Chapter 6 Flashcards
- At year-end, Barr Company had shipped $12,500 of merchandise FOB destination to Lee Company. Which company should include the $12,500 of merchandise in transit as part of its year-end inventory?
- Parris Company has shipped $20,000 of goods to Harlow Company, and Harlow Company has arranged to sell the goods for Parris. Identify the consignor and the consignee. Which company should include any unsold goods as part of its inventory?
- Barr Company
The title will pass at “destination,” which is Lee Company’s receiving dock. Barr should show the $12,500 in its inventory at year-end as Barr retains title until the goods reach Lee Company.
- Parris Company has shipped $20,000 of goods to Harlow Company, and Harlow Company has arranged to sell the goods for Parris. Identify the consignor and the consignee. Which company should include any unsold goods as part of its inventory?
Identify the consignor. Parris Company
Identify the consignee. Harlow Company
Which company should include any unsold goods as part of its inventory? Parris Company
Walberg Associates, antique dealers, purchased goods for $38,200. Terms of the purchase were FOB shipping point, and the cost of transporting the goods to Walberg Associates’s warehouse was $1,550. Walberg Associates insured the shipment at a cost of $220. Prior to putting the goods up for sale, they cleaned and refurbished them at a cost of $560.
Determine the cost of inventory.
Price $38,200
Transportation-in 1,550
Insurance on shipment 220
Cleaning and refurbishing 560
Total cost of inventory $40,530
Damaged, obsolete (out-of-date), and/or deteriorated goods that can be sold:
a) Are never counted as inventory.
b) Are included in inventory at their full cost.
c) Are included in inventory at their net realizable value.
d) Should be disposed of immediately.
e) Are assigned a value of zero.
c) Are included in inventory at their net realizable value.
Goods in transit are included in a purchaser’s inventory:
a) At any time during transit.
b) When the goods are shipped FOB shipping point.
c) When the supplier is responsible for freight charges.
d) If the goods are shipped FOB destination.
e) After the half-way point between the buyer and seller.
b) When the goods are shipped FOB shipping point.
Regardless of the inventory costing system used, cost of goods available for sale must be allocated at the end of the period between:
a) beginning inventory and net purchases during the period.
b) ending inventory and beginning inventory.
c) net purchases during the period and ending inventory.
d) ending inventory and cost of goods sold.
e) beginning inventory and cost of goods sold.
d) ending inventory and cost of goods sold.
On December 31 of the current year, Plunkett Company reported an ending inventory balance of $215,000. The following additional information is also available:
Plunkett sold and shipped goods costing $38,000 to Savannah Enterprises on December 28 with shipping terms of FOB shipping point. The goods were not included in the ending inventory amount of $215,000.
Plunkett purchased goods costing $44,000 on December 29. The goods were shipped FOB destination and were received by Plunkett on January 2 of the following year. The shipment was a rush order that was supposed to arrive by December 31. These goods were included in the ending inventory balance of $215,000.
Plunkett’s ending inventory balance of $215,000 included $15,000 of goods being held on consignment from Carole Company. (Plunkett Company is the consignee.)
Plunkett’s ending inventory balance of $215,000 did not include goods costing $95,000 that were shipped to Plunkett on December 27 with shipping terms of FOB destination and were still in transit at year-end.
Based on the above information, the amount that Plunkett should report in ending inventory on December 31 is:
$156,000
Start with beginning inventory of $215,000. The information in the first bullet point was handled correctly. No adjustment is needed for that merchandise. For the second bullet point, the $44,000 of goods should not have been included in ending inventory since the goods were shipped FOB destination. Subtract $44,000. For the third bullet point, ending inventory should not include goods held on consignment from another company. Subtract $15,000. The information in the fourth bullet point was handled correctly. No adjustment is needed. $215,000 − $44,000 − $15,000 = $156,000.
Buffalo Company reported a December 31 ending inventory balance of $412,000. The following additional information is also available:
The ending inventory balance of $412,000 did not include goods costing $48,000 that were purchased by Buffalo on December 28 and shipped FOB destination on that date. Buffalo did not receive the goods until January 2 of the following year.
The ending inventory balance of $412,000 included damaged goods at their original cost of $38,000. The net realizable value of the damaged goods was $10,000.
Based on this information, the correct balance for ending inventory on December 31 is:
$384,000
Start with beginning inventory of $412,000. The information in the first bullet point was handled correctly since inventory should not include goods shipped FOB destination that have not yet been received by the buyer. With respect to the second bullet point, damaged goods should not be included in inventory at their original cost if the net realizable value is materially below cost. Subtract $28,000 ($38,000 − $10,000). Ending inventory should be $412,000 − $28,000 = $384,000.
Physical counts of inventory:
a) Are not necessary under the perpetual system.
b) Are used to adjust the Inventory account balance to the actual inventory available.
c) Must be taken at least once a month.
d) Requires the use of hand-held portable computers.
e) Are not necessary under the cost-to benefit constraint.
b) Are used to adjust the Inventory account balance to the actual inventory available.
When purchase costs regularly rise, the inventory costing method that yields the highest reported net income is:
a) Specific identification method.
b) Average cost method.
c) Weighted-average method.
d) FIFO method.
e) LIFO method.
d) FIFO method.
The inventory costing method that has the advantages of assigning an amount to inventory on the balance sheet that approximates its current cost, and also follows the actual flow of goods for most businesses is:
a) FIFO
b) Weighted average.
c) LIFO
d) Specific identification.
e) Lower of cost or market.
a) FIFO
The inventory costing method that results in the lowest taxable income in a period of rising costs is:
a) LIFO method
b) FIFO method
c) Weighted-average cost method.
d) Specific identification method.
e) Gross profit method.
a) LIFO method
The LIFO conformity rule:
a) Requires that when LIFO is used for tax reporting, it must also be used for financial reporting.
b) Requires a company to use one method of inventory valuation exclusively.
c) Requires that all companies in the same industry use the same accounting methods of inventory valuation.
d) Is also called the taxation principle.
e) Is only applicable to the automotive industry.
a) Requires that when LIFO is used for tax reporting, it must also be used for financial reporting.
The understatement of the ending inventory balance causes:
a) Cost of goods sold to be overstated and net income to be understated.
b) Cost of goods sold to be overstated and net income to be overstated.
c) Cost of goods sold to be understated and net income to be understated.
d) Cost of goods sold to be understated and net income to be overstated.
e) Cost of goods sold to be overstated and net income to be correct.
a) Cost of goods sold to be overstated and net income to be understated.
Ace Company reported the following information for the current year:
Sales $ 410,000
Cost of goods sold:
Beginning inventory $ 132,000
Cost of goods purchased 273,000
Cost of goods available for sale 405,000
Ending inventory 144,000
Cost of goods sold 261,000
Gross profit $ 149,000
The beginning inventory balance is correct. However, the ending inventory figure was overstated by $20,000. Given this information, the correct gross profit would be:
$129,000.
If ending inventory of $144,000 was overstated by $20,000, the correct amount of ending inventory was $124,000. As a result, cost of goods sold was not $261,000 as reported, but rather $281,000. Thus, gross profit was $129,000 (Sales of $410,000 − Cost of Goods Sold of $281,000).
An understatement of ending inventory will cause
a) An overstatement of assets and equity on the balance sheet.
b) An understatement of assets and equity on the balance sheet.
c) An overstatement of assets and an understatement of equity on the balance sheet.
d) An understatement of assets and an overstatement of equity on the balance sheet.
e) No effect on the balance sheet.
b) An understatement of assets and equity on the balance sheet.
Days’ sales in inventory:
a) Shows the buffer against out-of-stock inventory.
b) Focuses on average inventory rather than ending inventory.
c) Is used to measure solvency.
d) Is calculated by dividing cost of goods sold by ending inventory.
e) Is a substitute for the acid-test ratio.
a) Shows the buffer against out-of-stock inventory.
Giorgio had cost of goods sold of $9,101 million, ending inventory of $2,089 million, and average inventory of $1,900 million. Its inventory turnover equals:
4.79.
Inventory Turnover = Cost of Goods Sold/Average Inventory
Inventory Turnover = $9,101/$1,900 = 4.79 times
Beckenworth had cost of goods sold of $9,421 million, ending inventory of $2,089 million, and average inventory of $1,965 million. Its days’ sales in inventory equals:
Note: Use 365 days a year.
80.9 days.
Days’ Sales in Inventory = Ending Inventory/Cost of Goods Sold × 365
Days’ Sales in Inventory = $2,089/$9,421 × 365 = 80.9 days
