10-29 Inventory Flashcards
The following information applied to Fenn, Inc. for 2005:
Merchandise purchased for resale $400,000
Freight-in 10,000
Freight-out 5,000
Purchase returns 2,000
Fenn’s 2005 inventoriable cost was
$408,000
Merchandise purchased for resale $400,000
Freight-in 10,000
Purchase returns (2,000)
Total inventoriable cost $408,000
Freight-out is a delivery expense. It is not inventoried because the goods have reached salable condition before incurring this cost. Only costs that contribute to preparing inventory for sale are inventoried.
The following items were included in Opal Co.’s inventory account on December 31, 2004:
Merchandise out on consignment, at sales price, including 40% markup on selling price $40,000
Goods purchased, in transit, shipped FOB shipping point 36,000
Goods held on consignment by Opal 27,000
By what amount should Opal’s inventory account at December 31, 2004 be reduced?
43,000
The merchandise out on consignment is included in inventory at selling price. But inventory must be measured at cost. $40,000 = cost + .40($40,000). Thus, cost = $24,000. Therefore, inventory should be reduced by the $16,000 of markup on the merchandise out on consignment.
The goods held on consignment should be removed from the inventory because these goods do not belong to Opal.
Hence, the total reduction from inventory is $43,000 ($16,000 + $27,000). The goods in transit are properly included in inventory because they were shipped FOB shipping point, which means the goods belong to Opal when the goods reach the common carrier at the shipping point.
Garson Co. recorded goods in transit purchased FOB shipping point at year-end as purchases. The goods were excluded from the ending inventory. What effect does the omission have on Garson’s assets and retained earnings at year end?
Assets Retained earnings
No effect Overstated
No effect Understated
Understated No effect
Understated Understated
Assets Retained earnings
Understated Understated
Both responses in this choice are correct. FOB shipping point means that the title passed to the buyer at the selling company’s warehouse. Therefore, Garson should have included this inventory in the ending inventory. This leaves inventory (assets) understated. This error also has overstated the cost of goods sold, which understates net income and retained earnings.
Stone Co. had the following consignment transactions during December 2005:
Inventory shipped on consignment to Beta Co. $18,000
Freight paid by Stone 900
Inventory received on consignment from Alpha Co. 12,000
Freight paid by Alpha 500
No sales of consigned goods were made through December 31, 2005. Stone’s December 31, 2005, balance sheet should include consigned inventory at
18,900
The $18,900 amount to be included in consigned inventory (this would be included in Stone’s ending inventory) = $18,000 + $900 freight.
This inventory is owned by Stone. The freight is included because it is a cost necessary to bring the inventory into salable condition and location. The inventory Stone received on consignment is not an asset of Stone’s and is not included in Stone’s inventory. Stone is helping to sell Alpha’s inventory, just as Beta is helping to sell Stone’s inventory.
West Retailers purchased merchandise with a list price of $20,000, subject to trade discounts of 20% and 10%, with no cash discounts allowable.
West should record the cost of this merchandise as
14,400
This is a chain discount and the correct recorded cost is $20,000(1 - .20)(1- .10) = $14,400. Each successive discount in a chain discount is applied to the previous net amount.
Seafood Trading Co. commenced operations during the year as a large importer and exporter of seafood. The imports were all from one country overseas. The export sales were conducted as drop shipments and were merely transshipped at Seattle. Seafood Trading reported the following data:
Purchases during the year $12.0 million
Shipping costs from overseas 1.5 million
Shipping costs to export customers 1.0 million
Inventory at year end 3.0 million
What amount of shipping costs should be included in Seafood Trading’s year-end inventory valuation?
3750,000
Only transportation-in is treated as a product cost and included in inventory. This cost is considered a cost necessary to bring the inventory to a salable condition. $1.5 million was incurred for this cost - the cost to import. Inventory represents
$3/$12 or 25% of total purchases.
Therefore, 25% of $1.5 million, or $375,000, of transportation-in is included in inventory. Shipping costs to customers are treated as a period cost.
On December 28, 2005, Kerr Manufacturing Co. purchased goods costing $50,000. The terms were FOB destination. Some of the costs incurred in connection with the sale and delivery of the goods were as follows:
Packaging for shipment $1,000
Shipping 1,500
Special handling charges 2,000
These goods were received on December 31, 2005. In Kerr’s December 31, 2005 balance sheet, what amount of cost for these goods should be included in inventory?
50,000
Kerr will pay only $50,000 for the goods. None of the other costs listed are incurred by Kerr. Rather, the seller will incur those costs.
Even the shipping costs are borne by the seller because the terms are FOB destination. This means that title does not transfer to the buyer (Kerr) until the goods reach the destination. The seller owned the goods in transit and therefore incurred the transportation cost. Kerr’s recorded cost is $50,000.
The following information was taken from Cody Co.’s accounting records for the year ended December 31, 2005:
Decrease in raw materials inv. $ 15,000
Increase in finished goods inv. 35,000
Raw materials purchased 430,000
Direct labor payroll 200,000
Factory overhead 300,000
Freight-out 45,000
There was no work-in-process inventory at the beginning or end of the year. Cody’s 2005 cost of goods sold is
The correct answer is $910,000:
Raw materials purchased $430,000
+ decrease in raw materials 15,000*
Direct labor 200,000
Factory overhead 300,000
Less finished goods increase (35,000) *
Cost of goods sold $910,000
*The decrease in raw materials is added to the amount purchased resulting in the cost of materials incorporated into production. $15,000 of materials purchased in 2005 were placed into production in 2005. The total cost of materials brought into production in 2005 equals $445,000.
** The increase in finished goods represents costs incurred in the current period to finish inventory that was not sold in the current period. Therefore, these costs must be removed in determining cost of goods sold.
Freight-out is not a manufacturing cost but rather is a distribution cost.
Therefore, freight-out is not inventoried.
There is no change in work-in-process inventory to affect the calculation.
During periods of inflation, a perpetual inventory system would result in the same dollar amount of ending inventory as a periodic inventory system under which of the following inventory valuation methods?
FIFO LIFO
Yes No
Yes Yes
No Yes
No No
FIFO LIFO
Yes No
Drew Co. uses the average cost inventory method for internal reporting purposes and LIFO for financial statement and income tax reporting.
On December 31, 2005, the inventory was $375,000 using average cost and $320,000 using LIFO. The unadjusted credit balance in the LIFO Reserve account on December 31, 2005 was $35,000.
What adjusting entry should Drew record to adjust from average cost to LIFO on December 31, 2005?
Debit Credit
COGS $55,000 Inventory $55,000
COGS $55,000 LIFO reserve $55,000
COGS $20,000 Inventory $20,000
COGS $20,000 LIFO reserve $20,000
COGS $20,000 LIFO reserve $20,000
The ending difference between average cost and LIFO is $55,000 ($375,000 - $320,000). This is the required LIFO reserve account.
The balance before adjustment is $35,000. Thus, $20,000 must be added to the account. The conversion to LIFO, for reporting purposes, increases cost of goods sold because, under LIFO, ending inventory is lower. The entry in this answer alternative increases the cost of goods sold. The inventory account itself is not credited. Rather, the LIFO reserve account acts as a valuation account to reduce inventory to LIFO for balance sheet purposes.
Which inventory costing method would a company that wishes to maximize profits in a period of rising prices use?
A. FIFO
B. Dollar-value LIFO.
C. Weighted average.
D. Moving average.
A. FIFO
FIFO assumes the sale of the earliest goods first. With rising prices, the earliest goods reflect the lowest prices. Therefore, cost of goods sold under FIFO is the lowest of the cost flow assumptions. With the lowest cost of goods sold, gross margin and income are the highest among the available cost flow assumptions (LIFO and average being the others).
A company decided to change its inventory valuation method from FIFO to LIFO in a period of rising prices. What was the result of the change on ending inventory and net income in the year of the change?
Ending inventory Net income
Increase Increase
Increase Decrease
Decrease Decrease
Decrease Increase
Ending inventory Net income
Decrease Decrease
Ending inventory would decrease because under LIFO, the latest items purchased (and therefore the most costly) are considered sold, leaving the earliest items purchased (and therefore the least costly) in inventory. This is opposite to the effect under FIFO.
The same is true for net income because now, under LIFO, cost of goods sold is increased relative to FIFO because the cost of the latest and most costly items are considered sold first.
When the FIFO inventory method is used during periods of rising prices, a perpetual inventory system results in an ending inventory cost that is
A. The same as in a periodic inventory system.
B. Higher than in a periodic inventory system.
C. Lower than in a periodic inventory system.
D. Higher or lower than in a periodic inventory system, depending on whether physical quantities have increased or decreased.
A. The same as in a periodic inventory system.
FIFO produces the same results for periodic and perpetual systems. FIFO always assumes the sale of the earliest goods acquired. Therefore, unlike LIFO periodic, goods can never be assumed sold before they are acquired.
Cost of goods sold and ending inventory are the same under FIFO for both a periodic and a perpetual system.
The original cost of an inventory item is below both replacement cost and net realizable value. The net realizable value less normal profit margin is below the original cost.
Under the lower of cost or market method, the inventory item should be valued at
A. Replacement cost.
B. Net realizable value.
C. Net realizable value less normal profit margin.
D. Original cost.
D. Original cost.
when solving put in fake numbers
NRV aka ceiling =
selling - cost to complete $15
RC = $20
Orig Cost $10
Floor = NRV-Normal profit $5
The replacement cost of an inventory item is below the net realizable value and above the net realizable value less the normal profit margin. The original cost of the inventory item is below the net realizable value less the normal profit margin.
Under the lower of cost or market method, the inventory item should be valued at
A. Net realizable value.
B. Net realizable value less the normal profit margin.
C. Original cost.
D. Replacement cost.
C. Original cost.
In LCM, market value is replacement cost if replacement cost is between the ceiling value (net realizable value) and the floor value (net realizable value less normal profit margin).
This is the situation in this question. The original cost is below the floor value. Thus, market exceeds cost and the item is recorded at cost (lower of cost or market).
