FAR 7.01 - COST OF INVENTORY Flashcards
FAR 7.01 - COST OF INVENTORY
Nomar Co.shipped inventory on consignment to Seabright Co. that cost $20,000. Seabright paid $500 for
advertising that was reimbursable from Nomar. At the end of the year, 70% of the inventory was sold for $30,000. The agreement states that a commission of 20% will be provided to Seabright for all sales. What amount of net inventory on consignment remains on the balance sheet for the first year for Nomar?
$6,000
$0
$20,000
$6,500
$6,000
EXPLANATION:
Thirty percent of the inventory remains at the end of the year, and will be reported on the consignor’s balance sheet (20,000 X 30% = 6,000).
The advertising and sales expenses are reported separately.
Advertising costs incurred by the consignor are normally included in inventory, but not advertising costs incurred by the consignee.
FAR 7.01 - COST OF INVENTORY
Fall Co. paid $500 in freight-out charges to ship $25,000 of inventory on consignment to Rodgers Co. Rodgers
printed and mailed customer promotions for the merchandise at a cost of $250, reimbursable from Fall. At the end of the year, 80% of the inventory was sold for $40,000. The agreement states that commission of 25% will be provided to Rodgers for all sales. What amount of net inventory on consignment remains on the balance sheet at the end of the year for Fall?
$5,100
$5,250
$5,000
$7,500
$5,100
EXPLANATION:
When inventory is shipped to a consignee, the consignor recognizes the cost of the inventory, $25,000, and the cost of
shipping it to the consignee, $500, as consignment inventory on the consignor’s balance sheet.
The cost of marketing brochures and commissions are recognized as expense and do not affect inventory. If 80% of the inventory was sold, 20% remains, which will have a carrying value of $25,500 x 20% or $5,100.
FAR 7.01 - COST OF INVENTORY
Willett Co. had the following amounts related to the sale of consignment inventory:
Cost of merchandise shipped to consignee - $100,000
Sales revenue for 3/4 of inventory sold by consignee- $125,000
Freight cost for merchandise shipped - $10,000
Advertising paid for by consignee, to be reimbursed - $5,000
10% commission due the consignee for the sale -$12,500
What amount should Willett report as net profit (loss) from this transaction for the year?
$23,750
$25,000
$22,500
$26,250
$22,500
EXPLANATION:
cost of sales will consist of ¾ of the $100,000 cost of the merchandise, or $75,000, and ¾ of the $10,000 in freight, or $7,500, for a total of $82,500.
The gross margin is $125,000 - $82,500, or $42,500. This is reduced by advertising $5,000 and commissions of $12,500, both of which are recognized immediately as expense.
The net profit will be $42,500 - $17,500 or
$25,000.
FAR 7.01 - COST OF INVENTORY
Choose the statement(s) regarding inventory that are true:
I. For a merchandising company, the cost of goods available for sale minus the cost of goods sold will equal ending inventory.
II. The LIFO inventory cost ow
assumption is preferable to FIFO for a company wishing to maximize prots
during a period of declining costs.
III. A company which ships finished
goods FOB destination will keep the inventory in its accounting records up
until the point that the goods are delivered to a common carrier acting as an agent for the buyer.
I, II, and III.
II and III only.
I and III only.
I and II only.
I and II only.
EXPLANATION:
Cost of goods sold is calculated by adding beginning inventory to purchases to provide cost of goods available for sale, which is then reduced by ending inventory.
As a result, cost of goods available for sale minus cost of goods sold will also equal ending inventory.
Since LIFO charges the most recent purchases against sales, LIFO will result in the highest prices in periods of falling prices since the recent lower prices will be charged to cost of sales instead of the earlier higher amounts.
When goods are shipped FOB destination, title and risk of loss remain with the seller until the common carrier reaches the customer, at which time the sale is generally recognized and the goods are removed from inventory and transferred to cost of goods sold.
FAR 7.01 - COST OF INVENTORY
Herc Co’s inventory at December 31, 20X2 was $1,500,000 based on a physical count priced at cost, and before
any necessary adjustment for the following:
- Merchandise costing $90,000 shipped FOB shipping point from a vendor on December 30, 20X2 was received and recorded on January 5, 20X3.
- Goods in the shipping area were excluded from inventory although shipment was not made until January
3, 20X3.
-The goods, billed to the customer FOB shipping point on December 30, 20X2, had a cost of $120,000.
What amount should Herc report as Inventory in its December 31, 20X2 balance sheet?
$1,590,000
$1,620,000
$1,500,000
$1,710,000
$1,710,000
EXPLANATION:
The merchandise in transit to Herc should be included in inventory since it was shipped FOB shipping point and therefore it belonged to Herc as soon as it was delivered to the common carrier.
The merchandise in the shipping area that was excluded needs to be included since it had not been delivered to a common carrier as of the end of the period.
As a result, inventory would be ($1,500,000 + $90,000 + $120,000), or $1,710,000.
