Question 1

What issues arise on the initial recognition and measurement of inventory?

Accepted Answer

A) Determining which expenditures to capitalize into the "inventory" account. 
B) Determining which expenditures to expense into the "cost of goods sold" account. 
C) Determining how much of the costs recognized in inventory should be expensed in the year. 
D) Determining the appropriate valuation of inventories that remain on hand. 
A) Determining which expenditures to capitalize into the "inventory" account. 
B) Determining which expenditures to expense into the "cost of goods sold" account. 
C) Determining how much of the costs recognized in inventory should be expensed in the year. 
D) Determining the appropriate valuation of inventories that remain on hand.

Question 2

In early 2020, Darwin's Pet Shop discovered that some of its inventory of puppies were not what the supplier purported them to be. 550 puppies that were supposed to be purebred (and therefore expensive)were in fact sired by parents with unknown history. As at the fiscal year ended December 31, 2019, 300 of these puppies had been sold while 250 remained in inventory. Purebred puppies cost $140 each and they would retail for $415. Non-purebreds have replacement cost of $30 each, and the estimated sale price is $100 each. Darwin is pursuing the supplier to obtain a refund for the cost difference. However, whether there will be compensation is uncertain.
Required:
a. Record the journal entry for the write-down of puppy inventory on December 31, 2019. Note any assumptions necessary.
b. Suppose the error (non-purebreds treated as purebreds)had not been discovered. Indicate the effect of this error on the following accounts (i.e., were they over- or understated, and by how much?):
i.Inventory, December 31, 2019;
ii.Cost of goods sold, year 2019; and
iii.Cost of goods sold, year 2020.
Note: The owners of Darwin's Pet Shop do not intend to disclose the puppy inventory error to the buyers of the 300 puppies, nor do they intend to compensate them. This is clearly an ethical issue, but it is not a factor in this question.

Accepted Answer

a. The puppy inventory needs to be writt

Question 3

Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2019, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2019 financial reporting?

Accepted Answer

A) Beginning inventory is understated by $1,000. 
B) Gross margin is understated by $1,000. 
C) Cost of sales is understated by $1,000. 
D) Inventory is overstated on the balance sheet. 
A) Beginning inventory is understated by $1,000. 
B) Gross margin is understated by $1,000. 
C) Cost of sales is understated by $1,000. 
D) Inventory is overstated on the balance sheet.

Question 4

Which statement is correct about the system used to account for inventories?

Accepted Answer

A) Organizations must use the perpetual system to determine the amount of inventory and cost of goods sold. 
B) The perpetual system is used to determine the amount of inventory and the periodic system is used to determine the cost of goods sold. 
C) The perpetual and periodic system are both acceptable methods to use for inventory control. 
D) The balance sheet under the perpetual system is different than that under the periodic system. 
A) Organizations must use the perpetual system to determine the amount of inventory and cost of goods sold. 
B) The perpetual system is used to determine the amount of inventory and the periodic system is used to determine the cost of goods sold. 
C) The perpetual and periodic system are both acceptable methods to use for inventory control. 
D) The balance sheet under the perpetual system is different than that under the periodic system.

Question 5

Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2019, but the inventory was excluded in error during the ending inventory count. What impact will this not have on fiscal 2020 financial reporting?

Accepted Answer

A) Beginning inventory is understated by $1,000. 
B) Gross margin is overstated by $1,000. 
C) Cost of sales is understated by $1,000. 
D) Inventory is overstated on the balance sheet. 
A) Beginning inventory is understated by $1,000. 
B) Gross margin is overstated by $1,000. 
C) Cost of sales is understated by $1,000. 
D) Inventory is overstated on the balance sheet.

Question 6

The following information was taken from the inventory records of Helena Ltd.: $$\begin{array} { | l | l | } 
\hline \text { Dates } & \text { Inventory units } \
\hline \text { Inventory - Feb 1 } & 100 \text { units at } \$ 3.00 \
\hline \text { Purchases - April 1 } & 300 \text { units at } \$ 3.10 \
\hline \text { Purchases - July 15 } & 200 \text { units at } \$ 3.20 \
\hline \text { Units available for sale } & 600 \text { units } \
\hline & \
\hline \text { Sales - May 10 } & 200 \text { units at } \$ 6.00 \
\hline \text { Sales - November 15 } & 100 \text { units at } \$ 6.10 \
\hline
\end{array}$$ What would be the cost of goods sold, assuming that the FIFO method is used in a periodic inventory system?

Accepted Answer

A) $920 
B) $930 
C) $940 
D) $950 
A) $920 
B) $930 
C) $940 
D) $950

Question 7

Sarabjit Inc. produced the following information for December, 2019:
   Required:
NOTE THAT EACH REQUIREMENT IS INDEPENDENT OF THE OTHERS.
a)Determine if any of the transactions near year-end should be included in the December 31, 2019 inventory balance.
b)Determine if there is any impairment of inventory at December 31, 2019.
c)Determine the cost of goods sold for December 2019.
d)The company has a historical gross margin of 25%. If sales were $400,000, what should ending inventory be at December 31, 2019?

Accepted Answer

a)Determine if any of the transactions n

Question 8

Explain how a merchandising company can manipulate earnings through its year-end inventories. What can an auditor do to detect this type of manipulation?

Accepted Answer

Inventories need to be assessed for impa

Question 9

Which inventory method provides the highest quality information for the balance sheet?

Accepted Answer

A) LIFO. 
B) FIFO. 
C) Weighted average. 
D) Retail inventory. 
A) LIFO. 
B) FIFO. 
C) Weighted average. 
D) Retail inventory.

Question 10

Explain the meaning of the following inventory costing methods: FIFO, specific identification, LIFO, and weighted average.

Accepted Answer

•@#LAT-DLM& A cost flow assumption that uses the o

Question 11

Assume that a $400 purchase invoice received close to year-end is not recorded in fiscal 2019, but the inventory is appropriately included in the ending inventory count. What impact will this have on fiscal 2020 financial reporting?

Accepted Answer

A) Cost of sales is overstated by $400. 
B) Gross margin is overstated. 
C) Cost of goods available for sale is understated. 
D) There is no effect on fiscal 2020. 
A) Cost of sales is overstated by $400. 
B) Gross margin is overstated. 
C) Cost of goods available for sale is understated. 
D) There is no effect on fiscal 2020.

Question 12

The following information was taken from the inventory records of Hari Ltd.: $$\begin{array} { | l | l | } 
\hline \text { Dates } & \text { Inventory units } \
\hline \text { Inventory - Feb 1 } & 100 \text { units at } \$ 3.00 \
\hline \text { Purchases - April 1 } & 300 \text { units at } \$ 3.10 \
\hline \text { Purchases - July 15 } & 200 \text { units at } \$ 3.20 \
\hline \text { Units available for sale } & 600 \text { units } \
\hline & \
\hline \text { Sales - May 10 } & 200 \text { units at } \$ 6.00 \
\hline \text { Sales - November 15 } & 100 \text { units at } \$ 6.10 \
\hline
\end{array}$$ What would be the cost of goods sold, assuming that the LIFO method is used in a perpetual inventory system?

Accepted Answer

A) $920 
B) $930 
C) $940 
D) $950 
A) $920 
B) $930 
C) $940 
D) $950

Question 13

Under which cost flow assumption is it the easiest for management to manipulate income?

Accepted Answer

A) LIFO. 
B) FIFO. 
C) Weighted average. 
D) Income manipulation is not possible through any of these methods. 
A) LIFO. 
B) FIFO. 
C) Weighted average. 
D) Income manipulation is not possible through any of these methods.

Question 14

Explain how fixed overhead costs should be accounted for if a plant is made idle due to a prolonged strike.

Accepted Answer

Under GAAP, companies should allocate fi

Question 15

JP Corporation had net income of $1,000,000 for 2020. After issuing its financial statements, the corporation realized that it had failed to include inventory from one of its small warehouses for two years. Specifically, it forgot to include $20,000 on December 31, 2019 and $30,000 on December 31, 2020. Which of the following is TRUE regarding JP's 2019 net income?

Accepted Answer

A) Net income was understated by $10,000. 
B) Net income was overstated by $10,000. 
C) Net income was understated by $30,000. 
D) Net income was overstated by $30,000. 
A) Net income was understated by $10,000. 
B) Net income was overstated by $10,000. 
C) Net income was understated by $30,000. 
D) Net income was overstated by $30,000.

Question 16

Muscle Concrete mixes concrete and trucks it to construction sites. The company uses a standard costing system for the batches of concrete produced. The company has a fleet of 10 mixing trucks, each of which goes on three runs per day, 350 days per year under normal circumstances. The standard costs are as follows:
 $\begin{array}{ll}
\text { Standard costs per batch based on } 1,050 \text { batches per year } & \text { Amount } \
\hline \text { Raw material - gravel, sand, cement, chemicals } & \$ 1,000 \
\text { Wages } & 400 \
\text { Variable overhead - mixing truck depreciation, diesel fuel, etc. } & 450 \
\text { Fixed overhead - depreciation on raw materials silo } &\underline{ 400} \
\text { Total production cost per batch } &\underline{ \$ 2,250} \
\text { Opening inventory cost - all raw materials } & 1,000,000 \
\text { Ending inventory cost - all raw material } & 450,000
\end{array}$ During 2020, the company received an unusually large order for a big construction project. As a result, Muscle Concrete had to extend its operating hours and days, temporarily increasing output to 1,250 batches for the year. The company used the first-in, first-out cost flow assumption. Actual variable costs approximated standard costs per batch. Depreciation rates established at the beginning of the year remain valid for the year.
Required:
Determine the amount of cost of goods sold for 2020.

Accepted Answer

\[\begin{array} { l r r r } 
& \text { C

Question 17

Which inventory method provides the highest quality information for the income statement?

Accepted Answer

A) LIFO. 
B) FIFO. 
C) Weighted average. 
D) Retail inventory. 
A) LIFO. 
B) FIFO. 
C) Weighted average. 
D) Retail inventory.

Question 18

On January 1, 2020, Franchisor Inc. sold the rights to open a new franchise location to Franchisee Corp. The franchise lasts for ten years. The terms of the contract include the following:
•A one-time fee of $50,000, due upon contract signing and an annual payment of $25,000 due on December 31 each year for the duration of the franchise agreement (ten annual payments of $25,000 first due December 31, 2020). These payments are for equipment (delivered at time of contract signing)and a commitment by Franchisor Inc.'s to provide technical support on an ongoing basis.
•4% of gross franchisee sales is payable monthly by Franchisee Corp. to Franchisor Inc., to cover marketing and advertising costs for the franchise.
$\underline{\text{Other information}}$
•The stand-alone sales price for the equipment and technical support are $160,000 and $9,000 per annum respectively. Franchisor Inc. has determined that a 5% discount rate appropriately reflects the credit risk rate associated with Franchisee Corp.
•Franchisor Inc. delivered the equipment at time of the contract signing. It was carrying these items in its inventory at a cost of $135,000.
•Franchisee Corp. pays both the upfront fee and the first payment on the instalment contract on the stipulated payment dates.
•Franchisee Corp.'s gross franchise sales for 2020 totalled $1,000,000 but due to an oversight, Franchisor Inc. has not yet invoiced Franchisee Corp. for any marketing and advertising fees.
Required:
a. Identify the distinct performance obligations in this contract.
b. Determine the transaction price.
c. Allocate the transaction price to the performance obligations.
d. Prepare Franchisor Inc.'s journal entries for 2020. Assume that it only accrues revenue at year-end.

Accepted Answer

a. There are three distinct performance

Question 19

Lean Ltd. had a balance of $52,300 in the office supplies account at the start of the year. During the year, purchases of $141,700 were made and debited to office supplies account. At the end of the year, a physical count of the office supplies indicated $41,800 on hand. What was the office supplies expense for the year?

Accepted Answer

A) $141,700 
B) $152,200 
C) $183,500 
D) $194,000 
A) $141,700 
B) $152,200 
C) $183,500 
D) $194,000

Question 20

Consider the following inventory information for last year:
 $$\begin{array} { | l | r | r | } 
\hline & \text { Number of units } & \text { Cost per unit } \
\hline \text { Beginning inventory, Jan 1 } & 2,500 & \$ 130 \
\hline \text { Purchase, March } & 10,000 & 100 \
\hline \text { Purchase, July } & 5,000 & 90 \
\hline \text { Purchase, October } & 7,500 & 80 \
\hline \text { Goods available for sale } & 25,000 & \
\hline
\end{array}$$ The company uses a periodic inventory system. The year-end inventory count indicated 5,300 units left in inventory.
Required:
Using the first-in, first-out (FIFO)method, calculate the ending inventory value and the cost of goods sold for the year.

Accepted Answer

EI = 5,300 × 80 = 42

What issues arise on the initial recognition and measurement of inventory?

Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2019, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2019 financial reporting?

Which statement is correct about the system used to account for inventories?

Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2019, but the inventory was excluded in error during the ending inventory count. What impact will this not have on fiscal 2020 financial reporting?

Explain how a merchandising company can manipulate earnings through its year-end inventories. What can an auditor do to detect this type of manipulation?

Which inventory method provides the highest quality information for the balance sheet?

Explain the meaning of the following inventory costing methods: FIFO, specific identification, LIFO, and weighted average.

Assume that a $400 purchase invoice received close to year-end is not recorded in fiscal 2019, but the inventory is appropriately included in the ending inventory count. What impact will this have on fiscal 2020 financial reporting?

Under which cost flow assumption is it the easiest for management to manipulate income?

Explain how fixed overhead costs should be accounted for if a plant is made idle due to a prolonged strike.

Which inventory method provides the highest quality information for the income statement?

Fundamentals of Financial Accounting Theory

Conceptual Frameworks for Financial Reporting

Accrual Accounting

Revenue and Recognition

Cash and Receivables

Financial Assets

Property, Plant and Equipment

Intangible Assets, Goodwill, Mineral Resources, and Government Grants

Applications of Fair Value to Non-Current Assets

Filters

Exam 6: Inventories

What issues arise on the initial recognition and measurement of inventory?

Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2019, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2019 financial reporting?

Which statement is correct about the system used to account for inventories?

Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2019, but the inventory was excluded in error during the ending inventory count. What impact will this not have on fiscal 2020 financial reporting?

Explain how a merchandising company can manipulate earnings through its year-end inventories. What can an auditor do to detect this type of manipulation?

Which inventory method provides the highest quality information for the balance sheet?

Explain the meaning of the following inventory costing methods: FIFO, specific identification, LIFO, and weighted average.

Assume that a $400 purchase invoice received close to year-end is not recorded in fiscal 2019, but the inventory is appropriately included in the ending inventory count. What impact will this have on fiscal 2020 financial reporting?

Under which cost flow assumption is it the easiest for management to manipulate income?

Explain how fixed overhead costs should be accounted for if a plant is made idle due to a prolonged strike.

Which inventory method provides the highest quality information for the income statement?

Fundamentals of Financial Accounting Theory

Conceptual Frameworks for Financial Reporting

Accrual Accounting

Revenue and Recognition

Cash and Receivables

Financial Assets

Property, Plant and Equipment

Intangible Assets, Goodwill, Mineral Resources, and Government Grants

Applications of Fair Value to Non-Current Assets

Filters