Intro to Inventory Flashcards
On December 28, 2005, Kerr Manufacturing Co. purchased goods costing $50,000. The terms were FOB destination. Some of the costs incurred in connection with the sale and delivery of the goods were as follows:
Packaging for shipment $1,000 Shipping 1,500 Special handling charges 2,000 These goods were received on December 31, 2005. In Kerr's December 31, 2005 balance sheet, what amount of cost for these goods should be included in inventory?
A. $54,500 B. $53,500 C. $52,000 D. $50,000
D
Kerr will pay only $50,000 for the goods. None of the other costs listed are incurred by Kerr. Rather, the seller will incur those costs.
Even the shipping costs are borne by the seller because the terms are FOB destination. This means that title does not transfer to the buyer (Kerr) until the goods reach the destination. The seller owned the goods in transit and therefore incurred the transportation cost. Kerr’s recorded cost is $50,000
On October 20, 2005, Grimm Co. consigned 40 freezers to Holden Co. for sale at $1,000 each and paid $800 in transportation costs.
On December 30, 2005, Holden reported the sale of 10 freezers and remitted $8,500. The remittance was net of the agreed 15% commission.
What amount should Grimm recognize as consignment sales revenue for 2005?
A. $7,700 B. $8,500 C. $9,800 D. $10,000
D
Consignment sales revenue is the revenue recognized on consignment sales.
In this case, total consignment revenue is 10 x $1,000 = $10,000. The commission and transportation costs are expenses that reduce earnings on consignment revenues, but they do not affect total revenues to be recognized.
Herc Co.’s inventory on December 31, 2005 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, 2005, was received and recorded on January 5, 2006.
Goods in the shipping area were excluded from inventory although shipment was not made until January 4, 2006. The goods, billed to the customer FOB shipping point on December 30, 2005, had a cost of $120,000.
What amount should Herc report as inventory in its December 31, 2005, balance sheet?
A. $1,500,000 B. $1,590,000 C. $1,620,000 D. $1,710,000
D
The correct ending inventory balance is $1,710,000 ($1,500,000 + $90,000 + $120,000).
The $90,000 of merchandise is included because it was shipped before year-end and the title was transferred to Herc at the shipping point (before year-end). The $120,000 also is included because the goods have not been shipped. The FOB designation is irrelevant because the goods have not yet reached a common carrier.
During 2005, Kam Co. began offering its goods to selected retailers on a consignment basis. The following information was derived from Kam's 2005 accounting records: Beginning inventory $122,000 Purchases 540,000 Freight-in 10,000 Transportation to consignees 5,000 Freight-out 35,000 Ending inventory - held by Kam 145,000 - held by consignees 20,000 In its 2005 income statement, what amount should Kam report as the cost of goods sold?
A. $507,000 B. $512,000 C. $527,000 D. $547,00
B
Beg. inventory + Net purchases = End. inventory + Cost of goods sold
$122,000 + ($540,000 + $10,000 + $5,000) = ($145,000 + $20,000) + $512,000
The freight-in and transportation to consignees is added to net purchases because they are costs of placing the inventory into salable condition (the general rule for capitalizing costs to inventory). The goods on consignment are included in ending inventory because they are owned by Kam.
King Corp.’s trial balance for the year ended December 31, 2005, included the following:
Debit Credit Sales $300,000 Cost of sales $120,000 Administrative expenses 30,000 Loss on sale of equipment 18,000 Sales commissions 20,000 Interest revenue 10,000 Freight-out 6,000 Loss on early retirement of long-term debt 20,000 Bad debt expense 6,000 \_\_\_\_\_\_\_\_\_\_ $220,000 $310,000 ========= ========= Other information Finished goods inventory: January 1, 2005 $200,000 December 31, 2005 180,000 In King's 2005 multiple-step income statement, the cost of goods manufactured was
A. $100,000 B. $106,000 C. $140,000 D. $146,000
A
Finished goods manufactured \+ beginning inventory - ending inventory = cost of goods sold X + $200,000 - $180,000 = $120,000 X = $100,000 = cost of goods manufactured
The following items were included in Opal Co.’s inventory account on December 31, 2004:
Merchandise out on consignment, at sales price, including 40% markup on selling price
$40,000
Goods purchased, in transit, shipped FOB shipping point
36,000
Goods held on consignment by Opal
27,000
By what amount should Opal’s inventory account at December 31, 2004 be reduced?
A. $103,000 B. $67,000 C. $51,000 D. $43,000
D
The merchandise out on consignment is included in inventory at selling price. But inventory must be measured at cost. $40,000 = cost + .40($40,000). Thus, cost = $24,000. Therefore, inventory should be reduced by the $16,000 of markup on the merchandise out on consignment.
The goods held on consignment should be removed from the inventory because these goods do not belong to Opal.
Hence, the total reduction from inventory is $43,000 ($16,000 + $27,000). The goods in transit are properly included in inventory because they were shipped FOB shipping point, which means the goods belong to Opal when the goods reach the common carrier at the shipping point.
Jel Co., a consignee, paid the freight costs for goods shipped from Dale Co., a consignor. These freight costs are to be deducted from Jel’s payment to Dale when the consignment goods are sold. Until Jel sells the goods, the freight costs should be included in Jel’s
A. Cost of goods sold. B. Freight-out costs. C. Selling expenses. D. Accounts receivable.
Jel will recover the freight costs when Jel deducts the costs from the amount it submits to Dale. Until that happens, the amount spent on freight is recorded in a receivable.
When Jel submits its payment for the sale of Dale’s goods (also less a commission), the receivable is credited; thus reducing the amount of cash that must be paid to Dale. Therefore, the freight costs are borne by Dale. Jel simply paid the costs for Dale and will be reimbursed later. This is not a cost or expense of Jel.
The following information was derived from the 2005 accounting records of Clem Co.: Clem's central warehouse Clem's goods held by consignees Beginning inventory $110,000 $12,000 Purchases 480,000 60,000 Freight-in 10,000 Transportation to consignees 5,000 Freight-out 30,000 8,000 Ending inventory 145,000 20,000
Clem's 2005 cost of sales was A. $455,000 B. $485,000 C. $507,000 D. $512,000
D
The goods on consignment are included in Clem’s inventory and therefore are included in the computation of Clem’s cost of goods sold.
The only costs not included in the computation are the two freight-out costs. Freight-out is a distribution expense. This cost does not contribute to the process of placing the goods into salable condition.
Only costs that assist in placing goods into salable condition are inventoried. Because this cost is required to place those items on consignment, freight-in is an inventoriable cost, as is transportation to consignees.
Beginning inventory $110,000 + $12,000 = $122,000
Plus purchases $480,000 + $60,000 = 540,000
Plus freight-in $10,000 = 10,000
Plus trans. in to consignees $5,000 = 5,000
Less ending inventory $145,000 + $20,000 = (165,000)
Equals cost of goods sold $512,000
Stone Co. had the following consignment transactions during December 2005:
Inventory shipped on consignment to Beta Co.
$18,000
Freight paid by Stone
900
Inventory received on consignment from Alpha Co.
12,000
Freight paid by Alpha
500
No sales of consigned goods were made through December 31, 2005. Stone’s December 31, 2005, balance sheet should include consigned inventory at
A. $12,000
B. $12,500
C. $18,000
D. $18,900
D
The $18,900 amount to be included in consigned inventory (this would be included in Stone’s ending inventory) = $18,000 + $900 freight.
This inventory is owned by Stone. The freight is included because it is a cost necessary to bring the inventory into salable condition and location. The inventory Stone received on consignment is not an asset of Stone’s and is not included in Stone’s inventory. Stone is helping to sell Alpha’s inventory, just as Beta is helping to sell Stone’s inventory.
The following information applied to Fenn, Inc. for 2005: Merchandise purchased for resale $400,000 Freight-in 10,000 Freight-out 5,000 Purchase returns 2,000 Fenn's 2005 inventoriable cost was A. $400,000 B. $403,000 C. $408,000 D. $413,000
C
Merchandise purchased for resale $400,000
Freight-in 10,000
Purchase returns (2,000)
Total inventoriable cost $408,000
Freight-out is a delivery expense. It is not inventoried because the goods have reached salable condition before incurring this cost. Only costs that contribute to preparing inventory for sale are inventoried.
Garson Co. recorded goods in transit purchased FOB shipping point at year-end as purchases. The goods were excluded from the ending inventory. What effect does the omission have on Garson’s assets and retained earnings at year end?
Assets Retained earnings No effect Overstated No effect Understated Understated No effect Understated Understated
Understated Understated
Both responses in this choice are correct. FOB shipping point means that the title passed to the buyer at the selling company’s warehouse. Therefore, Garson should have included this inventory in the ending inventory. This leaves inventory (assets) understated. This error also has overstated the cost of goods sold, which understates net income and retained earnings.
How should the following costs affect a retailer’s inventory?
Freight-in Interest on inventory loan
Increase No effect
Increase Increase
No effect Increase
No effect No effect
Increase No Effect
All costs necessary to prepare inventory for sale are capitalized to inventory. Freight-in is such a cost. The goods must be shipped to the seller’s location before they can be sold. Interest on inventory loans is a financing cost. It does not contribute to the process of making the inventory ready for sale.
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?
A. $0 B. $ 6,000 C. $6,500 D. $20,000
B
Nomar includes in its inventory account items of inventory it owns, regardless of its location. Nomar’s inventory on consignment at Seabright continues to be owned by Nomar and is included in Nomar’s inventory at cost. 70% of the inventory shipped has been sold.
Therefore, only 30%, or $6,000 (.30 x $20,000), remains in ending inventory. The commission and advertising costs are not inventory costs and are not included in inventory
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?
Ins Prem Adv commissions Yes Yes No No Yes No No Yes
Yes No
The insurance in transit is included in inventory because it is a cost necessary to bring the inventory into a salable condition. This is the criterion for capitalizing inventory costs.
The advance commissions are not inventoriable. They are not incurred to bring the inventory to a salable condition but rather are selling expenses. The costs will be recognized as such when the goods are sold. At that time, the commission is earned by the consignee and is an expense to the consignor. The commissions are never inventoried.
What is the appropriate treatment for goods held on consignment?
A. The goods should be included in the ending inventory of the consignor.
B. The goods should be included in ending inventory of the consignee.
C. The goods should be included in cost of goods sold of the consignee only when sold.
D. The goods should be included in cost of goods sold of the consignor when transferred to the consignee.
A
Consigned goods belong to the consignor and are included in the consignor’s ending inventory.
