Exam 8: Cost-Based Inventories and Cost of Sales

On a particular date, which of the following should be included in a company's inventory?

M Company should include the following items in its merchandise inventory:

A department store's accounts showed the following at the end of the period: At Cost At Retail Beginning inventory \ 120 \ 160 Purchases 240 340 Sales 430 (500) Markdowns 60 Markdown cancellations 10 Additional mark-ups 120 Additional mark-up cancellations 20 Using the above data, apply the retail inventory method to compute the approximate average cost (LCM) for the ending inventory. $___________________.

The following information relates to a firm with several similar products: Cost Retail Beginning inventory \ 29,000 \ 45,000 Purchases 140,000 190,000 Purchases discounts taken 3,000 Purchases returns 5,000 8,000 Freight-in 20,000 Net mark-ups 40,000 Net markdowns 12,000 Sales 190,000 Employee discounts 3,000 Using the retail inventory method and the average cost flow assumption (not LCM), what is ending inventory? When performing your calculations, round your cost ratios to one decimal point.

In inventorying goods at December 31, a company incorrectly included some items received on consignment. The error causes an:

On June 1, 2013, Yenex Corporation signed a binding, non-cancellable contract with AB Corporation to purchase, during the following 12 months, 500 units of Product Z at $30 each. By December 31, 2013, Yenex Corporation had purchased and paid for 400 of the units (debit inventory and credit cash, $12,000). At the end of 2013, Product Z could be purchased at a firm cash price of $27 per unit. (Assume amounts are material.) (a) Give any entry required at December 31, 2013 (end of the accounting period). (b) On March 30, 2013, Yenex Corporation purchased the remaining units under the contract. At that date, the units could have been purchased for a firm cash price of $28. Give the required entry (entries) under IFRS.

The primary difference between the inventory system of a manufacturing company and a retail company is that a retail company uses a periodic system and a manufacturing firm uses a perpetual system.

The relative sales value method is:

A company has several inventory items with a total cost of $100. Their net realizable values total $80. Thus, a $20 write down is required.

Which one of the following would cause a decrease in the cost ratio as used in the retail inventory method?

In the FIFO retail method, what does the ending inventory for any period represent?

From a theoretical viewpoint, which of the following costs would be considered inventoriable? Freight-in Warehousing 1 Yes Yes 2 No Yes 3 Yes No 4 No No

Which of the following should be included in the inventory cost of an item purchased?

At year end, after preparing the financial statements, four errors were found. The first line in the tabulation below gives the uncorrected amounts. You are to develop the correct amount on the bottom line by entering the corrections for each error; indicate subtractions with parentheses. Assume a periodic inventory system. Income Statement for Balance sheet 12/31/2003, year ending 12/31/2003 Assets Liabilities Owners' Equity Revenue Cost of Goods Sold Gross Margin Reported amounts (uncorrected) 16,000 4,000 12,000 18,000 10,000 8,000 1. Beg. 2003 invoice understated by \ 160 2. 2003 credit purchase \ 200 ; not recorded or inventoried in 2003. 3. Ending 2003 invoice overstated by \ 600 4. 2003 credit sales of \ 1,000 not recorded in 2003 ; cost of goods sold amount \ 600 ; not included in 2003 ending inventory.

When determining the unit cost of an inventory item, which of the following should not be included?

A valuation allowance account will be used when a company can apply the Lower of Cost & NRV rules on an item-by-item basis.

The gross margin method of estimating inventory is inappropriate when:

At December 31, 2013, after preparing the financial statements, several errors were discovered. The first line in the tabulation below gives the uncorrected amounts. You are to develop the correct amount for each category on the bottom line. Enter for each item the appropriate amount(s) needed for correction; indicate deductions (i.e., subtractions) with parentheses. Assume a periodic inventory system. Notes: 1. Some items may not involve errors. 2. You are only to correct the 2013 financial statements (do not give correcting entries). 3. Do not assume errors not specifically indicated. 4. Assume all amounts given are correct. Income Statement for the Year ended 12/31/2003 Balance Sheet 12/31/2003

Drafting Supplies Ltd. sells its merchandise at a mark-up of 40 percent on cost. Near the end of 2012, it recorded a credit sale amounting to $7,000. Although this merchandise was not shipped, it was excluded from the December 31, 2012, periodic inventory. The auditor later determined that the sale was incorrectly recorded in 2012; it should have been recorded in 2013. The company uses 1 percent of credit sales as the amount to record for bad debt expense. Ignoring income taxes, the effect of this error was to (answer only one): Overstate 2012 income by $__________________________ or Understate 2012 income by $________________________.

Four different independent errors relating to inventory are described below. You are to indicate the dollar amount by which various financial statement components are misstated and whether the error causes each component to be too high or too low. For example, if the effect of the error is to cause the component to be too high by $300, you should enter + 300 in the appropriate column; if it makes the component too low by $750, enter $-750. If a component is unaffected, enter a 0. Similarly, if on financial statements of a later year the error would have counterbalanced on that later year's statements, enter a 0. A periodic inventory system is used unless specifically stated to the contrary. (a) The 2001 ending inventory is understated by $400 and the related purchase on credit for that amount was not recorded until 2013. (b) At the end of 2001, the company failed to recognize that $1,500 of inventory was in the hands of a consignee. At the end of 2013, a similar error was made and the cost of goods consigned out was $1,100. (c) In running a total of inventory count sheets, a clerk included one line for $350 twice at the end of 2001; therefore, the inventory was overstated $350. (d) On December 31, 2001, a customer agreed to buy goods for $2,500 and asked that delivery be delayed until January 3, 2013. The goods, on which the average mark-up was 40 percent of sale price, were still on hand on December 31. They were included in the 2001 inventory. The customer was properly billed for the goods, and the sale was recorded on December 31, 2001. 2001 Statements 2002 Statements Error Assets Liabilities Owners' Equity Cost of Goods Sold (a) (b) (c) (d)