Exam 5: Accounting for Inventories

During November 2013, Cortez Company sold 125 units @ $450 each. Cash selling and administrative expenses for the year were $22,000. All transactions were cash transactions. The following information is also available: The company's income tax rate is 30%. Required: a) Prepare an income statement for Cortez Company for 2013 assuming: 1) FIFO inventory cost flow 2) LIFO inventory cost flow b) Prepare the operating activities section of the statement of cash flows for 2013 assuming: 1) FIFO inventory cost flow 2) LIFO inventory cost flow

One of the disadvantages of the specific identification inventory cost flow method is that it can allow managers of a business to manipulate the amount of income the business reports by choosing which item to sell if the cost is different for identical items of inventory.

What ratio (usually an average from prior periods) can be used in estimating the current period's ending inventory?

If a company uses the FIFO cost flow method for its income tax return it must also use FIFO for financial reporting.

Gannon, Inc. applies the lower-of-cost-or-market rule to its inventory in aggregate. At the end of the accounting period, it is determined that the cost of the inventory is $25,985 and the market (replacement) value is $24,886. If an adjustment is necessary, what is its effect on the financial statements?

The average number of days to sell inventory for Company Y is approximately:

Assume that Pufferbellies Bookstore purchased the first five books on account. How would the purchase transaction affect its financial statements?

Which of the following methods of applying the lower-of-cost-or-market rule will result in the fewest write-downs of inventory?

Explain the effects of an understatement of ending inventory on both the present year's net income and the following year's net income. What is the effect of this error on the inventory balance at the end of the following year?

If Beamon Company is using LIFO, how would the accountant compute cost of goods sold when recording a sale under the perpetual inventory system?

An overstatement of ending inventory results in which of the following in the present period?

The gross margin method of estimating inventory can be used to help detect inventory fraud.

On January 1, 2013, Hart Company carried inventory at the lower of cost or market on an aggregate basis. The cost of the inventory was $19,456 but the current market value is $19,950. Assuming the perpetual inventory system is used, how will the inventory adjustment, if one is necessary, affect the financial statements?

Assuming Chandler uses a FIFO cost flow method, the cost of goods sold for the sales transaction on January 31 is:

If Singh uses the FIFO cost flow method, its cost of goods sold would be $4,130.

Signal Company uses the perpetual inventory method. On January 1, 2013, Signal purchased 400 units of inventory that cost $2.00 each. On January 10, 2013, the company purchased an additional 600 units of inventory that cost $2.25 each. If Signal uses a weighted average cost flow method and sells 700 units of inventory for $4.00 each, the amount of gross margin reported on the income statement will be:

During a period of rising prices, a company's cost of goods sold would be higher using the LIFO cost flow method than with FIFO.

The West Company uses the perpetual inventory system and has computed the cost of its inventory to be $6,400 as follows: 200 units of Product A at a unit cost of $10; 300 units of Product B at a unit cost of $12; and 100 units of Product C at a unit cost of $8. The current replacement cost of each of the above items is $12.50, $11 and $7, respectively. West's accountant is not sure yet whether to apply the lower-of-cost-or-market rule by individual items or by the entire stock in aggregate. Indicate whether each of the following statements pertaining to the West Company is true or false. _____ a) When referring to Product B, the "cost" totals $3,300. _____ b) If West selects to apply the lower-of-cost-or-market rule by individual items, Product A would be listed at $12.50 per unit. _____ c) West would record a write-down of inventory if is uses the individual items approach, but would not if it uses the aggregate approach. _____ d) If West uses the individual items approach, $6,000 will be reported for inventory on the balance sheet. _____ e) For Product C, the lower of cost or market is $800.

Assume that Pufferbellies Bookstore made the second purchase for cash. How would that purchase affect the financial statements?

When prices are rising, which method of inventory, if any, will result in the lowest relative net cash outflow (including the effects of taxes, if any)?