Inventory COPY Flashcards
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?
- $507,000
- $512,000
- $527,000
- $547,000
$512,000
_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.
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?
- $7,700
- $8,500
- $9,800
- $10,000
$10,000
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.
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?
- $103,000
- $67,000
- $51,000
- $43,000
$43,000
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
- Cost of goods sold.
- Freight-out costs.
- Selling expenses.
- Accounts receivable.
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.
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?
- Insurance premium
- Advanced commissions
- Insurance premium - YES
- Advanced commissions - 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.
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
- $12,000
- $12,500
- $18,000
- $18,900
$18,900
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.
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?
- $0
- $6,000
- $6,500
- $20,000
$6,000
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.
What is the appropriate treatment for goods held on consignment?
- The goods should be included in the ending inventory of the consignor.
- The goods should be included in ending inventory of the consignee.
- The goods should be included in cost of goods sold of the consignee only when sold.
- The goods should be included in cost of goods sold of the consignor when transferred to the consignee.
The goods should be included in the ending inventory of the consignor.
Consigned goods belong to the consignor and are included in the consignor’s ending inventory.
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?
Understated / No Effect / Overstated?
- Assets
- Retained earnings
- Assets - Understated
- Retained earnings - 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.
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?
- $54,500
- $53,500
- $52,000
- $50,000
$50,000
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.
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
- $400,000
- $403,000
- $408,000
- $413,000
$408,000
Merchandise purchased for resale $400,000
PLUS Freight-in $10,000
SUBTRACT Purchase returns ($2,000)
= Total inventoriable cost $408,000
West Retailers purchased merchandise with a list price of $20,000, subject to trade discounts of 20% and 10%, with no cash discounts allowable.
West should record the cost of this merchandise as
- $14,000
- $14,400
- $15,600
- $20,000
$14,400
This is a chain discount and the correct recorded cost is $20,000(1 - .20)(1- .10) = $14,400. Each successive discount in a chain discount is applied to the previous net amount.
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 $12.0M
- Shipping costs from overseas $1.5M
- Shipping costs to export customers $1.0M
- Inventory at year end $3.0M
What amount of shipping costs should be included in Seafood Trading’s year-end inventory valuation?
- $0
- $250,000
- $375,000
- $625,000
$375,000
Only transportation-in is treated as a product cost and included in inventory. This cost is considered a cost necessary to bring the inventory to a salable condition. $1.5 million was incurred for this cost - the cost to import. Inventory represents $3/$12 or 25% of total purchases. Therefore, 25% of $1.5 million, or $375,000, of transportation-in is included in inventory. Shipping costs to customers are treated as a period cost.
The following information pertains to Deal Corp.’s 2004 cost of goods sold:
- Inventory, 12/31/03 $90,000
- 2004 purchases $124,000
- 2004 write-off of obsolete inventory $34,000
- Inventory, 12/31/04 $30,000
The inventory written off became obsolete due to an unexpected and unusual technological advance by a competitor. In its 2004 income statement, what amount should Deal report as cost of goods sold?
- $218,000
- $184,000
- $150,000
- $124,000
- $150,000
- Beginning inventory $90,000
- Plus purchases $124,000
- Less write-off ($34,000)
- Less ending inventory ($30,000)
- Equals cost of goods sold $150,000
The following information pertained to Azur Co. for the year:
- Purchases $102,800
- Purchase discounts $10,280
- Freight-in $15,420
- Freight-out $5,140
- Beginning inventory $30,840
- Ending inventory $20,560
What amount should Azur report as cost of goods sold for the year?
- $102,800
- $118,220
- $123,360
- $128,500
$118,220
Cost of goods sold is determined (in a periodic inventory system) as:
Beginning Inventory
+ Net Purchases
= Goods Available for Sale
- Ending Inventory
= Cost of Goods Sold
Net Purchases includes any purchase discounts (or allowances) and other cost of getting the goods in place and condition for resale, including freight-in. Freight-out (to customers) is a selling cost. Therefore, Azur Co.’s cost of goods sold would be:
- Beginning Inventory $30,840
- + Purchases $102,800
- - Purchases Discounts ($10,280)
- + Freight-in $15,420
- + Net Purchases $107,940
- = Goods Available for Sale $138,780
- - Ending Inventory $20,560
- = Cost of Goods Sold $118,220
The following information was taken from Cody Co.’s accounting records for the year ended December 31, 2005:
- Decrease in raw materials inventory $15,000
- Increase in finished goods inventory $35,000
- Raw materials purchased $430,000
- Direct labor payroll $200,000
- Factory overhead $300,000
- Freight-out $45,000
There was no work-in-process inventory at the beginning or end of the year. Cody’s 2005 cost of goods sold is
A. $895,000
B. $910,000
$910,000
- The correct answer is $910,000:
- Raw materials purchase d$430,000
- Plus decrease in raw materials $15,000*
- Direct labor $200,000
- Factory overhead $300,000
- Less finished goods increase ($35,000) **
- Cost of goods sold $910,000
*The decrease in raw materials is added to the amount purchased resulting in the cost of materials incorporated into production. In other words, $15,000 of materials purchased in 2005 were placed into production in 2005. The total cost of materials brought into production in 2005 equals $445,000.
** The increase in finished goods represents costs incurred in the current period to finish inventory that was not sold in the current period. Therefore, these costs must be removed in determining cost of goods sold.
Freight-out is not a manufacturing cost but rather is a distribution cost.
Therefore, freight-out is not inventoried.
There is no change in work-in-process inventory to affect the calculation.
During periods of inflation, 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 valuation methods?
- FIFO
- LIFO
- FIFO - YES
- LIFO - NO
Under a perpetual inventory system, the cost of goods sold (COGS) is determined at the time of each sale. In a perpetual FIFO inventory system, the cost of each sale (COGS) would be based on the cost of the earliest acquired goods on hand at the time of the sales. The cost of the most recently acquired goods would remain in ending inventory. In a perpetual LIFO inventory system, the cost of each sale (COGS) would be based on the cost of goods acquired just prior to the sale. The cost of the earlier acquired goods would remain in inventory.
Under a periodic inventory system, the costs of goods sold (COGS) and ending inventory are determined only at the end of the period. In a periodic FIFO inventory system, the cost of sales for the period (COGS) would be based on the cost of the earliest acquired goods available during the period. The cost of the most recently acquired goods would remain in ending inventory. In a periodic LIFO inventory system, the cost of sales for the period (COGS) would be based on the last goods acquired during the period. The cost of the earliest acquired goods would remain in ending inventory.
Which of the following statements regarding inventory accounting systems is true?
- A disadvantage of the perpetual inventory system is that the inventory dollar amounts used for interim reporting purposes are estimated amounts.
- A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
- An advantage of the perpetual inventory system is that the record keeping required to maintain the system is relatively simple.
- An advantage of the periodic inventory system is that it provides a continuous record of the inventory balance.
A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
A periodic system does not record the cost of each item as it is sold; nor does it maintain a continuously current record of the inventory balance. Rather, cost of goods sold is the amount derived from the equation: Beginning inventory + Purchases = Ending inventory + Cost of goods sold. A count of ending inventory establishes the inventory remaining at the end of the period, but there is no recording of cost of goods sold during the period. Cost of goods sold is the amount that completes the equation. Thus, cost of goods sold is really the cost of inventory no longer with the firm at year-end - an amount that includes shrinkage. Inventory shrinkage refers to breakage, waste, and theft. Shrinkage cannot be identified directly with a periodic inventory system.
What are the three primary FIFO cost assumptions?
FIFO:
- Oldest costs —–> COGS
- Recent costs —–> Ending Inventory
Period of rising prices:
- Lowest COGS
- Highest Net Income
- Highest Ending Inventory
What are the three primary LIFO cost assumptions?
LIFO:
- Recent costs —–> COGS
- Oldest costs —–> Ending Inventory
Period of rising prices:
- Highest COGS
- Lowest Net Income
- Lowest Ending Inventory
A company decided to change its inventory valuation method from FIFO to LIFO in a period of rising prices. What was the result of the change on ending inventory and net income in the year of the change?
- Ending inventory
- Net income
- Ending inventory - DECREASE
- Net income - DECREASE
Ending inventory would decrease because under LIFO, the latest items purchased (and therefore the most costly) are considered sold, leaving the earliest items purchased (and therefore the least costly) in inventory. This is opposite to the effect under FIFO.
The same is true for net income because now, under LIFO, cost of goods sold is increased relative to FIFO because the cost of the latest and most costly items are considered sold first.
When the FIFO inventory method is used during periods of rising prices, a perpetual inventory system results in an ending inventory cost that is
- The same as in a periodic inventory system.
- Higher than in a periodic inventory system.
- Lower than in a periodic inventory system.
- Higher or lower than in a periodic inventory system, depending on whether physical quantities have increased or decreased.
The same as in a periodic inventory system.
FIFO produces the same results for periodic and perpetual systems. FIFO always assumes the sale of the earliest goods acquired. Therefore, unlike LIFO periodic, goods can never be assumed sold before they are acquired.
Cost of goods sold and ending inventory are the same under FIFO for both a periodic and a perpetual system.
Generally, which inventory costing method approximates most closely the current cost for each of the following?
- Cost of goods sold
- Ending inventory
- Cost of goods sold - LIFO
- Ending inventory - FIFO
LIFO assumes the sale of the most recent purchases first and thus results in cost of goods sold that is the most current value. FIFO assumes the sale of the earliest purchases first (and beginning inventory before any purchases) and thus results in ending inventory that is the most current value. FIFO is sometimes called LISH: last in still here.
Drew Co. uses the average cost inventory method for internal reporting purposes and LIFO for financial statement and income tax reporting.
On December 31, 2005, the inventory was $375,000 using average cost and $320,000 using LIFO. The unadjusted credit balance in the LIFO Reserve account on December 31, 2005 was $35,000.
What adjusting entry should Drew record to adjust from average cost to LIFO on December 31, 2005?
- Debit
- Credit
- Debit - COGS $20,000
- Credit - LIFO Reserve $20,000
The ending difference between average cost and LIFO is $55,000 ($375,000 - $320,000). This is the required LIFO reserve account.
The balance before adjustment is $35,000. Thus, $20,000 must be added to the account. The conversion to LIFO, for reporting purposes, increases cost of goods sold because, under LIFO, ending inventory is lower. The entry in this answer alternative increases the cost of goods sold. The inventory account itself is not credited. Rather, the LIFO reserve account acts as a valuation account to reduce inventory to LIFO for balance sheet purposes.