CPA Inventory Flashcards
On April 1, year 1, Pine Construction Company entered into a fixed-price contract to construct an apartment building for $6,000,000. Pine appropriately accounts for this contract under the percentage-of-completion method. Information relating to the contract is as follows:
At December 31, year 1 At December 31, year 2
Percentage of completion 20% 60%
Estimated costs at completion $4,500,000 $4,800,000
Income recognized (cumulative) $ 300,000 $ 720,000
What is the amount of contract costs incurred during the year ended December 31, year 2?
$1,200,000
$1,920,000
$1,980,000
$2,880,000
This answer is correct. Based on the information given, it must be assumed that costs incurred are used to measure the extent of progress toward project completion. At 12/31/Y1, the project is 20% complete and total estimated costs are $4,500,000. Therefore, costs incurred as of 12/31/Y1 are 20% of $4,500,000, or $900,000. At 12/31/Y2, the project is 60% complete and total estimated costs are $4,800,000. Therefore, costs incurred as of 12/31/Y2 are 60% of $4,800,000, or $2,880,000. The costs incurred during year 2 are $2,880,000 less $900,000, or $1,980,000.
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? $0 $250,000 $375,000 $625,000
This answer is correct. The shipping costs to export to customers are a selling expense and not included in inventory. Shipping costs or freight-in necessary to get the inventory in place to sell should be recorded in inventory. Seafood Trading should include a proportionate amount of the shipping costs of $1.5 million in ending inventory. The correct answer is that $375,000 in shipping costs [($3.0 million ÷ $12.0 million) × $1.5 million] should be included in the cost of ending inventory.
During periods of rising prices, 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 cost flow methods?
FIFO LIFO Yes No Yes Yes No No No Yes
his answer is correct. Under the FIFO method, ending inventory is the same whether a perpetual or periodic system is used. The inventory flow is always in chronological order, and ending inventory is made up of the latest (most recent) purchases. Under the LIFO method, ending inventory is made up of the first (oldest) purchases. When LIFO periodic is used, the first/last purchase determination is based upon the chronological order of all purchases. When LIFO perpetual is used, this determination is made continuously based on the inventory layers available. Therefore, LIFO periodic ending inventory is usually different from LIFO perpetual ending inventory.
A corporation entered into a purchase commitment to buy inventory. At the end of the accounting period, the current market value of the inventory was less than the fixed purchase price, by a material amount. Which of the following accounting treatments is most appropriate?
Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a liability for the accrued loss.
Describe the nature of the contract and the estimated amount of the loss in a note to the financial statements, but do not recognize a loss in the income statement.
Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a reduction in inventory equal to the amount of the loss by use of a valuation account.
Neither describe the purchase obligation, nor recognize a loss on the income statement or balance sheet.
Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a liability for the accrued loss.
This answer is correct. When a corporation enters into a noncancelable purchase commitment, and there is a decline in market value below the contract price, an unrealized loss should be recorded in the period of decline and reported in the income statement. The nature of the contract should also be disclosed in a note to the financial statements. Therefore, this is correct.
Wildwood Company’s usual sales terms are net 60 days, FOB shipping point. Sales, net of returns and allowances, totaled $2,000,000 for the year ended December 31, year 1, before year-end adjustment. Additional information is as follows:
* Goods with an invoice amount of $40,000 were billed to a customer on January 3, year 2. The goods were shipped on December 31, year 1.
* On January 5, year 2, a customer notified Wildwood that goods billed and shipped to it on December 21, year 1 were lost in transit. The invoice amount was $50,000.
* On December 27, year 1, Wildwood authorized a customer to return, for full credit, goods shipped and billed at $25,000 on December 15, year 1. The returned goods were received by Wildwood on January 4, year 2, and a $25,000 credit memo was issued on the same date.
Wildwood’s adjusted net sales for year 1 should be $1,965,000 $1,975,000 $1,990,000 $2,015,000
This answer is correct. Since sales terms are FOB shipping point, title passes to the buyer when the seller (Wildwood) delivers the goods to the common carrier. The goods shipped on 12/31/Y1 ($40,000) should be added to sales since the sale was not recorded until year 2. The goods lost in transit ($50,000) were correctly recorded as a sale in year 1. Because the terms were FOB shipping point, Wildwood has a valid receivable, and the buyer must proceed against the common carrier for recovery. The goods returned ($25,000) should be recorded as a return in year 1, when Wildwood authorized the return. Since the return was not recorded until year 2, year 1 net sales must be adjusted downward for the $25,000. Therefore, adjusted net sales are $2,015,000 ($2,000,000 + $40,000 − $25,000).
When should an indicated loss on a long-term contract be recognized under the completed-contract method and the percentage-of-completion method, respectively?
Completed-contract Percentage-of-completion
Immediately Immediately
Immediately Over the life of the project
Completion of contract Over the life of the project
Completion of contract Immediately
This answer is correct. ASC Topic 605 requires that expected losses should be recognized immediately under both methods.
Question 15:
INVY-0063
Need a hint?See Reference…
The following information pertains to Fox Co. for the calendar year 2:
Sales (all on credit) $2,000,000
Gross profit on sales 900,000
Net income 150,000
Purchases 1,000,000
Inventory at end of year 200,000
Accounts receivable at beginning of year 600,000
Accounts receivable at end of year 400,000
Stockholders’ equity at end of year:
Common stock outstanding (unchanged during year)—300,000 shares at par of $1 per share $300,000
Retained earnings 500,000 800,000
Dividends paid during the year totaled $0.25 per share. The market price per share of Fox’s stock was $5 at the end of the year. Fox’s inventory turnover for year 2 was
2 times.
2.2 times.
4.4 times.
5 times.
This answer is correct. The solutions approach is to recall the formula to compute inventory turnover.
Cost of goods sold
Average inventory
Although cost of goods sold is not given, it is equal to sales minus gross margin on sales ($2,000,000 − $900,000 = $1,100,000). Beginning inventory (not given) equals cost of goods sold plus ending inventory (given) minus purchases ($1,100,000 + $200,000 − $1,000,000 = $300,000). Average inventory is the sum of the beginning and ending inventory divided by 2 [($300,000 + $200,000) ÷ 2 = $250,000]. Finally, using the above formula, the inventory turnover is $1,100,000 ÷ $250,000 = 4.4 times.
A company used the percentage-of-completion method to account for a 4-year construction contract. Which of the following would be used in the calculation of the income recognized in the second year?
Income previously recognized Progress billings to date
No Yes
No No
Yes No
Yes Yes
This answer is correct because ASC Topic 605 suggests a cost-to-cost measure which is a method of recognizing income based on costs incurred. The formula used for the calculation is
Current year’s profit = Costs to date
Total expected cost × Expected profit − Profit recognized in previous periods
Based on this formula, only income previously recognized is required in the calculation. Progress billings to date is an accumulation of amounts billed, and the balance in the account does not normally coincide with the costs incurred to date.
Theoretically, cash discounts permitted on purchased raw materials should be
Added to other income, whether taken or not.
Added to other income, only if taken.
Deducted from inventory, whether taken or not.
Deducted from inventory, only if taken.
Deducted from inventory, whether taken or not
This answer is correct. There are two methods of accounting for cash discounts: the gross method and the net method. The gross method records purchases before any discounts, and records cash discounts only when taken. The net method records purchases net of cash discounts whether taken or not, and any discounts foregone are considered to be financing expenses. Theoretically, purchases and accounts payable should be shown net of cash discounts whether taken or not because this net method allows for a more correct reporting of the related asset and liability, and it allows for a measure of the inefficiency of financial management if the discount is not taken.
