of goods sold was $6,300. The sales revenue was recorded immediately, but the entry recording the cost of goods sold was dated August 2. As a results , net income for July was

a. overstated by $8,400.

b. overstated by $6,300.

c. overstated by $2,100.

d. not affected, but the net income for August is understated.

Ans: b, LO: 5, BT:AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: none, AICPA FN: Measurement, AICPA PC: Problem Solving

134. Evergreen, Inc. is a successful company, but has a lower inventory turnover rate then the industry average. Which of the following offers the most likely explanation for these result?

a. Evergreen uses LIFO (assume rising purchase costs).

b. Evergreen has a just-in-time inventory system.

c. Evergreen sells unusually popular items.

d. Evergreen offers its customers an unusually large selection of merchandise.

Ans: d, LO: 6, BT:AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: none, AICPA FN: Measurement, AICPA PC: Problem Solving

135. Disclosures about inventory should include each of the following except the

a. basis of accounting.

b. costing method.

c. quantity of inventory.

d. major inventory classifications.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

136. Days in inventory is calculated by dividing

a. the inventory turnover ratio by 365 days.

b. average inventory by 365 days.

c. 365 days by the inventory turnover ratio.

d. 365 days by average inventory.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

137. The following information is available for Everett Company at December 31, 2013: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $700,000; and sales $1,200,000. Everette’s inventory turnover in 2013 is

a. 5.8 times.

b. 7 times.

c. 8.8 times.

d. 12 times.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

138. The following information was available for Pete Company at December 31, 2013: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $656,000; and sales $900,000. Pete’s inventory turnover ratio in 2013 was

a. 7.3 times.

b. 8.2 times.

c. 9.4 times.

d. 11.3 times.

Ans: B, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

139. The following information was available for Pete Company at December 31, 2013: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $656,000; and sales $900,000. Pete’s days in inventory in 2013 was

a 32.3 days.

b. 38.8 days.

c. 44.5 days.

d. 50.0 days.

Ans: C, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

140. Delmar Company had beginning inventory of $90,000, ending inventory of $110,000, cost of goods sold of $500,000, and sales of $800,000. Delmar's days in inventory is:

a 45.6 days.

b. 65.2 days.

c. 73.0 days.

d. 81.1 days.

Ans: C, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a 141. During July, the following purchases and sales were made by Big Dan Company. There was no beginning inventory. Big Dan Company uses a perpetual inventory system.

PurchasesSales

July 3 20 units @ $12 July 13 25 units

11 20 units @ $13 22 10 units

20 10 units @ $15

Under the FIFO method, the cost of goods sold for each sale is:

July 13July 22

a. $300 $120

b. 305 130

c. 325 130

d. 375 150

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a 142. During July, the following purchases and sales were made by Big Dan Company. There was no beginning inventory. Big Dan Company uses a perpetual inventory system.

PurchasesSales

July 3 20 units @ $12 July 13 25 units

11 20 units @ $13 22 10 units

20 10 units @ $15

Under the LIFO method, the cost of goods sold for each sale is:

July 13July 22

a. $300 $120

b. 320 150

c. 325 150

d. 375 130

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a 143. Pappy’s Staff has the following inventory information.

July 1 Beginning Inventory 10 units at $90

5 Purchases 60 units at $92

14 Sale 40 units

21 Purchases 30 units at $95

30 Sale 28 units

Assuming that a perpetual inventory system is used, what is the ending inventory on a FIFO basis?

a. $2,924

b. $2,930

c. $3,034

d. $6,346

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a 144 Pappy’s Staff Junkets has the following inventory information.

July 1 Beginning Inventory 10 units at $90

5 Purchases 60 units at $92

14 Sale 40 units

21 Purchases 30 units at $95

30 Sale 28 units

Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis?

a. $2,924

b. $2,930

c. $3,034

d. $6,346

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a 145. Pappy’s Staff has the following inventory information.

July 1 Beginning Inventory 10 units at $90

5 Purchases 60 units at $92

14 Sale 40 units

21 Purchases 30 units at $95

30 Sale 28 units

Assuming that a perpetual inventory system is used, what is the ending inventory (rounded) under the average-cost method?

a. $2,930

b. $2,966

c. $2,987

d. $3,054

Ans: C, LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

146. A new average cost is computed each time a purchase is made in the

a. average-cost method.

b. moving-average cost method.

c. weighted-average cost method.

d. all of these methods.

Ans: B, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

^a 147. When valuing ending inventory under a perpetual inventory system, the

a. valuation using the LIFO assumption is the same as the valuation using the LIFO assumption under the periodic inventory system.

b. moving average requires that a new average be computed after every sale.

c. valuation using the FIFO assumption is the same as under the periodic inventory system.

d. earliest units purchased during the period using the LIFO assumption are allocated to the cost of goods sold when units are sold.

Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 148. Sawyer Company uses the perpetual inventory system and the moving-average method to value inventories. On August 1, there were 10,000 units valued at $40,000 in the beginning inventory. On August 10, 20,000 units were purchased for $8 per unit. On August 15, 24,000 units were sold for $16 per unit. The amount charged to cost of goods sold on August 15 was

a. $40,000.

b. $144,000.

c. $160,000.

d. $192,000.

Ans: C, LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economic

^a 149. Under the gross profit method, each of the following items are estimated except for the

a. cost of ending inventory.

b. cost of goods sold.

c. cost of goods purchased.

d. gross profit.

Ans: C, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 150. Under the retail inventory method, the estimated cost of ending inventory is computed by multiplying the cost-to-retail ratio by

a. net sales.

b. goods available for sale at retail.

c. goods purchased at retail.

d. ending inventory at retail.

Ans: D, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 151. Inventories are estimated

a. more frequently under a periodic inventory system than a perpetual inventory system.

b. using the wholesale inventory method.

c. more frequently under a perpetual inventory system than the periodic inventory system.

d. using the net method.

Ans: A, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

^a 152. Clooney Department Store estimates inventory by using the retail inventory method. The following information was developed:

At Cost At Retail

Beginning inventory $360,000 $ 750,000

Goods purchased 900,000 1,350,000

Net sales 1,200,000

The estimated cost of the ending inventory is

a. $360,000.

b. $432,000.

c. $540,000.

d. $600,000.

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a 153. Turturro Department Store utilizes the retail inventory method to estimate its inventories. It calculated its cost to retail ratio during the period at 75%. Goods available for sale at retail amounted to $400,000 and goods were sold during the period for $280,000. The estimated cost of the ending inventory is

a. $90,000.

b. $120,000.

c. $210,000.

d. $300,000.

Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a 154. TB Nelson Company prepares monthly financial statements and uses the gross profit method to estimate ending inventories. Historically, the company has had a 40% gross profit rate. During June, net sales amounted to $60,000; the beginning inventory on June 1 was $18,000; and the cost of goods purchased during June amounted to $30,000. The estimated cost of TB Nelson Company's inventory on June 30 is

a. $7,200.

b. $12,000.

c. $24,000.

d. $42,000.

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

155. Towson Products uses the retail method to estimate ending inventory in its monthly financial statement. The following information is available for the month ended March 31

Cost Retail

Sales $320,000

Inventory, March 1 $136,000 219,000

Net purchases 182,000273,000

Goods available for sale $318,000 $492,000

The cost ratio that would be used in estimating the March 31 inventory using the retail method is

a. 64.6%.

b. 61.0%.

c. 62.1%.

d. 66.7%.

Ans: a, LO: 8, BT:AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: none, AICPA FN: Measurement, AICPA PC: Problem Solving

156. Towson Products uses the retail method to estimate ending inventory in its monthly financial statement. The following information is available for the month ended March 31

Cost Retail

Sales $320,000

Inventory, March 1 $136,000 219,000

Net purchases 182,000273,000

Goods available for sale $318,000 $492,000

The cost of the March 31 inventory using the retail method is

a. $101,000.

b. $111,112.

c. $106,813.

d. $205,428.

Ans: b, LO: 8, BT:AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: none, AICPA FN: Measurement, AICPA PC: Problem Solving

157. Towson Products uses the retail method to estimate ending inventory in its monthly financial statement. The following information is available for the month ended March 31

Cost Retail

Sales $320,000

Inventory, March 1 $136,000 219,000

Net purchases 182,000273,000

Goods available for sale $318,000 $492,000

The cost of the goods sold for March using the retail method is

a. $211,187.

b. $217,000.

c. $206,888.

d. $172,000.

Ans: c, LO: 8, BT:AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: none, AICPA FN: Measurement, AICPA PC: Problem Solving

158. Over the last few years, Mohawk Industries has operated with a gross profit rate of 35%. On January 1, 2012, the company had inventory on hand with a cost of $750,000. Purchases of merchandise during January amounted to $215,000, and sales for the month were $480,000. Using the gross profit method, what is the estimated inventory at January 31

a. $169,750.

b. $627,250.

c. $480,000.

d. $653,000.

Ans: d, LO: 8, BT:AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: none, AICPA FN: Measurement, AICPA PC: Problem Solving

159. During March, Vetter Corporation had sales of $380,000 and a cost of goods available for sale of $750,000. The company consistently earns a gross profit rate of 42%. Using the gross profit method, the estimated inventory at March 31 amounts to

a. $315,000.

b. $155,400.

c. $435,000.

d. $529,600.

Ans: d, LO: 8, BT:AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: none, AICPA FN: Measurement, AICPA PC: Problem Solving

160. Goods in transit should be included in the inventory of the buyer when the

a. public carrier accepts the goods from the seller.

b. goods reach the buyer.

c. terms of sale are FOB destination.

d. terms of sale are FOB shipping point.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

161..... Inventory items on an assembly line in various stages of production are classified as

a. Finished goods.

b. Work in process.

c. Raw materials.

d. Merchandise inventory.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

162. The cost flow method that often parallels the actual physical flow of merchandise is the

a. FIFO method.

b. LIFO method.

c. average-cost method.

d. gross profit method.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

163. Goodman Company's inventory records show the following data:

UnitsUnit Cost

Inventory, January 1 5,000 $9.00

Purchases: June 18 4,500 8.20

November 8 3,000 7.00

A physical inventory on December 31 shows 3,000 units on hand. Under the FIFO method, the December 31 inventory is

a. $21,000.

b. $24,600.

c. $24,696.

d. $27,000.

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

164. In a period of inflation, the cost flow method that results in the lowest income taxes is the

a. FIFO method.

b. LIFO method.

c. average-cost method.

d. gross profit method.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

165. In a period of rising prices, FIFO will have

a. lower net income than LIFO.

b. lower cost of goods sold than LIFO.

c. lower income tax expense than LIFO.

d. lower net purchases than LIFO.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

166. Under the LCM approach, the market value is defined as

a. FIFO cost.

b. LIFO cost.

c. current replacement cost.

d. selling price.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

167. Penny Company made an inventory count on December 31, 2013. During the count, one of the clerks made the error of counting an inventory item twice. For the balance sheet at December 31, 2013, the effects of this error are

AssetsLiabilitiesStockholders' Equity

a. overstated understated overstated

b. understated no effect understated

c. overstated no effect overstated

d. overstated overstated understated

Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

168. The inventory turnover ratio is computed by dividing cost of goods sold by

a. beginning inventory.

b. ending inventory.

c. average inventory.

d. 365 days.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 169. H. Hunter Company's records indicate the following information for the year:

Merchandise inventory, 1/1 $ 550,000

Purchases 2,250,000

Net Sales 3,200,000

On December 31, a physical inventory determined that ending inventory of $500,000 was in the warehouse. H. Hunter's gross profit on sales has remained constant at 30%.
H. Hunter suspects some of the inventory may have been taken by some new employees. At December 31, what is the estimated cost of missing inventory?

a. $60,000

b. $100,000

c. $150,000

d. $1,340,000

Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Answers to Multiple Choice Questions

BRIEF EXERCISES

BE 170

Tommy Johnson Company identifies the following items for possible inclusion in the physical inventory. Indicate whether each item should be included or excluded from the inventory taking.

1. Goods shipped on consignment by Tommy Johnson to another company.

2. Goods in transit from a supplier shipped FOB destination.

3. Goods shipped via common carrier to a customer with terms FOB shipping point.

4. Goods held on consignment from another company.

Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 170 (3 min.)

1. Included

2. Excluded

3. Excluded

4. Excluded

BE 171

In the first month of operations, C. T. King Company made three purchases of merchandise in the following sequence: (1) 200 units at $6, (2) 300 units at $7, and (3) 400 units at $9. Assuming there are 300 units on hand, compute the cost of the ending inventory under (1) the FIFO method and (2) the LIFO method. C. T. King uses a periodic inventory system.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 171 (5 min.)

1. FIFO

300 × $9 = $2,700

2. LIFO

200 × $6 = $1,200

100 × $7 = 700

$1,900

BE 172

O’Daniel Company had beginning inventory on May 1 of $12,000. During the month, the company made purchases of $40,000 but returned $2,000 of goods because they were defective. At the end of the month, the inventory on hand was valued at $15,500.

Calculate cost of goods available for sale and cost of goods sold for the month.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 172 (4 min.)

Beginning inventory $12,000

Net purchases ($40,000 – $2,000)+38,000

Cost of goods available for sale $50,000

Ending inventory – 15,500

Cost of goods sold $34,500

BE 173

Homer Stokes Company's inventory records show the following data for the month of September:

UnitsUnit Cost

Inventory, September 1 100 $3.34

Purchases: September 8 450 3.50

September 18 350 3.70

A physical inventory on September 30 shows 200 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses FIFO inventory costing and a periodic inventory system.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 173 (4 min.)

Ending inventory of 200 units: 200 x $3.70 = $740

Cost of goods sold:

Units available for sale (100 + 450 + 350) = 900

Units sold 900 – 200 = 700

100 × $3.34 = $ 334

450 × $3.50 = 1,575

150 × $3.70 = 555

Cost of goods sold $2,464

BE 174

Homer Stokes Company's inventory records show the following data for the month of September:

UnitsUnit Cost

Inventory, September 1 100 $3.34

Purchases: September 8 450 3.50

September 18 350 3.70

A physical inventory on September 30 shows 200 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses LIFO inventory costing and a periodic inventory system.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 174 (4 min.)

Ending inventory: (100 units × $3.34) + (100 units × $3.50) = $684

Cost of goods sold: (350 units × $3.70) + (350 units × $3.50) = $2,520

BE 175

Homer Stokes Company's inventory records show the following data for the month of September:

UnitsUnit Cost

Inventory, September 1 100 $3.34

Purchases: September 8 450 3.50

September 18 350 3.70

A physical inventory on September 30 shows 200 units on hand. Calculate the value of the ending inventory and cost of goods sold if the company uses weighted average inventory costing and a periodic inventory system. Round cost per unit to 2 decimal places and ending inventory and cost of goods sold to the nearest dollar.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 175 (4 min.)

Weighted average cost per unit:

Cost of goods available for sale = $3,204

Units available for sale 900

$3,204 ÷ 900 = $3.56

Ending inventory: 200 × $3.56 = $712

Cost of goods sold: 700 × $3.56 = $2,492

BE 176

The following accounts are included in the ledger of The Little Man Company:

Advertising expense

Freight-in

Inventory

Purchases

Purchase returns and allowances

Sales

Sales returns and allowances

Which of the accounts would be included in calculating cost of goods sold?

Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 176 (3 min.)

Freight-in

Inventory

Purchases

Purchase returns and allowances

BE 177

The Badalucco Company accumulates the following cost and market data at December 31.

Inventory CategoriesCost DataMarket Data

Camera $11,000 $9,900

Camcorders 7,800 8,500

DVDs 14,000 12,000

What is the lower-of-cost-or-market value of the inventory?

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 177 (5 min.)

Lower-of-cost-

Inventory CategoriesCost DataMarket Dataor-market value

Camera $11,000 $9,900 $9,900

Camcorders 7,800 8,500 7,800

DVDs 14,000 12,000 12,000

$29,700

BE 178

Cooley Supply Company reports net income of $120,000 in 2013. The ending inventory did not include goods valued at $7,000 that Cooley had consigned to Sharif’s Gift Shop.

(1) What is the correct net income for 2013?

(2) What impact will this error have on the balance sheet at 12/31/13?

Ans: N/A, LO: 5, Bloom: C, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 178 (4 min.)

(1) If ending inventory is understated by $7,000, cost of goods sold will be overstated and net income will be understated by $7,000. The correct net income is $127,000.

(2) On the balance sheet, both inventory and owner’s equity will be understated by $7,000.

BE 179

At December 31, 2013, the following information was available for Fife Company: ending inventory $22,600; beginning inventory $21,400; cost of goods sold $171,000; and sales revenue $430,000.

Calculate the inventory turnover ratio and days in inventory for Fife.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 179 (4 min.)

Inventory Turnover Ratio = $171,000 ÷ [($21,400 + $22,600) ÷ 2] = 7.8 times

Days in Inventory = 365 ÷ 7.8 = 46.8 days

EXERCISES

Ex. 180

The following information is available for Waldrip Company:

Beginning inventory 600 units at $4

First purchase 900 units at $6

Second purchase 500 units at $7.20

Assume that Waldrip uses a periodic inventory system and that there are 700 units left at the end of the month.

Instructions

Compute the cost of ending inventory under the

(a) FIFO method.

(b) LIFO method.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 180 (7 min.)

(a) FIFO Ending Inventory Cost:

500 × $7.20 = $3,600

200 × $6 = 1,200

$4,800

(b) LIFO Ending Inventory Cost:

600 × $4 = $2,400

100 × $6 = 600

$3,000

Ex. 181

The following information is available for Waldrip Company:

Beginning inventory 600 units at $4

First purchase 900 units at $6

Second purchase 500 units at $7.20

Assume that Waldrip uses a periodic inventory system and that there are 700 units left at the end of the month.

Instructions

Compute each of the following under the average-cost method:

(a) Cost of ending inventory.

(b) Cost of goods sold.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 181 (7 min.)

Average cost/unit = $5.70 ($11,400 ¸ 2,000)

600 × $4 = $ 2,400

900 × $6 = 5,400

500 × $7.20 = 3,600

2,000$11,400

(a) Cost of ending inventory = $3,990 (700 × $5.70)

(b) Cost of goods sold = $7,410 (1,300 × $5.70) or $11,400 – $3,990

Ex. 182

Hogwallop Company uses the periodic inventory method and had the following inventory information available:

Units Unit CostTotal Cost

1/1 Beginning Inventory 100 $4 $ 400

1/20 Purchase 400 $6 2,400

7/25 Purchase 200 $7 1,400

10/20 Purchase 300 $8 2,400

1,000$6,600

A physical count of inventory on December 31 revealed that there were 400 units on hand.

Instructions

Answer the following independent questions and show computations supporting your answers.

1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________.

2. Assume that the company uses the Average-Cost method. The value of the ending inventory on December 31 is $__________.

3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________.

4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less?

Ans: N/A, LO: 2, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 182 (20 min.)

1. FIFO: Ending inventory $3,100

300 units @ $8 = $2,400

100 units @ $7 = 700

400 units $3,100

2. Average Cost: Ending inventory $2,640

$6,600 ÷ 1,000 = $6.60 per unit × 400 units = $2,640

3. LIFO: Ending Inventory $2,200

100 units @ $4 = $ 400

300 units @ $6 = 1,800

400 units $2,200

4. FIFO: Cost of goods sold $3,500 LIFO: Cost of goods sold $4,400

100 units @ $4 = $ 400 300 units @ $8 = $2,400

400 units @ $6 = 2,400 200 units @ $7 = 1,400

100 units @ $7 = 700100 units @ $6 = 600

600 units $3,500 600 units $4,400

Income would have been $900 ($4,400 vs. $3,500) greater if the company used FIFO instead of LIFO.

Ex. 183

Pomade Company sells many products. Fortenberry is one of its popular items. Below is an analysis of the inventory purchases and sales of Fortenberry for the month of March. Pomade Company uses the periodic inventory system.

Purchases Sales

UnitsUnit CostUnitsSelling Price/Unit

3/1 Beginning inventory 100 $40

3/3 Purchase 60 $50

3/4 Sales 70 $80

3/10 Purchase 200 $55

3/16 Sales 80 $90

3/19 Sales 60 $90

3/25 Sales 40 $90

3/30 Purchase 40 $60

Instructions

(a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)

(b) Using the weighted average method, calculate the amount assigned to the inventory on hand on March 31. (Show computations)

(c) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 183 (20 min.)

Purchases Sales

UnitsUnit CostUnitsSelling Price/Unit

3/1 Beginning inventory 100 $40

3/3 Purchase 60 $50

3/4 Sales 70 $80

3/10 Purchase 200 $55

3/16 Sales 80 $90

3/19 Sales 60 $90

3/25 Sales 40 $90

3/30 Purchase 40 $60

400250

(a) Using FIFO - the earliest units purchased were the first sold.

3/1 100 @ $40 = $ 4,000

3/3 60 @ 50 = 3,000

3/10 90 @ 55 = 4,950

250 units $11,950 = the cost of goods sold

(b) Calculate the weighted average unit cost:

$20,400 ÷ 400 = $51

$51 × units in ending inventory (400 available less 250 sold = 150)

$51 × 150 = $7,650

(c) There are 150 units in ending inventory. They are comprised of the first units purchased when LIFO is assumed.

3/1 100 @ $40 = $4,000

3/3 50 @ $50 = 2,500

150 units $6,500 = ending inventory

Ex. 184

Toso Company uses the periodic inventory system to account for inventories. Information related to Toso Company's inventory at October 31 is given below:

October 1 Beginning inventory 400 units @ $9.80 = $ 3,920

8 Purchase 800 units @ $10.40 = 8,320

16 Purchase 600 units @ $10.80 = 6,480

24 Purchase 200 units @ $11.80 = 2,360

Total units and cost 2,000 units $21,080

Instructions

1. Show computations to value the ending inventory using the FIFO cost assumption if 550 units remain on hand at October 31.

2. Show computations to value the ending inventory using the weighted-average cost method if 550 units remain on hand at October 31.

3. Show computations to value the ending inventory using the LIFO cost assumption if 550 units remain on hand at October 31.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 184 (20 min.)

1. 550 units in ending inventory.

Under FIFO, the units remaining in inventory are the ones purchased most recently.

10/24 200 units @ $11.80 = $2,360

10/16 350 units @ 10.80 = 3,780

550 units $6,140

2. 550 units in ending inventory.

Under average cost method, the weighted average cost per unit must be computed.

$21,080 ÷ 2,000 units = $10.54

550 units × $10.54 = $5,797

3. 550 units in ending inventory.

Under LIFO, the units remaining are the ones purchased earliest.

10/1 400 units @ $9.80 = $3,920

10/8 150 units @ 10.40 = 1,560

550 units $5,480

Ex. 185

Wash Co. uses a periodic inventory system. Its records show the following for the month of May, in which 75 units were sold.

UnitsUnit CostTotal Cost

May 1 Inventory 35 $ 8 $ 280

15 Purchases 30 12 360

24 Purchases 40 13 520

Totals 105$1,160

Instructions

Compute the ending inventory at May 31 and cost of goods sold using the FIFO and LIFO methods. Prove the amount allocated to cost of goods sold under each method.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 185 (20 min.)

FIFO

Beginning inventory (35 X $8).................................................................................... $280

Purchases

May 15 (30 X $12)................................................................................ $360

May 24 (40 X $13).......................................................................................... 520 880

Cost of goods available for sale................................................................. 1,160

Less: Ending inventory (30 X $13)............................................................. 390

Cost of goods sold...................................................................................... $770

Proof

DateUnitsUnit CostTotal Cost

5/1 35 $ 8 $280

5/15 30 12 360

5/24 10 13 130

$ 770

LIFO

Cost of goods available for sale.................................................................. $1,160

Less: Ending inventory (30 X $8)................................................................ 240

Cost of goods sold....................................................................................... $ 920

Proof

DateUnitsUnit CostTotal Cost

5/24 40 $13 $520

5/15 30 12 360

5/1 5 8 40

$920

Ex. 186

Soggy Bottom Company reports the following for the month of June.

UnitsUnit CostTotal Cost

June 1 Inventory 300 $5 $1,500

12 Purchase 450 6 2,700

23 Purchase 750 8 6,000

30 Inventory 180

Instructions

(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO and (2) LIFO.

(b) Compute the cost of the ending inventory and the cost of goods sold using the average-cost method.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 186 (20 min.)

(a) FIFO

Beginning inventory (300 X $5).................................................... $1,500

Purchases

June 12 (450 X $6)................................................................. $2,700

June 23 (750 X $8)................................................................. 6,000 8,700

Cost of goods available for sale.................................................... ....................... 10,200

Less: Ending inventory (180 X $8)............................................... ..................... 1,440

Cost of goods sold........................................................................ $8,760

LIFO

Cost of goods available for sale................................................... ........................ $10,200

Less: Ending inventory (180 X $5)............................................... 900

Cost of goods sold........................................................................ $9,300

(b) Cost of Goods Total Units Weighted Average

Available for Sale ¸ Available for Sale = Unit Cost

$10,200 1,500 $6.80

Ending inventory (180 X $6.80) $1,224

Cost of goods sold (1,320 X $6.80) 8,976

Ex. 187

Purdy Company is in the electronics industry and the price it pays for inventory is decreasing.

Instructions

Indicate which inventory method will:

a. provide the highest ending inventory.

b. provide the highest cost of goods sold.

c. result in the highest net income.

d. result in the lowest income tax expense.

e. produce the most stable earnings over several years.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Easy, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Quantitative Methods

Solution 187 (4 min.)

a. LIFO

b. FIFO

c. LIFO

d. FIFO

e. Average cost

Ex. 188

Siren Company reported the following summarized annual data at the end of 2012:

Sales revenue $1,000,000

Cost of goods sold* 600,000

Gross margin 400,000

Operating expenses 250,000

Income before income taxes $ 150,000

*Based on an ending FIFO inventory of $250,000.

The income tax rate is 40%. The controller of the company is considering a switch from FIFO to LIFO. He has determined that on a LIFO basis, the ending inventory would have been $180,000.

Instructions

(a) Restate the summary information on a LIFO basis.

(b) What effect, if any, would the proposed change have on Siren’s income tax expense, net income, and cash flows?

(c) If you were an owner of this business, what would your reaction be to this proposed change?

Ans: N/A, LO: 3, Bloom: E, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 188 (25 min.)

(a) Restate to a LIFO basis:

Sales revenue $1,000,000

Cost of goods sold* 670,000

Gross margin 330,000

Operating expenses 250,000

Income before income taxes $ 80,000

*Ending inventory would be $70,000 less ($250,000 – $180,000 = $70,000) under LIFO, thereby increasing cost of goods by $70,000.

(b) The taxes on the FIFO basis would be:

$150,000 ×.40 = $60,000

Leaving Net Income of $90,000 ($150,000 – $60,000 = $90,000).

The taxes on the LIFO basis would be:

$80,000 ×.40 = $32,000

Leaving Net Income of $48,000 ($80,000 – $32,000 = $48,000).

Switching to the LIFO basis will result in $28,000 less income tax expense and less net income of $42,000. The cash effect is $28,000 ($60,000 – $32,000 = $28,000) saved in taxes if LIFO were used.

(c) Owners of the business may favor the LIFO basis since more cash will be available for use in the business. LIFO results in more cash being retained in the business since less is paid out for income taxes.

Ex. 189

Compute the lower-of-cost-or-market valuation for Wharvey Company's total inventory based on the following:

Inventory CategoriesCost DataMarket Data

A $18,000 $16,900

B 13,900 14,600

C 21,000 20,500

Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 189 (5 min.)

Inventory CategoriesCost DataMarket Data LCM

A $18,000 $16,900 $16,900

B 13,900 14,600 13,900

C 21,000 20,500 20,500

Total Valuation $51,300

Ex. 190

The controller of Cox Company is applying the lower-of-cost-or-market basis of valuing its ending inventory. The following information is available:

Cost Market

Lawnmowers:

Self-propelled $14,800 $17,000

Push type 19,000 18,000

Total 33,800 35,000

Snowblowers:

Manual 29,800 31,000

Self-start 19,000 21,000

Total 48,800 52,000

Total inventory $82,600$87,000

Instructions

Compute the value of the ending inventory by applying the lower-of-cost-or-market basis.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

Solution 190 (15 min.)

Lower-of-cost-or-market

Lawnmowers:

Self-propelled $14,800

Push type 18,000

Snowblowers:

Manual 29,800

Self-start 19,000

Total inventory $81,600

Ex. 191

Gihan Company is preparing the annual financial statements dated December 31, 2013. Information about inventory stocked for regular sale follows:

Quantity Unit Cost Replacement Cost

Itemon HandWhen Acquired(market) at year end

A 50 $20 $19

B 100 45 45

C 20 59 62

D 40 40 36

Instructions

Compute the valuation for the December 31, 2013, inventory using the lower-of-cost-or-market basis.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 191 (10 min.)

Lower - of - Cost

ItemUnits or - Market Total LCM

A 50 $19 $ 950

B 100 45 4,500

C 20 59 1,180

D 40 36 1,440

$8,070

Ex. 192

Welch Company applied FIFO to its inventory and got the following results for its ending inventory.

VCRs 140 units at a cost per unit of $59

DVD players 210 units at a cost per unit of $75

IPods 175 units at a cost per unit of $80

The cost of purchasing units at year-end was VCRs $71, DVD players $68, and iPods $78.

Instructions

Determine the amount of ending inventory at lower-of-cost-or-market.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 192 (10 min.)

Lower

of Cost

Cost Market or Market:

VCRs $ 8,260 $ 9,940 $ 8,260

DVD players 15,750 14,280 14,280

IPods 14,000 13,650 13,650

Total inventory $38,010$37,870$36,190

Ex. 193

Linden Watch Company reported the following income statement data for a 2-year period.

2012 2013

Sales $260,000$320,000

Cost of goods sold

Beginning inventory 32,000 44,000

Cost of goods purchased 193,000 225,000

Cost of goods available for sale 225,000 269,000

Ending inventory 44,000 57,000

Cost of goods sold 181,000 212,000

Gross profit $ 79,000$108,000

Linden uses a periodic inventory system. The inventories at January 1, 2012, and December 31, 2013, are correct. However, the ending inventory at December 31, 2012, was overstated $5,000.

Instructions

(a) Prepare correct income statement data for the 2 years.

(b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?

Ans: N/A, LO: 5, Bloom: AN, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 193 (15 min.)

(a)

2012 2013

Sales.............................................................. $260,000$320,000

Cost of goods sold

Beginning inventory................................ 32,000 39,000

Cost of goods purchased........................ 193,000 225,000

Cost of goods available for sale.............. 225,000 264,000

Ending inventory ($44,000 – $5,000)...... 39,000 57,000

Cost of goods sold................................... 186,000 207,000

Gross profit.................................................... $ 74,000$113,000

(b) The cumulative effect on total gross profit for the two years is zero as shown below:

Incorrect gross profits: $79,000 + $108,000 = $187,000

Correct gross profits: $74,000 + $113,000 = 187,000

Difference $ 0

Ex. 194

Buck White Company reported net income of $60,000 in 2012 and $80,000 in 2013. However, ending inventory was overstated by $7,000 in 2012.

Instructions

Compute the correct net income for Buck White Company for 2012 and 2013.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 194 (6 min.)

2012 correct net income = $53,000 ($60,000 – $7,000)

2013 correct net income = $87,000 ($80,000 + $7,000)

Ex. 195

For each of the independent events listed below, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item.

Code: O = item is overstated

U = item is understated

NA = item is not affected

Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 195 (20 min.)

Ex. 196

Speer's Hardware Store prepared the following analysis of cost of goods sold for the previous three years:

2011 2012 2013

Beginning inventory 1/1 $40,000 $18,000 $25,000

Cost of goods purchased 50,000 55,000 70,000

Cost of goods available for sale 90,000 73,000 95,000

Ending inventory 12/31 18,000 25,000 40,000

Cost of goods sold $72,000$48,000$55,000

Net income for the years 2011, 2012, and 2013 was $70,000, $60,000, and $55,000, respectively. Since net income was consistently declining, Mr. Speer hired a new accountant to investigate the cause(s) for the declines.

The accountant determined the following:

1. Purchases of $25,000 were not recorded in 2011.

2. The 2011 December 31 inventory should have been $24,000.

3. The 2012 ending inventory included inventory costing $5,000 that was purchased FOB destination and in transit at year end.

4. The 2013 ending inventory did not include goods costing $4,000 that were shipped on December 29 to Sampson Plumbing Company, FOB shipping point. The goods were still in transit at the end of the year.

Instructions

Determine the correct net income for each year. (Show all computations.)

Ans: N/A, LO: 5, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 196 (25 min.)

2011 2012 2013

Beginning inventory 1/1 $ 40,000 $24,000 $20,000

Cost of goods purchased (1) 75,000 55,000 70,000

Cost of goods available for sale 115,000 79,000 90,000

Ending inventory 12/31 (2) 24,000 (3) 20,000 40,000

Cost of goods sold $ 91,000$59,000$50,000

2011 2012 2013

Net Income previously reported $70,000 $60,000 $55,000

Add: Prior cost of goods sold 72,000 48,000 55,000

Less: Revised cost of goods sold (91,000) (59,000) (50,000)

Corrected Net Income $51,000$49,000$60,000

(1) Additional purchases $25,000

(2) Additional ending inventory $6,000

(3) Less ending inventory $5,000

Ex. 197

Snodderly Pharmacy reported cost of goods sold as follows:

2012 2013

Beginning inventory $ 54,000 $ 64,000

Cost of goods purchased 847,000 891,000

Cost of goods available for sale 901,000 955,000

Ending inventory 64,000 55,000

Cost of goods sold $837,000$900,000

Holt, the bookkeeper, made two errors:

(1) 2012 ending inventory was overstated by $7,000.

(2) 2013 ending inventory was understated by $16,000.

Instructions

Assuming the errors had not been corrected, indicate the dollar effect that the errors had on the items appearing on the financial statements listed below. Also indicate if the amounts are overstated (O) or understated (U).

2012 2013

Overstated/ Overstated/

Amount Understated Amount Understated

Total assets $_________ _______ $_________ _______

Owner’s equity $_________ _______ $_________ _______

Cost of goods sold $_________ _______ $_________ _______

Net income $_________ _______ $_________ _______

Ans: N/A, LO: 5, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 197 (20 min.)

2012 2013

Overstated/ Overstated/

Amount UnderstatedAmount Understated

Total assets $7,000 O $16,000 U

Owner’s equity $7,000 O $16,000 U

Cost of goods sold $7,000 U $23,000 O

Net income $7,000 O $23,000 U

Correct cost of goods sold:

2012 2013

Beginning inventory $ 54,000 $ 57,000

Cost of goods purchased 847,000 891,000

Cost of goods available for sale 901,000 948,000

Ending inventory 57,000 71,000

Cost of goods sold $844,000$877,000

Ex. 198

This information is available for Grant's Photo Corporation for 2012 and 2013.

2012 2013

Beginning inventory $ 200,000 $ 300,000

Ending inventory 300,000 380,000

Cost of goods sold 1,150,000 1,330,000

Sales 1,600,000 1,900,000

Instructions

Calculate inventory turnover, days in inventory, and gross profit rate for Grant's Photo Corporation for 2012 and 2013. Comment on any trends.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 198 (20 min.)

2012 2013

Inventory $1,150,000 $1,330,000

turnover ($200,000 + $300,000) ¸ 2 ($300,000 + $380,000) ¸ 2

$1,150,000 = 4.6 $1,330,000 = 3.9

$250,000 $340,000

Days in 365 = 79.3 days 365 = 93.6 days

inventory 4.6 3.9

Gross $1,600,000 – $1,150,000 = .28 $1,900,000 – $1,330,000 = .30

profit rate $1,600,000 $1,900,000

The inventory turnover ratio decreased by approximately 15% from 2012 to 2013 while the days in inventory increased by 18% over the same time period. Both of these changes would be considered negative since it's better to have a higher inventory turnover and lower days in inventory. However, Grant's Photo gross profit rate increased by 7% from 2012 to 2013, which is a positive sign.

Ex. 199

The following information is available for Dobro Company:

Beginning inventory $ 60,000

Cost of goods sold 640,000

Ending inventory 100,000

Sales 1,000,000

Instructions

Compute each of the following:

(a) Inventory turnover.

(b) Days in inventory.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 199 (5 min.)

$640,000 $640,000

(a) Inventory turnover: ———————————— = ———— = 8.0

($60,000 + $100,000) ¸ 2 $80,000

365

(b) Days in inventory: —— = 45.6 days

8.0

^a Ex. 200

Zimmer Company uses the perpetual inventory system and the LIFO method. The following information is available for the month of May:

May 1 Beginning inventory 20 units @ $5

10 Purchase 20 units @ $8

15 Sales 15 units

18 Purchase 10 units @ $9

21 Sales 15 units

30 Purchase 10 units @ $10

Instructions

Prepare a schedule to show cost of goods sold and the value of the ending inventory for the month of May.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a Solution 200 (10 min.)

Cost of goods sold:

May 15 sale 15 units × $8 = $120

May 21 sale 10 units × $9 = 90

5 units × $8 = 40

30 units $250 Cost of goods sold

Ending inventory:

May 1 20 units × $5 = $100

May 30 10 units × $10 = 100

30 units $200 Ending inventory

^a Ex. 201

Lumley Company uses the perpetual inventory system and had the following purchases and sales during March.

Purchases Sales

Units Unit CostUnits Selling Price/Unit

3/1 Beginning inventory 100 $40

3/3 Purchase 60 $50

3/4 Sales 70 $80

3/10 Purchase 200 $55

3/16 Sales 80 $90

3/19 Purchase 40 $60

3/25 Sales 120 $90

Instructions

Using the inventory and sales data above, calculate the value assigned to cost of goods sold in March and to the ending inventory at March 31 using (a) FIFO and (b) LIFO.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a Solution 201 (20 min.)

a) FIFO

Date Purchases Sales Balance

3/1 (100 @ $40) $4,000

3/3 (60 @ $50) $3,000 (100 @ $40)

(60 @ $50) $7,000

3/4 (70 @ $40) $2,800 (30 @ $40)

(60 @ $50) $4,200

3/10 (200 @ $55) $11,000 (30 @ $40)

(60 @ $50)

(200 @ $55) $15,200

3/16 (30 @ $40) (10 @ $50)

(50 @ $50) $3,700 (200 @ $55) $11,500

3/19 (40 @ $60) $2,400 (10 @ $50)

(200 @ $55)

(40 @ $60) $13,900

3/25 (10 @ $50) (90 @ $55)

(110 @ $55) $6,550 (40 @ $60) $7,350

March cost of goods sold = $13,050 ($2,800 + $3,700 + $6,550)

March 31 inventory = $7,350

b) LIFO

Date Purchases Sales Balance

3/1 (100 @ $40) $4,000

3/3 (60 @ $50) $3,000 (100 @ $40)

(60 @ $50) $7,000

3/4 (60 @ $50)

(10 @ $40) $3,400 (90 @ $40) $3,600

3/10 (200 @ $55) $11,000 (90 @ $40)

(200 @ $55) $14,600

3/16 (80 @ $55) $4,400 (90 @ $40)

(120 @ $55) $10,200

3/19 (40 @ $60) $2,400 (90 @ $40)

(120 @ $55)

(40 @ $60) $12,600

3/25 (40 @ $60) (90 @ $40)

(80 @ $55) $6,800 (40 @ $55) $5,800

March cost of goods sold = $14,600 ($3,400 + $4,400 + $6,800)

March 31 inventory = $5,800

^aEx. 202

Tyminstii Department Store prepares monthly financial statements but only takes a physical count of merchandise inventory at the end of the year. The following information has been developed for the month of July:

At Cost At Retail

Beginning inventory $ 30,000 $ 50,000

Merchandise purchases 99,000 150,000

The net sales for July amounted to $142,000.

Instructions

Use the retail inventory method to estimate the ending inventory at cost for July. Show all computations to support your answer.

Ans: N/A, LO: 8, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a Solution 202 (10 min.)

At Cost At Retail

Beginning inventory $ 30,000 $ 50,000

Merchandise purchases 99,000 150,000

Goods available for sale $129,000 200,000

Net sales 142,000

(1) Ending inventory at retail $ 58,000

(2) Cost to retail ratio = 64.5% ($129,000 ÷ $200,000).

(3) Ending inventory at cost = ($58,000 × 64.5%) = $37,410.

^a Ex. 203

Banjo Company suffered a loss of its inventory on March 28 due to a fire in its warehouse. As a basis for filing a claim with its insurance company, Banjo Company developed the following information:

March net sales through March 28 $350,000

Beginning Inventory, March 1 100,000

Merchandise purchases through March 28 180,000

The company has experienced an average gross profit rate of 35% in the past and this rate appears to be appropriate in the current period.

Instructions

Using the gross profit method, prepare an estimate of the cost of the inventory destroyed by fire on March 28. Show all computations in good form.

Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a Solution 203 (10 min.)

Net sales $350,000

Less: Estimated gross profit ($350,000 × 35%) 122,500

Estimated cost of goods sold $227,500

Beginning inventory $100,000

Merchandise purchases 180,000

Goods available for sale 280,000

Less: Estimated cost of goods sold 227,500

Estimated cost of ending inventory destroyed by fire $ 52,500

^a Ex. 204

The inventory of Hardcastle Company was destroyed by fire on April 1. From an examination of the accounting records, the following data for the first three months of the year are obtained:

Sales $185,000

Sales Returns and Allowances 5,000

Purchases 110,000

Freight-In 3,500

Purchase Returns and Allowances 4,000

Instructions

Determine the merchandise lost by fire, assuming a beginning inventory of $50,000 and a gross profit rate of 40% on net sales.

Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a Solution 204 (10 min.)

Net Sales ($185,000 – $5,000) $180,000

Less: Estimated gross profit (40% × $180,000) 72,000

Estimated cost of goods sold $108,000

Beginning inventory $ 50,000

Cost of goods purchased ($110,000 – $4,000 + $3,500) 109,500

Cost of goods available for sale 159,500

Less: Estimated cost of good sold 108,000

Estimated cost of merchandise lost $ 51,500

^a Ex. 205

Georgia Rae Company reports goods available for sale at cost, $76,800. Beginning inventory at retail is $40,000 and goods purchased during the period at retail were $80,000. Sales for the period amounted to $85,000.

Instructions

Determine the estimated cost of the ending inventory using the retail inventory method.

Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a Solution 205 (10 min.)

At Cost At Retail

Beginning inventory $ 40,000

Goods purchased 80,000

Goods available for sale $76,800 120,000

Net sales 85,000

Ending inventory $ 35,000

First calculate the cost to retail ratio.

$76,800 ÷ $120,000 = 64%

Apply this ratio to the ending inventory at retail.

$35,000 × .64 = $22,400

$22,400 is the estimated cost of the ending inventory.

CHALLENGE EXERCISE

CE 206

Stengel company sells a snowboard, WhiteOut, that is popular with snowboard enthusiasts. Presented below is information relating to Stengel Company's purchases of WhiteOut snowboards during September. During the same month, 124 WhiteOut snowboards were sold at $160 each. Stengel company uses a periodic inventory system.

Date Explanation Units Unit Cost Total Cost

Sept. 1 Inventory 25 $ 100 $ 2,500

Sept. 12 Purchases 45 106 4,770

Sept. 19 Purchases 24 110 2,640

Sept. 26 Purchases 50 112 5,600

Total 144$15,510

Instructions

(a) Compute the ending inventory at September 30 and cost of goods sold using the FIFO and LIFO method. Prove the amount allocated to cost of goods sold under each method.

(b) For both FIFO and LIFO, calculate the sum of inventory and cost of goods sold. What do you notice about the answer you found for each method?

(c) What is gross profit under each method?

(d) Which method results in a larger amount reported for assets on the balance sheet? Which results in a larger amount reported for stockholders' equity on the balance sheet?

Solution 206

FIFO

Beginning inventory (25 ´ $100)....................................................... $ 2,500

Purchases

Sept. 12 (45 ´ $106).............................................................................. $4,770

Sept. 19 (24 ´ $110).......................................................................... 2,640

Sept. 26 (50 ´ $112).......................................................................... 5,60013,010

Solution 206 cont.

LIFO

Cost of goods available for sale 15,510

Lass: Ending inventory (20 ´ $112).................................................. 2,240

Cost of goods sold ................................................................................ $13,270

Cost of goods available for sale........................................................................................... $15,510

Less: Ending inventory (20 ´ $100)........................................................................................... 2,000

Cost of goods sold................................................................................................................ $13,510

(b)

FIFO $2,240 (ending inventory) + 13,270 (COGS) = $15,510 Cost of goods available for sale

LIFO $2,000 (ending inventory) + 13,510 (COGS) = $15,510 Cost of goods available for sale

Under both methods, the sum of the ending inventory and cost of goods sold equals the same amount, $15,510 which is the cost of goods available for sale.

(c) FIFO: Sales $19,840 (124 ´ $160) less $13,270 = $6,570 gross profit

LIFO: Sales $19,840 (124 ´ $160) less $13,510 = $6,330) gross profit

(d) FIFO reports a larger amount for ending inventory ($2,240 vs. $2,000),so therefore it results in a larger amount reported for assets on the balance sheet. Since FIFO reports a larger gross profit, it will result in a larger amount for retained earnings and stockholders' equity.

CE 207

Naughty Dog Disc Golf Show uses the lower-of-cost-or market basis for its inventory. The following data are available at December 31

ItemUnitUnit CostMarket

Baskets:

Innova 15 $190 $200

Discraft 25 175 160

Disc bags:

Lightning 30 20 16

Wham-o 28 30 28

Instructions

(a) Determine the amount of the ending inventory by applying the lower- of- cost- or-market basis.

(b) When determining "lower of cost or market", what is "market? Why is defined in this way?

Solution 207

a)

CostMarketLower-of -Cost or Market

Baskets:

Innova $2,850 $3,000 $2,850

Discraft 4,3754,000 4,000

Total 7,2257,000

Disc bags:

Lightning 600 480 480

Wham-o 840 784 784

Total 1,4401,264

Total inventory $8,665$8,264$8,114

b) Under the LCM basis, market is defined as current replacement cost, not selling price. For a merchandising company, market is the cost of purchasing the same goods at the present time from the usual suppliers in usual quantities. Current replacement cost is used because a decline in the replacement cost of an item usually leads to a decline in the selling price of the item.

CE 208

Waters Hardware reported cost of the goods sold as follows.

2012 2013

Beginning inventory $ 30,000 $ 40,000

Cost of goods purchased 220,000245,000

Cost of goods available for sale 250,000 285,000

Ending inventory 40,00045,000

Cost of goods sold $210,000 $240,000

Waters made two errors: (1) 2012 ending inventory was overstated $5,000, and (2) 2013 ending inventory was understated $8,000

Instructions

(a) Compute the correct cost of goods sold for each year.

(b) What correcting entry would Waters make for error (2)?

Solution 208

(a)

2012 2013

Beginning inventory.............................................................. $ 30,000 $ 35,000

Cost of goods purchased 220,000245,000

Cost of goods available for sale........................................... 250,000 280,000

Corrected ending inventory.................................................. 35,000^a53,000^b

Cost of goods sold................................................................ $215,000$227,000

^a $40,000 - $5,000 = $35,000. ^b$45,000 + $8,000 = $53,000.

(b) Inventory........................................................................ 8,000

Cost of Goods Sold 8,000

COMPLETION STATEMENTS

209. Accounting for inventories is important because inventories affect the ______________ section of the balance sheet and the ______________ section on the income statement.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

210. In a manufacturing company, goods that are ready to be sold to customers are referred to as ________________, whereas in a merchandising company they are generally referred to as _______________.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

211. The cost of goods purchased during a period plus the beginning inventory is the amount of goods ________________ during the period.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

212. Inventoriable costs are allocated to ______________ and cost of goods ____________.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

213. It is generally recognized that a major objective of accounting for inventory is the proper determination of ______________.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

214. The ______________ method tracks the actual physical flow of each unit of inventory available for sale; however, management may be able to manipulate ______________ by using this method.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

215. If the unit cost of inventory has continuously increased, the ______________, first-out inventory valuation method will result in a higher valued ending inventory than if the ______________, first-out method had been used.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

216. The lower-of-cost-or-market basis of accounting for inventories should be applied when the ______________ cost of the goods is lower than its cost.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

217. ______________ is calculated as cost of goods sold divided by average inventory.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

^a 218. Two widely used methods of estimating inventories are the ______________ method and the _____________ method.

Ans: N/A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic

Answers to Completion Statements

209. current assets, cost of goods sold 214. specific identification, income

210. finished goods, merchandise inventory 215. first-in, last-in

211 available for sale 216. replacement

212. Ending inventory, sold 217. Inventory turnover

213. net income ^a218. gross profit, retail inventory

MATCHING

219. Match the items below by entering the appropriate code letter in the space provided.

A. Merchandise Inventory F. First-in, first-out (FIFO) method

B. Work in process G. Last-in, first-out (LIFO) method

C. FOB shipping point H. Average-cost method

D. FOB destination I. Inventory turnover

E. Specific identification method J. Current replacement cost

____ 1. Measures the number of times the inventory sold during the period.

____ 2. Tracks the actual physical flow for each inventory item available for sale.

____ 3. Goods that are only partially completed in a manufacturing company.

____ 4. Cost of goods sold consists of the most recent inventory purchases.

____ 5. Goods ready for sale to customers by retailers and wholesalers.

____ 6. Title to the goods transfers when the public carrier accepts the goods from the seller.

____ 7. Ending inventory valuation consists of the most recent inventory purchases.

____ 8. The same unit cost is used to value ending inventory and cost of goods sold.

____ 9. Title to goods transfers when the goods are delivered to the buyer.

____ 10. The amount that would be paid at the present time to acquire an identical item.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Matching

1. I 6. C

2. E 7. F

3. B 8. H

4. G 9. D

5. A 10. J

SHORT-ANSWER ESSAY QUESTIONS

S-A E 220

FIFO and LIFO are the two most common cost flow assumptions made in costing inventories. The amounts assigned to the same inventory items on hand may be different under each cost flow assumption. If a company has no beginning inventory, explain the difference in ending inventory values under the FIFO and LIFO cost bases when the price of inventory items purchased during the period have been (1) increasing, (2) decreasing, and (3) remained constant.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic

Solution 220

The FIFO method determines the ending inventory by the cost of the most recent purchase. The LIFO method determines the ending inventory by the cost of the earliest purchase. Therefore, if the FIFO method is used and the prices during the period are increasing, the ending inventory under FIFO will be greater than under LIFO. Likewise, if the FIFO method is used and the prices during the period are decreasing, the ending inventory under FIFO will be less than under LIFO. If prices remain constant and the company has no beginning inventory, then there will be no difference in ending inventory.

S-A E 221

In a period of rising prices, the inventory reported in Marianna Company's balance sheet is close to the current cost of the inventory. Breland Company's inventory is considerably below its current cost. Identify the inventory cost flow method being used by each company. Which company has probably been reporting the higher gross profit?

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic

Solution 221

Marianna Company is using the FIFO method of inventory costing, and Breland Company is using the LIFO method. Under FIFO, the latest goods purchased remain in inventory. Thus, the inventory on the balance sheet should be close to current costs. The reverse is true of the LIFO method. Marianna Company will have the higher gross profit because cost of goods sold will include a higher proportion of goods purchased at earlier (lower) costs.

S-A E 222

Errors occasionally occur when physically counting inventory items on hand. Identify the financial statement effects of an overstatement of the ending inventory in the current period. If the error is not corrected, how does it affect the financial statements for the following year?

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic

Solution 222

The overstatement of ending inventory will cause cost of goods sold to be understated. Consequently, net income for the period will be overstated. The effect on the balance sheet is that assets and owner’s equity will be overstated. The subsequent period will have an overstatement of beginning inventory. This will cause cost of goods sold to be overstated and net income to be understated, counterbalancing the overstatement of income in the prior period.

S-A E 223

A survey of major U.S. companies revealed that 77% of those companies used either LIFO or FIFO cost flow methods, while 19% used average cost, and only 4% used other methods.

Required:

Provide brief, yet concise responses to the following questions.

a. Why are LIFO and FIFO so popular?

b. Since computers and inventory management software are readily available, why aren’t more companies using specific identification?

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic

Solution 223

a. FIFO and LIFO are based on cost flow assumptions that may be unrelated to the physical flow of goods. The reasons for using one of these methods involve the effects on the income statement, balance sheet, and taxes that the company must pay.

In periods of rising prices (inflation), LIFO provides for a lower net income, thus resulting in a lower tax liability. LIFO reflects the most realistic cost of goods sold (the most recent or highest costs). However, the cost of inventory on the balance sheet is distorted because it consists of the earliest or lowest costs.

In periods of rising prices, FIFO provides for the most realistic ending inventory cost on the balance sheet (using the most recent or highest costs). On the income statement, FIFO represents the least realistic cost of goods sold because the amount consists of the earliest or lowest costs. This makes net income higher, which is good for the external financial statements but it thus results in a higher tax liability. In periods of falling prices, opposite results apply.

b. With computers and inventory management software, it would appear that the specific identification method would be the most popular because it matches the actual cost of each item sold to its selling price. However, using computers to keep up with the information does not eliminate some of the problems with using specific identification.

One problem is an ethical one. A major disadvantage of the specific identification method is that management may be able to manipulate net income. For example, it can boost net income by selling units purchased at a low cost, or reduce net income by selling units purchased at a high cost. As long as customers receive the units they demand, they are indifferent when the company bought them. This manipulation means that net income is not objectively measured.

Another problem is that the costs of maintaining a specific identification system may outweigh the benefits of using such a method. As mentioned in part a, financial statement and tax effects of using FIFO and LIFO are more beneficial to companies than simply being able to match the actual cost of a unit to its selling price.

S-A E 224

Your former college roommate is opening a new retail store and asks you “Which inventory costing method should I use?”

What is your response? Include a comparison of the tax effect, balance sheet effect, and income statement effect for FIFO versus LIFO.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic

Solution 224

It is always good to hear from you and you have certainly asked a very good question. Since the consistency principle requires that you adopt accounting methods and stay with them (until there is need for a proper change), it is very important to consider the options before starting a business.

I suggest that you consider one of the three cost flow assumptions—Average, First-In, First-Out (FIFO), or Last-In, First-Out (LIFO). These methods are based on the assumption of cost flows instead of the actual physical flow of goods.

The effects on the income statement, balance sheet, and tax returns depend on whether your

company experiences rising prices or falling prices.

Here is a summary of the effects for each inventory method, for companies that experience rising

prices (the opposite will be true for falling prices).

S-A E 225

Shayne Tingle is studying for the next accounting mid-term examination. What should Shayne know about (a) departing from the cost basis of accounting for inventories and (b) the meaning of "market" in the lower-of-cost-or-market method?

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic

Solution 225

Shayne should know the following:

(a) A departure from the cost basis of accounting for inventories is justified when the value of the goods is lower than its cost. The writedown to market should be recognized in the period in which the price decline occurs.

(b) Market means current replacement cost, not selling price. For a merchandising company, market is the cost at the present time from the usual suppliers in the usual quantities.

S-A E 226 (Ethics)

Rachel Rave and Chris Rock are department managers in the house wares and shoe departments, respectively, for Litwins, a large department store. Chris has observed Rachel taking inventory from her own department home, apparently without paying for it. He hesitates confronting Rachel because he is due to be promoted, and needs Rachel's recommendation. He also does not want to notify the company management directly, because he doesn't want an ethics investigation on his record, believing that it will give him a “goody-goody” image. This week, Rachel tried on several pairs of expensive running shoes in his department before finding a pair that suited her. She did not, however, buy them. That very pair was missing this morning.

Litwins recently replaced its old periodic inventory system with a perpetual inventory system using scanners and bar codes. In addition, the annual inventory is to be replaced by a monthly inventory conducted by an independent firm. On hearing the news of the changes, Chris relaxes. "The system will catch Rachel now," he says to himself.

Required:

1. Is Chris's attitude justified? Why or why not?

2. What, if any, action should Chris take now?

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Internal Controls

Solution 226

1. Chris's attitude is not justified. The system will only be able to detect that merchandise is missing, not to determine who took it.

2. Chris should notify his superiors at once. He has knowledge of what may be criminal acts, and by concealing them, he is very close to becoming a party to the acts. Chris's apparent fear of not being promotable because of a “goody-goody” image seems unjustified. It would seem more likely that Chris's refusal to accept unethical (and illegal) acts by others would make him a more valuable manager. He may even be jeopardizing his career with Litwins if someone else reports Rachel's actions. The resulting investigation may implicate Chris because of his failure to notify the proper authorities in a timely manner.

S-A E 227 (Communication)

Craig Ferguson, a new employee of Riggs Company, recorded $1,000 in consigned goods received as part of the firm's inventory. The goods were received one day after the end of the fiscal period, but Craig reasoned that the goods should be included in inventory sooner because Riggs paid the freight. The mistake was brought to his attention by the purchasing department who said the goods should not have been recorded as Riggs’s inventory at all. Craig told Sara Himes, the purchasing supervisor, that nobody needed to worry, because the mistake would cancel itself out the following month. In Craig's opinion, there was no reason to get everyone excited over nothing, especially since it was monthly, and not annual, financial statements that were affected. Sara Himes has reported the problem to the accounting department.

Required:

You are Craig's supervisor. Write a memo to Craig explaining why the error should have been corrected.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: FSA

Solution 227

M E M O

TO: Craig Ferguson, Accounting Department

FROM: Mary Farr, Supervisor

DATE: March 12, 2012

It has come to my attention that $1,000 in consigned goods were included in the inventory reported in our January financial statements. You were informed that this amount should be removed from inventory, which you did not do, apparently believing that February's entries would correct the error.

The error would have been corrected in February if it were only a matter of your recording inventory in the wrong month. January's inventory and expenses would have been overstated, and February's understated, but the net effect would have been zero. Since the $1,000 is a fairly large amount, however, that still would not have been appropriate.

The error you made, however, was to enter into inventory goods that the company did not own, and will not own. Consigned goods are owned by the consignors until purchased by customers. We only provide our shops for the consignors to sell their goods, and we collect a fee for doing so.

Please correct the error at once. We may need to notify some of the other departments of the error as well. Please arrange to meet with me in my office as soon as possible to discuss the matter.

(signature)

IFRS QUESTION

228. The requirements for accounting for and reporting of inventories under IFRS, compared to GAAP, tend to be more

a. detailed.

b. rules-based.

c. principles-based.

d. full of disclosure requirements.

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

229. The major IFRS requirements related to accounting for and reporting inventories are

a. the same as GAAP.

b. the same as GAAP with a couple of exceptions.

c. completely different fom GAAP.

d. not comparable to GAAP.

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

230. Inventory accounting under IFRS differs from GAAP in regard to

a. neither the use of LIFO nor lower-of-cost-or-market.

b. the use of LIFO but not lower-of-cost-or-market.

c. the use of lower-of-cost-or-market but not LIFO.

d. the use of LIFO and lower-of-cost-or-market.

Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

231. Under GAAP, companies can choose which inventory system?

LIFOFIFO

a. Yes No

b. Yes Yes

c. No Yes

d. Yes No

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

232. Under IFRS, companies can choose which inventory system?

LIFOFIFO

a. Yes No

b. Yes Yes

c. No Yes

d. No No

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

233. GAAP’s definition for inventory and provision of guidelines for inventory accounting, as compared to IFRS are:

Definitions for InventoryGuideliness for inventory accounting

a. essentially similar more detailed

b. essentially different more detailed

c. essentially similar less detailed

d. essentially different less detailed

Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

234. Inventories are defined by IFRS as

a. held-for-sale in the ordinary Assignment of business.

b. in the process of production for sale in the ordinary Assignment of business.

c. in the form of materials or supplies to be consumed in the production process or in the providing of services.

d. all of the above.

Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

235. Specific Identification can be used for inventory valuation under

GAAPIFRS

a. Yes No

b. Yes Yes

c. No No

d. No Yes

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

236. Specific Identification must be used for inventory valuation where the inventory items are not interchangeable under

GAAPIFRS

a. Yes No

b. Yes Yes

c. No No

d. No Yes

Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

237. GAAP’s provision for ownership of goods (goods-in-transit or consigned goods), as well as which costs to include in inventory, as compared to IFRS are:

Ownership of goodsCosts to include in inventory

a. essentially similar essentially similar

b. essentially different essentially different

c. essentially similar essentially different

d. essentially different essentially similar

Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

238. The only acceptable cost flow assumptions under IFRS are

a. FIFO and LIFO.

b. FIFO and average.

c. LIFO and average.

d. FIFO, LIFO and average.

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

239. LIFO can be used

a. under neither GAAP nor IFRS.

b. under IFRS but not GAAP.

c. under GAAP but not IFRS.

d. under both GAAP and IFRS.

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

240. The requirement that companies use the same cost flow assumption of all goods of a similar nature is found in

GAAPIFRS

a. Yes No

b. Yes Yes

c. No No

d. No Yes

Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

241. IFRS defines market for lower-of-cost-or market as

a. net realizable value.

b. estimated selling price in the ordinary Assignment of business.

c. replacement cost.

d. replacement cost less costs of disposal.

Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

242. GAAP defines market for lower-of-cost-or market essentially as

a. net realizable value.

b. estimated selling price in the ordinary Assignment of business.

c. replacement cost.

d. replacement cost less costs of disposal.

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

243. Inventory written down under lower-of-cost-or market may be written back up to original cost in a subsequent period under

GAAPIFRS

a. Yes No

b. Yes Yes

c. No No

d. No Yes

Ans: D, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

244. The option to value inventory at fair value exists under

GAAPIFRS

a. Yes No

b. Yes Yes

c. No No

d. No Yes

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

245. Certain agricultural and mineral products can be reported at net realizable value under

GAAPIFRS

a. Yes No

b. Yes Yes

c. No No

d. No Yes

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

246. The convergence issue that will be most difficult to resolve in the area of inventory accounting is:

a. FIFO.

b. LIFO.

c. ownership of goods.

d. costs to include in inventory.

Ans: B, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

247. With a new conceptual framework being developed, it is likely that which concept will be eliminated?

a. conservatism.

b. prudence.

c. conservatism and prudence.

d. neither conservatism nor prudence.

Ans: C, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods