Chapter 6: Inventories Flashcards
Which of the following should not be included in the physical inventory of a company?
(a) Goods held on consignment from another
company.
(b) Goods shipped on consignment to another
company.
(c) Goods in transit from another company shipped
FOB shipping point.
(d) None of the above.
(a) Goods held on consignment should not be included because another company has title (ownership) to the goods.
As a result of a thorough physical inventory, Railway Company determined that it had inventory worth $180,000 at December 31, 2017. This count did not take into consideration the following facts: Rogers Consignment store currently has goods worth $35,000
on its sales floor that belong to Railway but are being
sold on consignment by Rogers. The selling price of
these goods is $50,000. Railway purchased $13,000 of goods that were shipped on December 27, FOB destination, that will be received by Railway on January 3. Determine the correct amount of inventory that Railway should report.
(a) $230,000.
(b) $215,000.
(c) $228,000.
(d) $193,000.
(b) The inventory held on consignment by Rogers should be included in Railway’s inventory balance at cost ($35,000). The purchased goods of $13,000 should not be included in inventory until January 3 because the goods are shipped FOB destina- tion. Therefore, the correct amount of inventory is $215,000 ($180,000 + $35,000)
Cost of goods available for sale consists of two elements: beginning inventory and
(a) ending inventory.
(b) cost of goods purchased.
(c) cost of goods sold.
(d) All of the answer choices are correct.
(b) Cost of goods available for sale consists of beginning inventory and cost of goods purchased.
In periods of rising prices, LIFO will produce:
(a) higher net income than FIFO.
(b) the same net income as FIFO.
(c) lower net income than FIFO.
(d) higher net income than average-cost.
(c) In periods of rising prices, LIFO will produce lower net income than FIFO.
Factors that affect the selection of an inventory costing method do NOT include:
(a) tax effects.
(b) balance sheet effects.
(c) income statement effects.
(d) perpetual vs. periodic inventory system.
(d) Perpetual vs. periodic inventory system is not one of the factors that affect the selection of an inventory costing method.
Falk Company’s ending inventory is understated $4,000. The effects of this error on the current year’s cost of goods sold and net income, respectively, are:
(a) understated, overstated.
(b) overstated, understated.
(c) overstated, overstated.
(d) understated, understated.
(b) Because ending inventory is too low, cost of goods sold will be too high (overstated) and since cost of goods sold (an expense) is too high, net income will be too low (understated).
Pauline Company overstated its inventory by $15,000 at December 31, 2016. It did not correct the error in 2016 or 2017. As a result, Pauline’s owner’s equity was:
(a) overstated at December 31, 2016, and understated
at December 31, 2017.
(b) overstated at December 31, 2016, and properly
stated at December 31, 2017.
(c) understated at December 31, 2016, and under-
stated at December 31, 2017.
(d) overstated at December 31, 2016, and overstated
at December 31, 2017.
(b) Owner’s equity is overstated by $15,000 at December 31, 2016, and is properly stated at December 31, 2017. An ending inventory error in one period will have an equal and opposite effect on cost of goods sold and net income in the next period; after two years, the errors have offset each other.
Norton Company purchased 1,000 widgets and has
200 widgets in its ending inventory at a cost of $91 each and a current replacement cost of $80 each. The ending inventory under lower-of-cost-or-market is:
(a) $91,000.
(b) $80,000.
(c) $18,200.
(d) $16,000.
(d) Under the LCM basis, “market” is defined as the current replacement cost. Therefore, ending inventory would be valued at 200 widgets * $80 each = $16,000
Santana Company had beginning inventory of $80,000, ending inventory of $110,000, cost of goods sold of $285,000, and sales of $475,000. Santana’s days in inventory is:
(a) 73 days.
(b) 121.7 days.
(c) 102.5 days.
(d) 84.5 days.
(b) Santana’s days in inventory = 365 / Inventory turnover = 365 / [$285,000 / ($80,000 + $110,000 ) /2)] = 121.7 days.
Which of these would cause the inventory turnover to increase the most?
(a) Increasing the amount of inventory on hand.
(b) Keeping the amount of inventory on hand con-
stant but increasing sales.
(c) Keeping the amount of inventory on hand con-
stant but decreasing sales.
(d) Decreasing the amount of inventory on hand and
increasing sales.
(d) Decreasing the amount of inventory on hand will cause the denominator to decrease, causing inventory turnover to increase. Increasing sales will cause the numerator of the ratio to increase (higher sales means higher COGS), thus causing inventory turn- over to increase even more.
In a perpetual inventory system:
(a) LIFO cost of goods sold will be the same as in a periodic inventory system.
(b) average costs are a simple average of unit costs incurred.
(c) a new average is computed under the average-cost method after each sale.
(d) FIFO cost of goods sold will be the same as in a periodic inventory system.
(d) FIFO cost of goods sold is the same under both a periodic and a perpetual inventory system.
King Company has sales of $150,000 and cost of goods available for sale of $135,000. If the gross profit
rate is 30%, the estimated cost of the ending inven-
tory under the gross profit method is:
(a) $15,000.
(b) $30,000.
(c) $45,000.
(d) $75,000.
(b) COGS = Sales ($150,000) - Gross profit ($150,000 * 30%) = $105,000. Ending inventory = Cost of goods available for sale ($135,000) - COGS ($105,000) = $30,000
