Question 1

Inventory costing procedures used by businesses are the same in all countries.

Accepted Answer

A) True 
 B)False  False

Question 2

Use the following financial statements to answer exercises below
The following are the income statement, the assets section of the balance sheet, and inventory disclosures from Terrific Toys, Inc., a toy manufacturer, for 2016.
   
   Inventories
Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.
-Use the financial information presented for Terrific Toys, Inc. to answer the following:
A. Compute the ratio of inventories to total current assets for 2016 and 2015. Explain the change.
B. Compute the inventory turnover for both 2016 and 2015. The 2014 ending inventories were $1,159,695. Interpret and explain the change in inventory turnover as a positive or a negative for the company.
C. What inventory costing method does Terrific Toys, Inc. use?

Accepted Answer

A. Ratio of inventories to total current assets:
2016: $1,162,643 / $7,346,139 = 0.15827 or 15.9%
2015: $1,217,500 / $7,130,914 = 0.17074 or 17.1%
The percentage of inventory as current assets has decreased slightly from 2015 by over 1%. This generally is viewed as a positive development since the composition of inventory is usually not as liquid as other assets.
B. Inventory turnover = COGS/Average inventory:
2016: $6,023,368 / [($1,162,643 + $1,217,500) / 2] = 5.06
2015: $6,240,422 / [($1,217,500 + $1,159,695) / 2] = 5.25
Terrific Toys Inc.'s inventory turnover decreased slightly from 2015 to 2016. This small change is generally not viewed as a problem; although the turnover should be monitored to be sure there are no underlying problems. A more detailed analysis as to what exactly caused the decreased inventory turnover rate would be helpful for management.
C. Terrific Toys, Inc. uses FIFO costing method as stated in the note disclosure.

Question 3

What does it mean to capitalize inventory cost, and what is the effect on the income statement?

Accepted Answer

Capitalization means that a cost is recorded on the balance sheet and is not immediately expensed on the income statement. Once costs are capitalized, they remain on the balance sheet as assets until they are used up, at which time they are transferred from the balance sheet to the income statement as an expense. If costs are capitalized rather than expensed, then assets, current income, and current equity are higher. In the case of inventories, when they are used up in production or are sold, their costs are transferred from the balance sheet to the income statement as cost of goods sold (COGS). COGS is matched against sales revenue to determine gross profit. However, it is important to note that the manner in which inventory costs are transferred from the balance sheet to the income statement affects the level of inventories reported on the balance sheet and the gross profit on the income statement. Different methods of reporting inventory cost include the First-In, First-Out (FIFO), the Last-in, First-Out (LIFO), and the Average Cost methods. In addition, any inventory impairment or write-down, as a result of reporting inventories at the lower of cost or market, will reduce the asset value on the balance sheet and increase the COGS on the income statement, which reduces current period gross profit and income, and consequently, equity.

Question 4

Yellow Star Software Company's 2016 balance sheet reveals that inventories reported on a LIFO basis are $22,480 million. In a footnote, management stated that the LIFO reserve was $3,776 million.
A. How much would Yellow Star's ending inventory be using FIFO?
B. What is the total cumulative tax effect of using LIFO given a 35% income tax rate?

Accepted Answer

A. LIFO reserve is the difference in inv

Question 5

Complete the grid to calculate Cost of Goods Sold:

Accepted Answer

A. Beginni

Question 6

In the period of rising costs and prices, a reduction in inventory quantities when FIFO is used is known as FIFO liquidation, and it yields an increase in gross profit and income.

Accepted Answer

A) True 
 B)False

Question 7

Red Company and White Company reported the following information in their financial statements, prior to their merger:
  The LIFO reserve for White Company is $3,560 at the end of 2016 and $3,040 at the end of 2015.
What is the 2016 adjusted inventory turnover for White Company?

Accepted Answer

A)  2.45 
B)  2.70 
C)  2.72 
D)  2.22 
A)  2.45 
B)  2.70 
C)  2.72 
D)  2.22

Question 8

Which expense recognition system is used to recognize cost of goods sold?

Accepted Answer

A)  Direct association 
B)  Immediate recognition 
C)  Systematic allocation 
D)  Reserve association 
A)  Direct association 
B)  Immediate recognition 
C)  Systematic allocation 
D)  Reserve association

Question 9

If inventory at the end of the year is understated by $60,000, what will this error cause?

Accepted Answer

A)  An understatement of cost of goods sold for the year by $60,000 
B)  An overstatement of gross profit for the year by $60,000 
C)  An overstatement of inventory for the year by $60,000 
D)  An understatement of net income for the year by $60,000 
A)  An understatement of cost of goods sold for the year by $60,000 
B)  An overstatement of gross profit for the year by $60,000 
C)  An overstatement of inventory for the year by $60,000 
D)  An understatement of net income for the year by $60,000

Question 10

Which statement is true concerning write-downs under U.S. GAAP and IFRS?

Accepted Answer

A)  GAAP allows inventory that has been written down to be revalued later at higher levels 
B)  IFRS allows inventory that has been written down to be revalued later at higher levels 
C)  GAAP and IFRS both allow inventory to be revalued higher once it has been written down 
D)  IFRS allows inventory revaluation only up to the point of a previous write down 
A)  GAAP allows inventory that has been written down to be revalued later at higher levels 
B)  IFRS allows inventory that has been written down to be revalued later at higher levels 
C)  GAAP and IFRS both allow inventory to be revalued higher once it has been written down 
D)  IFRS allows inventory revaluation only up to the point of a previous write down

Question 11

The following hammers were available for sale during the year for Felicity Tools:
  Felicity has 30 hammers on hand at the end of the year. What is the dollar amount of inventory at the end of the year according to the first-in, first-out method?

Accepted Answer

A)  $5,100 
B)  $5,950 
C)  $7,900 
D)  $7,800 
A)  $5,100 
B)  $5,950 
C)  $7,900 
D)  $7,800

Question 12

Greencastle, Inc. reports the following information in its annual report:
   Sales for 2016 totaled $12,800,000. Cost of goods sold under LIFO totaled $7,400,000.
Compute Greencastle's cost of goods sold and gross profit, assuming it uses the FIFO method.

Accepted Answer

Change in LIFO reser

Question 13

At the beginning of the current period, Haitijah Industries has 150 units of a product with a unit cost of $640. Its inventory records report the following transactions:
   During the current period, Haitijah sells 340 units.
A. Assume Haitijah uses the FIFO method. Compute the cost of goods sold for the current period and the ending inventory balance for this product.
B. Assume Haitijah uses the LIFO method. Compute the cost of goods sold for the current period and the ending inventory balance for this product.
C. Assume Haitijah uses the average cost method. Compute the cost of goods sold for the current period and the ending inventory balance for this product.

Accepted Answer

Ending inventory units = 150 + 150 + 70

Question 14

Manufacturing firms typically report three categories of inventory as raw materials, work-in-process, and finished goods.

Accepted Answer

A) True 
 B)False

Question 15

Assuming sales hold steady, which of the following actions would result in lowering income taxes for a company that uses the LIFO inventory method?

Accepted Answer

A)  Increasing sales prices 
B)  Buying extra inventory at the end of the year in an inflationary environment 
C)  Allowing the inventory quantity at year end to fall below beginning year levels 
D)  None of these. All would cause increasing taxes 
A)  Increasing sales prices 
B)  Buying extra inventory at the end of the year in an inflationary environment 
C)  Allowing the inventory quantity at year end to fall below beginning year levels 
D)  None of these. All would cause increasing taxes

Question 16

Garfield's Goods purchases $80,000 of inventory during the period, has beginning of the period inventory of $12,000, and sells $72,000 of inventory during the period for $120,000.
What is the company's inventory balance to be reported on its balance sheet at year end?

Accepted Answer

A)  $36,000 
B)  $20,000 
C)  $10,000 
D)  $12,000 
A)  $36,000 
B)  $20,000 
C)  $10,000 
D)  $12,000

Question 17

Felix Inc. owes $80,000 to Cat, Inc. for inventory acquired with terms of 3/15.
A. How much will Felix pay if payment is made within the discount period?
B. What transaction will Felix Inc. record on November 30, the company's fiscal year end, if the invoice is dated November 28 and payment will be made on December 12?

Accepted Answer

A. $80,000

Question 18

Fabulous Fabricators, Inc. has 10 units in beginning inventory costing $60 each. It purchased 90 more for $48 each during the month. The company sold 80 units during the month.
Calculate cost of goods sold using:
A. FIFO
B. Average cost
C. LIFO

Accepted Answer

A. FIFO Cost of goods sold = (

Question 19

A low inventory turnover indicates that a firm is able to sell its inventory more quickly.

Accepted Answer

A) True 
 B)False

Question 20

Use the following financial statements to answer exercises below
The following are the income statement, the assets section of the balance sheet, and inventory disclosures from Terrific Toys, Inc., a toy manufacturer, for 2016.
   
   Inventories
Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.
-Using the financial information presented for Terrific Toys, Inc. to answer the following:
A. Compute the average inventory days outstanding for Terrific Toys, Inc. for 2016 and 2015. Discuss what this measures and the importance of this measurement in analyzing company performance.
B. Discuss what would be included in a detailed analysis of an inventory turnover decrease and possible reasons for a potential decrease in that ratio.
C. Is there any adjustment required to Terrific Toys' balance sheet amount of inventory for a LIFO reserve? Describe why such an adjustment is needed or not needed for Terrific Toys, Inc.

Accepted Answer

A. Average inventory days outstanding =

Inventory costing procedures used by businesses are the same in all countries.

What does it mean to capitalize inventory cost, and what is the effect on the income statement?

Complete the grid to calculate Cost of Goods Sold:

In the period of rising costs and prices, a reduction in inventory quantities when FIFO is used is known as FIFO liquidation, and it yields an increase in gross profit and income.

Red Company and White Company reported the following information in their financial statements, prior to their merger: The LIFO reserve for White Company is $3,560 at the end of 2016 and $3,040 at the end of 2015. What is the 2016 adjusted inventory turnover for White Company?

Which expense recognition system is used to recognize cost of goods sold?

If inventory at the end of the year is understated by $60,000, what will this error cause?

Which statement is true concerning write-downs under U.S. GAAP and IFRS?

The following hammers were available for sale during the year for Felicity Tools: Felicity has 30 hammers on hand at the end of the year. What is the dollar amount of inventory at the end of the year according to the first-in, first-out method?

Greencastle, Inc. reports the following information in its annual report: Sales for 2016 totaled $12,800,000. Cost of goods sold under LIFO totaled $7,400,000. Compute Greencastle's cost of goods sold and gross profit, assuming it uses the FIFO method.

Manufacturing firms typically report three categories of inventory as raw materials, work-in-process, and finished goods.

Assuming sales hold steady, which of the following actions would result in lowering income taxes for a company that uses the LIFO inventory method?

Garfield's Goods purchases $80,000 of inventory during the period, has beginning of the period inventory of $12,000, and sells $72,000 of inventory during the period for $120,000. What is the company's inventory balance to be reported on its balance sheet at year end?

Fabulous Fabricators, Inc. has 10 units in beginning inventory costing $60 each. It purchased 90 more for $48 each during the month. The company sold 80 units during the month. Calculate cost of goods sold using: A. FIFO B. Average cost C. LIFO

A low inventory turnover indicates that a firm is able to sell its inventory more quickly.

Introducing Financial Accounting

Constructing Financial Statements

Adjusting Accounts for Financial Statements

Reporting and Analyzing Cash Flows

Analyzing and Interpreting Financial Statements

Reporting and Analyzing Revenues and Receivables

Reporting and Analyzing Long-Term Operating Assets

Reporting and Analyzing Liabilities

Reporting and Analyzing Leases, Pensions, and Income Taxes

Reporting and Analyzing Stockholders Equity

Reporting and Analyzing Financial Investments

Appendix : Compound Interest and the Time-Value of Money

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Exam 7: Reporting and Analyzing Inventory

Inventory costing procedures used by businesses are the same in all countries.

What does it mean to capitalize inventory cost, and what is the effect on the income statement?

Complete the grid to calculate Cost of Goods Sold:

In the period of rising costs and prices, a reduction in inventory quantities when FIFO is used is known as FIFO liquidation, and it yields an increase in gross profit and income.

Red Company and White Company reported the following information in their financial statements, prior to their merger: The LIFO reserve for White Company is $3,560 at the end of 2016 and $3,040 at the end of 2015. What is the 2016 adjusted inventory turnover for White Company?

Which expense recognition system is used to recognize cost of goods sold?

If inventory at the end of the year is understated by $60,000, what will this error cause?

Which statement is true concerning write-downs under U.S. GAAP and IFRS?

The following hammers were available for sale during the year for Felicity Tools: Felicity has 30 hammers on hand at the end of the year. What is the dollar amount of inventory at the end of the year according to the first-in, first-out method?

Greencastle, Inc. reports the following information in its annual report: Sales for 2016 totaled $12,800,000. Cost of goods sold under LIFO totaled $7,400,000. Compute Greencastle's cost of goods sold and gross profit, assuming it uses the FIFO method.

Manufacturing firms typically report three categories of inventory as raw materials, work-in-process, and finished goods.

Assuming sales hold steady, which of the following actions would result in lowering income taxes for a company that uses the LIFO inventory method?

Garfield's Goods purchases $80,000 of inventory during the period, has beginning of the period inventory of $12,000, and sells $72,000 of inventory during the period for $120,000. What is the company's inventory balance to be reported on its balance sheet at year end?

Fabulous Fabricators, Inc. has 10 units in beginning inventory costing $60 each. It purchased 90 more for $48 each during the month. The company sold 80 units during the month. Calculate cost of goods sold using: A. FIFO B. Average cost C. LIFO

A low inventory turnover indicates that a firm is able to sell its inventory more quickly.

Introducing Financial Accounting

Constructing Financial Statements

Adjusting Accounts for Financial Statements

Reporting and Analyzing Cash Flows

Analyzing and Interpreting Financial Statements

Reporting and Analyzing Revenues and Receivables

Reporting and Analyzing Long-Term Operating Assets

Reporting and Analyzing Liabilities

Reporting and Analyzing Leases, Pensions, and Income Taxes

Reporting and Analyzing Stockholders Equity

Reporting and Analyzing Financial Investments

Appendix : Compound Interest and the Time-Value of Money

Filters