2C - Inventory Flashcards
Delar Co. completed its year-end physical count of inventory. The inventory was valued at first-in, first-out (FIFO) costs and totaled $500,000. Delar subsequently noted the following two items:
1,000 units of inventory with a FIFO cost of $10 each were shipped and billed to a customer, FOB destination. These items were included in the physical count.
6,000 units at a FIFO cost of $5 each were held on consignment for one of its suppliers, but were excluded from the physical count.
What amount should Delar report as inventory at year-end?
$520,000
$530,000
$500,000
$490,000
$500,000
At the balance sheet date, goods in transit that were shipped FOB shipping point should be included in the inventory of the buyer; goods in transit shipped FOB destination should be included in the inventory of the seller.
Goods out on consignment should be included in the inventory of the consignor.
Goods in on consignment should not be included in the consignee’s ending inventory. Therefore, neither of the items listed requires an adjustment to the reported ending inventory balance; Delar’s ending inventory is just the $500,000
Mast Co. converted from the FIFO method for inventory valuation to the LIFO method for financial statement and tax purposes. During a period of inflation, would Mast’s ending inventory and income tax payable using LIFO be higher or lower than FIFO?
Ending inventory: Higher
Income tax payable: Lower
Ending inventory: Lower
Income tax payable: Lower
Ending inventory: Higher
Income tax payable: Higher
Ending inventory: Lower
Income tax payable: Higher
Ending inventory: Lower
Income tax payable: Lower
During a period of rising prices, the last inventory items added to inventory would be the most expensive and the items that began the period in inventory would be the least expensive.
LIFO (last in, first out) would result in the last inventory items added being recognized in cost of goods sold and the earliest, less expensive items remaining in inventory. FIFO (first in, last out) would result in the more recent, more expensive items remaining in inventory and the earliest, less expensive items being recognized in cost of goods sold.
Therefore, LIFO would result in higher cost of goods sold, lower income tax expense payable (because higher cost of goods sold would result in lower taxable income), and lower ending inventory.
The following information was obtained from Smith Co.:
Sales $275,000
Beginning inventory 30,000
Ending inventory 18,000
Smith’s gross margin is 20%. What amount represents Smith purchases?
$202,000
$232,000
$208,000
$220,000
$208,000
Cost of goods sold = Sales × (1 − Gross margin ratio)
$220,000 = $275,000 × 0.80
Cost of goods sold = Beginning inventory + Purchases − Ending inventory
$220,000 = $30,000 + Purchases − $18,000 Purchases = $208,000
Which of the following statements regarding inventory accounting systems is true?
A disadvantage of the perpetual inventory system is that the inventory dollar amounts used for interim reporting purposes are estimated amounts.
An advantage of the perpetual inventory system is that the record keeping required to maintain the system is relatively simple.
An advantage of the periodic inventory system is that it provides a continuous record of the inventory balance.
A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
The periodic inventory system calculates cost of goods sold as the difference between cost of goods available for sale and ending inventory. This system does not maintain records indicating what the amount of ending inventory should be. It simply requires a company to determine what the amount of ending inventory is at period end.
Therefore, there is no way to determine what portion of the items represented by the difference between cost of goods available for sale and cost of ending inventory was sold and what portion was stolen, broken and discarded, etc.
In short, this system assigns the entire difference to cost of goods sold because of the inability to determine what portion represents inventory shortages.
Which inventory costing method would a company that wishes to maximize profits in a period of rising prices use?
FIFO
Moving average
Dollar-value LIFO
Weighted average
Dollar-value LIFO
Under the FIFO method, the amounts expensed as cost of goods sold are the oldest purchases. In a period of rising prices, the oldest purchases are the smallest amounts. A smaller cost of goods sold results in a larger gross profit.
A company uses a periodic inventory system and has its cost of ending inventory understated by $4,000. Which of the following describes the effects of this error on the company’s current-year cost of goods sold and net income, respectively?
Cost of goods sold overstated; Net income overstated
Cost of goods sold understated; Net income overstated
Cost of goods sold understated; Net income understated
Cost of goods sold overstated; Net income understated
Cost of goods sold overstated; Net income understated
When goods are sold, the goods are removed from inventory and recognized as cost of goods sold (COGS). If inventory is understated by $4,000, it implies that $4,000 too much was removed from inventory and placed into COGS, overstating COGS. If COGS is overstated, it implies that expenses are overstated, and overstated expenses lead to understated (too low) net income.
Cobb, Inc.’s inventory at May 1 consisted of 200 units at a total cost of $1,250. Cobb uses the periodic inventory method. Purchases for the month were as follows:
Date No. of Units Unit Cost Total Cost
May 4 20 $5.80 $116.00
May 17 80 5.50 440.00
Cobb sold 10 units on May 14 for $120. What is Cobb’s weighted-average cost of goods sold for May?
$65.00
$62.10
$60.20
$62.50
$60.20
Computation of average cost per unit:
Total cost of goods available for sale
(beginning inventory + purchases) $1,806 ($1,250 + $116 + $440)
Divided by total units for sale 300 (200 + 20 + 80)
= Average cost per unit $6.02
Cost of goods sold = Average cost per unit × Units sold
Cost of goods sold = $6.02 × 10 units = $60.20
Ultra Co. uses a periodic inventory system. The following are inventory transactions for the month of January:
1/1 Beginning inventory 20,000 units at $13
1/20 Purchase 30,000 units at $15
1/23 Purchase 40,000 units at $17
1/31 Sales at $20 per unit 50,000 units
Ultra uses the LIFO method to determine the value of its inventory. What amount should Ultra report as cost of goods sold on its income statement for the month of January?
$750,000
$710,000
$1,000,000
$830,000
$830,000
Under a periodic system, units and costs are determined at the end of the period and are not constantly updated during the period. Periodic systems do not consider the timing of sales during the period. LIFO (last in, first out) cost of goods sold is determined as follows:
Sales of 50,000 units, recognizing the most recently added inventory to cost of goods sold:
40,000 at $17 = $680,000
10,000 at $15 = 150,000
Cost of goods sold $830,000
The lower of cost or market rule for inventories may be applied to total inventory, to groups of similar items, or to each item. Which application generally results in the lowest inventory amount?
Total inventory
Separately to each item
Groups of similar items
All applications result in the same amount.
Separately to each item
When applying the lower of cost or market inventory method, the lowest total inventory amount is obtained when the lower of cost or market determination is made on an item-by-item basis because the lower value for each item is selected.
Note that inventory measured using any method other than LIFO or the retail inventory method (e.g., FIFO or average cost) is measured at the lower of cost and net realizable value (NRV), which is defined to be the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. If the NRV of inventory is lower than its cost, the difference is recognized as a loss in earnings in the period in which it occurs
A material overstatement in ending inventory was discovered after the year-end financial statements of a company were issued to the public. What effect did this error have on the year-end financial statements?
Current assets were understated and gross profit was overstated.
Current assets were overstated and gross profit was understated.
Current assets and gross profit were both overstated.
Current assets and gross profit were both understated.
Current assets and gross profit were both overstated.
The overstatement of ending inventory (a current asset) results in an understatement of cost of goods sold.
The understatement of cost of goods sold results in an overstatement of gross profit.
Carver Co., a retailer, uses the perpetual inventory method. Carver uses the moving-average method to determine the value of its inventory. The following information relates to inventory transactions that took place during the month of March:
3/1 Beginning inventory 30,000 units at $10
3/5 Purchase 10,000 units at $12
3/10 Sales at $20 per unit 20,000 units
3/20 Purchase 20,000 units at $13
What amount should Carver report as cost of goods sold on its income statement at the end of March?
$240,000
$200,000
$210,000
$260,000
$210,000
Using the perpetual method of accounting under a moving-average assumption, cost of goods sold would be $210,000, calculated as follows:
Moving
Average Per-
Per-Unit Extended Unit
Date Description Units Amount Amount Amount
3/1 Beginning inventory 30,000 $10.00 $300,000
3/5 Purchase 10,000 12.00 120,000
NEW AVERAGE 40,000 420,000 $10.50*
3/10 Sale (COGS) 20,000 10.50 210,000
* ($300,000 + $120,000) ÷ (30,000 units + 10,000 units) = $420,000 ÷ 40,000 units = $10.50
Mare Co.’s December 31, 20X1, balance sheet reported the following current assets:
Cash $ 70,000
Accounts receivable 120,000
Inventories 60,000
Total $250,000
An analysis of the accounts disclosed that accounts receivable consisted of the following:
Trade accounts $ 96,000
Allowance for uncollectible accounts (2,000)
Selling price of Mare’s unsold goods
out on consignment at 130% of
cost, not included in Mare’s
ending inventory 26,000
Total $120,000
On December 31, 20X1, the total of Mare’s current assets is:
$270,000.
$230,000.
$224,000.
$244,000
$244,000.
Mare’s consigned goods should be carried at cost, not selling price. Goods out on consignment remain the property of the consignor and must be included on the consignor’s balance sheet at cost.
Thus:
Cost of consigned goods = Selling price / 1.30
= $26,000 / 1.30
= $20,000
This would reduce the accounts receivable balance by $26,000 to $94,000.
Current assets:
Cash $ 70,000 70,000
Accounts receivable 120,000 (26,000) 94,000
Inventories 60,000 20,000 80,000
Total current assets $250,000 (6,000) 244,000
Several cost flow assumptions are used for purposes of determining inventory cost. Among the most commonly used methods are the following:
a. First-in, first-out (FIFO)
b. Last-in, first-out (LIFO)
c. Average
d. Specific identification
Yep!
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, Yes; LIFO, Yes
FIFO, No; LIFO, No
FIFO, No; LIFO, Yes
FIFO, Yes; LIFO, No
FIFO, No; LIFO, Yes
Under the FIFO inventory method, the ending inventory would consist of the last units purchased under both the perpetual and periodic inventory systems. Under the LIFO inventory method, the periodic inventory system would include in ending inventory the earliest units (beginning inventory and early purchases).
Under LIFO, the perpetual inventory system would have expensed some of the beginning inventory and early purchases when sales were made early in the year.
Several cost flow assumptions are used for purposes of determining inventory cost. Among the most commonly used methods are the following — WHICH 2 ARE MISSING?
a. First-in, first-out (FIFO)
b. Last-in, first-out (LIFO)
c. ___
d. ____ ___
Average
Specific Identification
Ashe Co. recorded the following data pertaining to raw material X during January:
Units
Date Received Cost Issued On-Hand
1/01 Inventory $8.00 3,200
1/11 Issue 1,600 =1600
1/22 Purchase 4,800 9.60 =6400
The moving-average unit cost of X inventory at January 31 is:
$9.60.
$8.96.
$8.80.
$9.20.
$9.20.
Moving average is an average costing method of a perpetual inventory system. Thus, after every purchase, the average unit cost must be recomputed and carried forward.
At the end of the period, there are still 1,600 units of the items bought for $8.00 each, and also the newest purchase of 4,800 units at $9.60 each. The total units at the end of the month is thus 6,400 and their total cost is $58,880, computed as the total of 1,600 × $8.00 and 4,800 × $9.60.
The unit cost is the total cost of $58,880 divided by the total number of units: $58,880 ÷ 6,400 = $9.20.
The retail inventory method includes which of the following in the calculation of both cost and retail amounts of goods available for sale?
Purchase returns
Net markups
Freight in
Sales returns
Purchase returns
When applying the retail inventory method, one must compute the total cost and total retail amounts for goods available for sale. Some items are only included in one of these totals, sales returns and markups only go into the retail column, and freight in only goes into the cost column. Purchase returns are an adjustment to both columns
A firm’s ending inventory balance was overstated by $1,000. Which of the following statements is correct according to a periodic inventory system?
The cost of goods sold was overstated by $1,000.
The gross margin was understated by $1,000.
The retained earnings were overstated by $1,000.
The cost of goods available for sale was overstated by $1,000.
The retained earnings were overstated by $1,000.
To solve this question, try using the inventory formula:
Cost of goods sold (COGS) = Beginning inventory (BI) + Purchases (P) – Ending inventory (EI)
If EI is overstated, then COGS is understated.
This results in overstating net income (NI). Since NI closes into retained earnings (RE) at year-end, RE would also be overstated (by $1,000). Cost of goods available for sale (CGAS) is BI + P and would not be affected by the amount in EI.
The following information pertained to Azur Co. for the year:
Purchases $102,800
Purchase discounts 10,280
Freight-in 15,420
Freight-out 5,140
Beginning inventory 30,840
Ending inventory 20,560
What amount should Azur report as cost of goods sold for the year?
$118,220
$102,800
$128,500
$123,360
Comparison of FIFO and LIFO: If prices remain unchanged, FIFO and LIFO will yield DIFFERNET results. T/F In periods of RISING prices, (LIFO/FIFO) will result in smaller inventory costs and larger cost of goods sold than (LIFO/FIFO). In periods of LOWERING prices, (LIFO/FIFO) will result in smaller inventory costs and larger cost of goods sold than (LIFO/FIFO). Of the two methods, (LIFO/FIFO) comes closest to matching current costs against current revenues. However, (LIFO/FIFO) also results in inventory being stated in terms of the oldest costs.
False - they will yield SIMILAR results
LIFO ; FIFO
FIFO ; LIFO
LIFO ; LIFO
Southgate Co. paid the in-transit insurance premium for consignment goods shipped to Hendon Co., the consignee. In addition, Southgate advanced part of the commissions that will be due when Hendon sells the goods. Should Southgate include the in-transit insurance premium and the advanced commissions in inventory costs?
Southgate should include the advanced commissions but not the insurance premium.
Southgate should include both the insurance premium and the advanced commissions.
Southgate should include the insurance premium but not the advanced commissions.
Southgate should include neither the insurance premium nor the advanced commissions.
Southgate should include the insurance premium but not the advanced commissions.
The insurance premium is a part of the cost of getting the consigned goods to the sale location. It is a legitimate cost of inventory and should be treated as such.
The advanced commissions are simply a prepayment of future commission expense. It should be charged to prepaid commissions, and then to selling expense, not to inventory costs.
Consigned goods: Goods out on consignment should be included in the inventory of the (consignor/consignee).
The (consignor/consignee) should include none of these goods in its inventory.
Consignor
Consignee
Walt Co. adopted the dollar-value LIFO inventory method as of January 1, 20X1, when its inventory was valued at $500,000. Walt’s entire inventory constitutes a single pool. Using a relevant price index of 1.10,
Walt determined that its December 31, 20X1, inventory was $577,500 at current-year cost, and $525,000 at base-year cost. What was Walt’s dollar-value LIFO inventory on December 31, 20X1?
$527,500
$552,500
$525,000
$577,500
$527,500
Dollar-Value LIFO
The objective of the dollar-value LIFO method is to state inventory on a ___ cost basis.
The procedure is essentially one of measuring ___ layers in terms of dollar values rather than physical units.
Dollar-value LIFO requires the use of a ___ ___and the concept of a base year, the year in which dollar-value LIFO is adopted
LIFO
inventory
Price Index
