Exam 5: Inventories and Cost of Sales

A company has the following per unit original costs and replacement costs for its inventory: Part A: 50 units with a cost of $5 and replacement cost of $4.50. Part B: 75 units with a cost of $6 and replacement cost of $6.50. Part C: 160 units with a cost of $3 and replacement cost of $2.50. Under the lower of cost or market method,the total value of this company's ending inventory must be reported as:

The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to net sales.

The _____________________ is a measure of how quickly a merchandiser sells its merchandise inventory.

A company that uses a perpetual inventory system made the following cash purchases and sales.There was no beginning inventory. January 1: Purchased 100 units at \ 10 per unit February 5: Purchased 60 units at \ 12 per unit March 16: Sold 40 Units for \ 16 per unit Prepare general journal entries to record the March 16 sale using the FIFO inventory valuation method.

Derick Pearson and Felecia Hatcher founded Feverish Ice Cream.Why is managing inventory an important issue for their company?

The City Store reported the following amounts on their financial statements for 2012,2013,and 2014: \begin{array}{r}\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { For the Year Ended December } 31\\ \end{array}\\\begin{array}{|l|r|r|r|} \hline &2012 & 2013 & 2014 \\ \hline \text { Cost of goods sold } & \mathbf{\$ 75,000} & \$ 87,000 & \$ 77,000 \\ \hline \text { Net income } & 22,000 & 25,000 & 21,000 \\ \hline \text { Total current assets } & 155,000 & 165,000 & 110,000 \\ \hline \text { Equity } & 287,000 & 295,000 & 304,000 \\ \hline \end{array} It was discovered early in 2015 that the ending inventory on December 31,2012,was overstated by $6,000 and the ending inventory on December 31,2013,was understated by $2,500.The ending inventory on December 31,2014,was correct.Ignoring income taxes,determine the correct amounts of cost of goods sold,net income,total current assets,and equity for each of the years 2012,2013,and 2014.

Identify the inventory valuation method that is being described for each situation below.In all cases,assume a period of rising prices.Use the following to identify the inventory valuation method: FIFO First in, first out LIFO Last in, first out SI Specific identification WA Weighted average a.The method that can only be used if each inventory item can be matched with a specific purchase and its invoice. b.The method that will cause the company to have the lowest income taxes. c.The method that will cause the company to have the lowest cost of goods sold. d.The method that will assign a value to inventory that approximates its current cost. e.The method that will tend to smooth out erratic changes in costs.

Describe the internal controls that must be applied when taking a physical count of inventory.

LIFO inventory value is often less than the inventory's replacement cost because LIFO inventory is valued using the oldest purchase cost.

An advantage of LIFO is that it assigns the most recent costs to cost of goods sold and does a better job of matching current costs with revenues on the income statement.

Toys "R" Us had cost of goods sold of $9,421 million,ending inventory of $2,089 million,and average inventory of $1,965 million.The inventory turnover equals:

Given the following information,determine the cost of goods sold for November 30 using the FIFO perpetual inventory method. November 3: 15 units were purchased at $8 per unit. November 11: 18 units were purchased at $9.50 per unit. November 15: 15 units were sold at $45 per unit. November 18: 30 units were purchased at $10.75 per unit. November 30: 20 units were sold at $55 per unit.

The inventory turnover ratio is calculated as:

The assignment of costs to the cost of goods sold and to inventory under FIFO is the same for both the perpetual and periodic inventory systems.

One of the most important decisions in accounting for inventory is determining the unit costs assigned to each inventory item.

All incidental costs of inventory acquisition and handling,whether necessary or not,are assigned to inventory.

Incidental costs most commonly added to the costs of inventory include import duties,freight,storage,and insurance.

The understatement of the beginning inventory balance causes:

In a period of rising prices,FIFO usually gives a lower taxable income,which leads to an advantage when it comes to paying income tax.