Exam 5: Inventories and Cost of Sales

In the retail inventory method of inventory valuation, the retail amount of inventory refers to its dollar amount measured using selling prices of inventory items.

The company's inventory manager receives compensation that includes a bonus based on gross profit. You discover that the inventory manager has knowingly overstated ending inventory by $2 million. What effect does this error have on the financial statements of the company and specifically gross profit? Why would the manager knowingly overstate ending inventory? Would this be considered an ethics violation?

The days' sales in inventory ratio is computed by dividing ending inventory by cost of goods sold and multiplying the result by 365.

Overstating beginning inventory will understate cost of goods sold and net income.

Sarbanes Oxley (SOX) demands that companies safeguard inventory and properly report it. List methods that companies should use to safeguard inventory and accounting procedures that should be used to properly report inventory.

Regardless of the inventory costing system used, cost of goods available for sale must be allocated at the end of the period between

A company's cost of inventory was $219,500. Due to phenomenal demand the market value of its inventory increased to $221,700. This company should write up the value of its inventory according to the conservatism constraint.

Under FIFO, the most recent costs are assigned to ending inventory.

Starlight Company has inventory of 8 units at a cost of $200 each on October 1. On October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the LIFO perpetual inventory method, what amount will be reported in cost of goods sold for the 11 units that were sold?

The understatement of the beginning inventory balance causes:

Identify the items that are included in merchandise inventory. (In your answer address the special situations of goods in transit, consigned goods, and damaged goods.)

Explain how the inventory turnover ratio and the days' sales in inventory ratio are used to evaluate inventory management.

In applying the lower of cost or market method to inventory valuation, market is defined as the current replacement cost.

Whether purchase costs are rising or falling, FIFO always will yield the highest gross profit and net income.

An overstatement of ending inventory will cause an overstatement of assets and an understatement of equity on the balance sheet.

Damaged and obsolete goods that can be sold:

If the seller is responsible for paying freight charges, then ownership of inventory passes when goods arrive at their destination.

The inventory turnover ratio is computed by dividing cost of goods sold by average merchandise inventory.

The choice of an inventory valuation method has little to no impact on gross profit and cost of sales.

Most companies do not take a physical count of inventory each year, but rather rely on inventory records to determine the inventory value.