Exam 8: Inventories and the Cost of Goods Sold

Effects of errors in inventory valuation Show the effect, if any, of each of the following errors on ending inventory, cost of goods sold, gross profit on sales, and net income by placing the appropriate symbol in each column. In use is the periodic inventory system. Use the following symbols: O = Overstated, U = Understated, NE = No Effect. Ending Inventory Cost of Goods Sold Gross Profit on Sales Net Income (a) Ending inventory is overstated (b) Purchases are understated (c) Beginning inventory is overstated (d) Net sales are overstated (e) Beginning inventory is understated (f) Ending inventory is understated

The write-down of inventory:

Harding Systems, Inc. uses a periodic inventory system. The purchases of a particular product during the year are shown below: At December 31 the ending inventory consisted of 1,500 units. Jan.1 Beginning inventory 1,100 units @ \ 7.25 \ 7,975 Feb. 7 Purchase 1,450 units @\ 7.50 10,875 July 10 Purchase 1,600 units @\ 8.00 12,800 Nov. 25 Purchase units @\ 8.50 Total -Compute the cost of goods sold for the current year based on the LIFO method of inventory valuation.

At year-end, the perpetual inventory records of Anderson Co. indicate 60 units of a particular product in inventory, acquired at the following dates and unit costs: Purchased in August: 30 units at $750 per unit. Purchased in November: 30 units at $700 per unit. A complete physical inventory taken at year-end indicates only 50 units of this product actually are on hand. -Assuming that Anderson uses the FIFO flow assumption, it should record this inventory shrinkage by:

The principle of consistency prohibits a company from changing an inventory valuation method once one is selected.

The inventory turnover rate provides an indication of how quickly the average quantity of inventory on hand:

Castle TV, Inc. purchased 1,000 monitors on January 5 at a per-unit cost of $185, and another 1,000 units on January 31 at a per-unit cost of $230. In the period from February 1 through year-end, the company sold 1,800 units of this product. At year-end, 200 units remained in inventory. -Assume that the replacement cost of this monitor at year-end is $220 per unit. Using the FIFO flow assumption and the lower-of-cost-or-market rule, Castle TV should write down the carrying value of this inventory by:

The logic behind the lower-of-cost-or-market rule is:

During the course of an audit of a company's financial statements, an auditor will be concerned that the company's inventory:

Gross profit method The Walnut Shop is a furniture company that uses a periodic inventory system. On February 8, 2009, a fire destroyed all the furniture on display in the company's main showroom. Fortunately, $35,000 of the company's inventory was located in a separate warehouse and was not damaged by the fire. Walnut Shop now is attempting to determine the cost of the merchandise destroyed in the fire from the following information: Compute the following (show computations): Net sales during 2009, through February 8 \ 450,000 Ending inventory, December 31, 2008 \ 130,000 Purchases in 2009 through February 8 \ 225,000 Historical rate of gross profit 45\% (a) The cost of goods available for sale through February 8, 2009. $\$$ _______ (b) The cost of goods sold in 2009 through February 8. $\$$ _______ (c) The estimated total inventory on hand on February 8, prior to the fire. $\$$ ________ (d) The cost of the inventory lost in the fire. $\$$ ________

Castle TV, Inc. purchased 1,000 monitors on January 5 at a per-unit cost of $185, and another 1,000 units on January 31 at a per-unit cost of $230. In the period from February 1 through year-end, the company sold 1,800 units of this product. At year-end, 200 units remained in inventory. -Assume that the replacement cost of this monitor at year-end is $210 per unit. Using LIFO flow assumption and the lower-of-cost-or-market rule, the ending inventory amounts to:

Beech Soda, Inc. uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows: On January 14, Beech Soda, Inc. sold 25 units of this product. The other 28 units remained in inventory at January 31. Quantity Unit Cost Total Cost Beginning inventory (Jan. 1) 16 \ 10 \ 160 Purchase (Jan. 11) 14 \ 12 168 Purchase (Jan. 20) \ 15 Total 53 \ 673 -Assuming that Beech Soda uses the FIFO flow assumption, the 28 units of this product in inventory at January 31 have a total cost of:

If an error in valuing inventory occurs in one year:

The Valley Garden Company had the following transactions: (A) Prepare journal entries for Valley Garden assuming the Company uses the gross method when accounting for purchases and a perpetual inventory. (B) Prepare journal entries for Valley Garden assuming the Company uses the gross method and a periodic inventory. July 1 Purchased merchandise on credit for \ 3,600 7 Purchased merchandise for cash for \ 6,300 9 Sold merchandise costing \ 7,050 for \ 11,250 on credit.

Periodic inventory systems Funky Fashions uses a periodic inventory system. The beginning inventory of a particular product, and the purchases during the current year, were as follows: At December 31, the ending inventory of this product consisted of 1,300 units. Determine the cost of the year-end inventory and the cost of goods sold for this product under each of the following methods of inventory valuation: Jan 1 Beginning inventory 400 units @\ 7.00= \ 2,800 Feb 15 Purchase. 1,000 units@ \7 .50= 7,500 June 30 Purchase 1,400 units@ \ 8.00= 11,200 Nov 25 Purchase. 1,200 units @\ 8.25= 9,900 Total available for sale in year. units \3 1,400 Inventory at Dec. 31 Cost of Goods Sold (a) Average cost underline underline (b) First-in, first-out underline underline (c) Last in, first-out \ underline

A clothing store would logically have a higher inventory turnover rate than would a doughnut shop.

During periods of inflation which method would yield the largest ending inventory and cost of goods sold?

Merchandise that has been sold but not yet recorded in the accounts should not be included in the physical inventory at year-end.

Trent Department Store uses a perpetual inventory system but adjusts its inventory records at year-end to reflect the results of a complete physical inventory. In the physical inventory taken at the ends of 2010 and 2011, Trent's employees failed to count the merchandise in the store's window display. The cost of this merchandise amounted to $13,000 at the end of 2010, and $19,000 at the end of 2011. As a result of these errors, the cost of goods sold for 2005 will be:

At year-end, the perpetual inventory records of Anderson Co. indicate 60 units of a particular product in inventory, acquired at the following dates and unit costs: Purchased in August: 30 units at $750 per unit. Purchased in November: 30 units at $700 per unit. A complete physical inventory taken at year-end indicates only 50 units of this product actually are on hand. -Under the LIFO flow assumption, the cost of this item to be included as inventory in the company's year-end balance sheet is: