Deck 5: Accounting for Inventories

Question 1

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?

Answer 1

Understating ending inventory would cause the following effects in the first year: an overstatement of cost of goods sold and an understatement of gross margin,net income,retained earnings and total assets.In the following year the error would reverse itself.Beginning inventory would be understated,cost of goods sold would be understated and gross margin and net income would be overstated.Retained earnings and total assets would be correctly stated at the end of the second year.

Question 2

Define the terms FIFO and LIFO.

Answer 2

FIFO = First-in,first-out: This cost flow assumption designates the cost of the first goods purchased as the cost of the first goods sold.
LIFO = Last-in,first-out: This cost flow assumption designates cost of the last goods purchased as the cost of the first goods sold.

Question 3

What accounting steps would a firm normally take when it discovers a material difference between a physical inventory count and the book inventory figure? Assume that the company uses a perpetual inventory system.

Answer 3

If a material difference is detected between the physical and book inventories,an inventory adjustment is normally made.For example,if the physical count is less than the book figure,cost of goods sold (or an inventory loss account)would be increased and the inventory account would be decreased.

Question 4

In an inflationary period,which inventory cost flow method,FIFO or LIFO,is more desirable from a tax standpoint? Why?

Question 5

How would the sale affect the financial statements if Stan's Surf Shack uses the FIFO inventory cost flow method?

Question 6

In an inflationary period,which cost flow method of accounting for inventory will produce the smallest amount of net income?

Question 7

In relation to inventory,differentiate between the flow of cost and the physical flow of goods.

Question 8

Explain the computation of the inventory amount if the lower-of-cost-or-market rule is applied using the individual inventory item approach.

Question 9

In a world with inflation,but no income tax,how does the choice between LIFO and FIFO affect a company's cash flows? Would the presence of an income tax system cause a difference in the amount of cash outflow when using FIFO versus LIFO?

Question 10

Stan's Surf Shack uses the FIFO inventory cost flow method.When its income tax is paid,what is the effect of the entry on the financial statements? Note that no tax liability had been accrued.

Question 11

How would the sale affect the financial statements if Stan's Surf Shack uses the LIFO inventory cost flow method?

Question 12

Explain the meaning of "cost" and "market" as used in the application of the lower-of-cost-or-market rule.

Question 13

Assume that Stan's Surf Shack made the second purchase for cash.How would that purchase affect the financial statements?

Question 14

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

Question 15

Kincaid Camera Shop applies the lower-of-cost-or-market rule to individual items of inventory.In 2016,some of Kincaid's inventory lost value due to obsolescence.Other items increased in market value.In total,the market value of Kincaid's inventory was higher at the end of 2016 than the cost of the inventory.Would Kincaid have an adjustment to make at the end of 2016 due to the lower-of-cost-or-market rule? Would the answer be any different if Kincaid applied the rule in aggregate rather than to individual items?

Question 16

In an inflationary period,which cost flow method,LIFO or FIFO,results in the larger dollar amount of assets on the balance sheet?

Question 17

Use the following information for questions 1-5:
Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.
Stan's Surf Shack purchased 5 surfboards for $200 each.Later it purchased 2 more surfboards for $250 each.Stan's uses the perpetual inventory system.Assume that 6 surfboards were sold during the period for $350 cash each.

Assume that Stan's Surf Shack purchased the first five surfboards on account.How would the purchase transaction affect its financial statements?

Question 18

Sierra Company uses the weighted average inventory cost flow method.How would Sierra's accountant compute cost of goods sold when recording a sale under the perpetual inventory system?

Question 19

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

Question 20

If some inventory items have declined in value from damage or obsolescence,what effect will the lower-of-cost-or-market rule have on the amount of inventory shown on the balance sheet?

Question 21

Which inventory costing method will produce an amount for cost of goods sold that is closest to current market value?

A)Weighted average.
B)Specific identification.
C)LIFO.
D)FIFO.

Question 22

Blake Company purchased two identical inventory items.The item purchased first cost $16.00,and the item purchased second cost $18.00.Blake sold one of the items for $24.00.Which of the following statements is true?

A)Ending inventory will be lower if Blake uses weighted average than if FIFO were used.
B)Cost of goods sold will be higher if Blake uses FIFO than if weighted average were used.
C)The dollar amount assigned to ending inventory will be the same no matter which cost flow method is used.
D)Gross margin will be higher if Blake uses LIFO than it would be if FIFO were used.

Question 23

Discuss the significance of the average number of days to sell inventory.

Question 24

Explain the computation of and the significance of inventory turnover.

Question 25

Use the following information for questions
The inventory records for Radford Co.reflected the following


-Determine the amount of cost of goods sold assuming the LIFO cost flow method.

A)$4,100
B)$4,320
C)$2,360
D)$3,600

Question 26

In an inflationary environment,

A)a company's net income will be higher if it uses LIFO than if it uses FIFO.
B)a company's cost of goods sold will be lower if it uses LIFO as opposed to FIFO.
C)a company's net income will be the same regardless of whether LIFO or FIFO is used.
D)a company's assets will be lower if it uses LIFO as opposed to FIFO cost flow.

Question 27

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

Question 28

List the specific steps used in computing the estimated inventory balance using the gross margin method.

Question 29

If prices are rising,which inventory cost flow method will produce the lowest amount of cost of goods sold?

A)LIFO
B)FIFO
C)Weighted average
D)LIFO,FIFO,and weighted average will all produce equal amounts.

Question 30

Use the following information for questions
The inventory records for Radford Co.reflected the following


-Determine the amount of gross margin assuming the weighted average cost flow method.

A)$3,015
B)$2,412
C)$1,314
D)$2,970

Question 31

Use the following information for questions
The inventory records for Radford Co.reflected the following


-Determine the weighted average cost per unit (rounded)for May.

A)$4.45
B)$4.50
C)$5.12
D)$6.34

Question 32

When prices are falling:

A)LIFO will result in lower income and a lower inventory valuation than will FIFO.
B)LIFO will result in lower income and a higher inventory valuation than will FIFO.
C)LIFO will result in higher income and a higher inventory valuation than will FIFO.
D)LIFO will result in higher income and a lower inventory valuation than will FIFO.

Question 33

At a time of declining prices,which cost flow assumption will result in the highest ending inventory?

A)Weighted average
B)FIFO
C)LIFO
D)Either weighted average or FIFO

Question 34

Barker Company paid cash to purchase two identical inventory items.The first purchase cost $18.00 cash and the second cost $20.00 cash.Barker sold one inventory item for $30.00 cash.Based on this information alone,without considering the effect of income tax,:

A)cash flow from operating activities is $11.00 assuming a weighted average cost flow.
B)cash flow from operating activities is $12.00 assuming a FIFO cost flow.
C)cash flow from operating activities is $10.00 assuming a LIFO cost flow.
D)the amount of cash flow from operating activities is not affected by the cost flow method.

Question 35

When the cost of purchasing inventory is declining,which inventory cost flow method will produce the highest amount of cost of goods sold?

A)Weighted average
B)LIFO
C)FIFO
D)LIFO,FIFO,and weighted average will all produce the same amount of cost of goods sold.

Question 36

What are the circumstances that might cause a company to need an estimate of the amount of its inventory?

Question 37

Use the following information for questions
The inventory records for Radford Co.reflected the following


-Determine the amount of ending inventory assuming the FIFO cost flow method.

A)$480
B)$440
C)$400
D)$940

Question 38

Hoover Company purchased two identical inventory items.The item purchased first cost $33.00.The item purchased second cost $35.00.Then Hoover sold one of the inventory items for $62.00.Based on this information:

A)the amount of ending inventory is $35.00 if Hoover uses the LIFO cost flow method.
B)the amount of gross margin is $28.00 if Hoover uses the weighted average cost flow method.
C)the amount of cost of goods sold is $35.00 if Hoover uses the FIFO cost flow method.
D)the amount of cost of goods sold is $33.00 if Hoover uses the LIFO cost flow method.

Question 39

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)?

A)LIFO.
B)FIFO.
C)Weighted average
D)None of these;inventory methods cannot affect cash flows.

Question 40

Anton Co.uses the perpetual inventory method.Anton purchased 400 units of inventory that cost $12.00 each.At a later date the company purchased an additional 600 units of inventory that cost $16.00 each.If Anton uses the FIFO cost flow method and sells 700 units of inventory,the amount of cost of goods sold will be:

A)$11,200.
B)$10,400.
C)$8,400.
D)$9,600.

Question 41

Vargas Company uses the perpetual inventory method.Vargas purchased 400 units of inventory that cost $15.00 each.At a later date the company purchased an additional 800 units of inventory that cost $18.00 each.Vargas sold 500 units of inventory for $27.00.If Vargas uses a FIFO cost flow method,the amount of cost of goods sold appearing on the income statement will be:

A)$7,800.
B)$6,000.
C)$4,500.
D)$5,700.

Question 42

Use the following information for questions
Chase Co.uses the perpetual inventory method.The inventory records for Chase reflected the following


-Assuming Chase uses a FIFO cost flow method,the ending inventory on January 31 is:

A)$345.
B)$340.
C)$330.
D)$1,020.

Question 43

Koontz Company uses the perpetual inventory method.On January 1,2016,the company's first day of operations,Koontz purchased 400 units of inventory that cost $7.50 each.On January 10,2016,the company purchased an additional 600 units of inventory that cost $9.00 each.If Koontz uses a weighted average cost flow method and sells 550 units of inventory,the amount of inventory appearing on balance sheet following the sale will be approximately:

A)$3,780.
B)$4,738.
C)$3,080.
D)$3,713.

Question 44

Use the following information for questions
Glasgow Enterprises started the period with 80 units in beginning inventory that cost $7.50 each.During the period,the company purchased inventory items as follows
Glasgow sold 220 units after purchase 3 for $17.00 each.


-Glasgow's ending inventory under weighted average would be approximately:

A)$2,361.
B)$2,340.
C)$1,980.
D)$1,998.

Question 45

Which of the following businesses is most likely to use a specific identification cost flow method?

A)Car dealership
B)Grocery store
C)Hardware store
D)Roofing company

Question 46

Use the following information for questions
The inventory records for Radford Co.reflected the following


-Determine the amount of gross margin assuming the FIFO cost flow method.

A)$2,920
B)$3,420
C)$3,000
D)$4,020

Question 47

Poole Company purchased two identical inventory items.One of the items,purchased in January,cost $4.50.The other,purchased in February,cost $4.75.One of the items was sold in March at a selling price of $7.50.Select the correct answer assuming that Poole uses a LIFO cost flow.

A)The balance in ending inventory would be $4.75.
B)The amount of gross margin would be $2.75.
C)The amount of ending inventory would be $4.625.
D)The amount of cost of goods sold would be $4.50.

Question 48

Use the following information for questions
Chase Co.uses the perpetual inventory method.The inventory records for Chase reflected the following


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

A)$1,020.
B)$1,005.
C)$1,045.
D)$340.

Question 49

Rowan Company has four different categories of inventory.Quantity,cost,market value for each inventory category is shown below:
The company carries inventory at lower-of-cost-or-market applied to the inventory in aggregate.The implementation of the lower-of-cost-or-market rule would:

A)increase assets and equity by $55.50.
B)reduce assets and equity by $101.00.
C)reduce assets and equity by $79.00.
D)leave total assets and equity unchanged.

Question 50

Use the following information for questions
Glasgow Enterprises started the period with 80 units in beginning inventory that cost $7.50 each.During the period,the company purchased inventory items as follows
Glasgow sold 220 units after purchase 3 for $17.00 each.


-Glasgow's ending inventory under LIFO would be:

A)$2,730.
B)$2,460.
C)$2,220.
D)$1,950.

Question 51

Melbourne Company uses the perpetual inventory method.Melbourne purchased 500 units of inventory that cost $4.00 each.At a later date the company purchased an additional 600 units of inventory that cost $5.00 each.If Melboune uses a LIFO cost flow method,and sells 800 units of inventory,the amount of ending inventory appearing on the balance sheet will be:

A)$3,800.
B)$1.350.
C)$1,500.
D)$1,200.

Question 52

The lower-of-cost-or-market rule: can be applied to

A)can be applied to major classes or categories of inventory.
B)can be applied to the entire stock of inventory in aggregate.
C)can be applied to each individual inventory item.
D)can be applied to any of these answer choices.

Question 53

What is meant by "market" in lower-of-cost-or-market calculations?

A)The amount of gross margin earned by selling merchandise.
B)The amount the goods were sold for during the period.
C)The amount that would have to be paid to replace the merchandise.
D)The amount originally paid for the merchandise.

Question 54

Use the following information for questions
Glasgow Enterprises started the period with 80 units in beginning inventory that cost $7.50 each.During the period,the company purchased inventory items as follows
Glasgow sold 220 units after purchase 3 for $17.00 each.


-Glasgow's cost of goods sold under FIFO would be:

A)$1,650.
B)$1,860.
C)$2,310.
D)$2,100.

Question 55

Tetra Company purchased 2,000 units of inventory that cost $4.00 each on January 1,2016.An additional 3,000 units of inventory were purchased on January 12,2016 at a cost of $4.20 each.Tetra Company sold 4,000 units of inventory on January 20,2016.Which of the following entries would be required to recognize the cost of goods sold assuming that Tetra Co.uses the perpetual inventory method and a FIFO cost flow method?

Question 56

Nelson Corporation is required to record an inventory write-down of $2,500 as a result of using the lower-of-cost-or-market rule.Which of the following answers correctly shows how this entry would affect the financial statements?

Question 57

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

A)Each individual inventory item.
B)Average of cost of goods sold for the past three years.
C)Major classes or categories of inventory.
D)The entire stock of inventory in aggregate.

Question 58

Stubbs Company uses the perpetual inventory method.On January 1,2016,Stubbs purchased 400 units of inventory that cost $8.00 each.On January 10,2016,the company purchased an additional 600 units of inventory that cost $9.00 each.If Stubbs uses a weighted average cost flow method and sells 700 units of inventory for $16.00 each,the amount of gross margin reported on the income statement will be:

A)$5,180.
B)$5,250.
C)$5,000.
D)$6,020.

Question 59

Use the following information for questions
Chase Co.uses the perpetual inventory method.The inventory records for Chase reflected the following


-Assuming Chase uses a LIFO cost flow method,the amount of cost of goods sold for the sales transaction on January 18 is (round the final result to the nearest whole dollar):

A)$1,150.
B)$1,050.
C)$1,070.
D)$1,130.

Question 60

If a firm is using the lower-of-cost-or-market rule and if a write-down entry is required,which of the following effects will apply?

A)Net income will increase.
B)Gross margin will decrease.
C)Assets will decrease.
D)Ggross margin will decrease and assets will also decrease .

Question 61

Phipps Corporation overstated its ending inventory on December 31,2015.Which of the following answers correctly identifies the effect of the error on 2016 financial statements?

A)Cost of goods sold is overstated.
B)Gross margin overstated.
C)Ending inventory is understated.
D)Net income is overstated.

Question 62

Zirkle Company understated its ending inventory.Which of the following answers correctly states the effect of the error in the present period?

A)Overstatement of total assets and cost of goods sold.
B)Overstatement of cost of goods sold and retained earnings.
C)Understatement of liabilities and retained earnings.
D)Understatement of total assets and gross margin.

Question 63

Use the following information for questions


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

A)15.3
B)24.8
C)23.9
D)25.6

Question 64

When using the gross margin method to estimate inventory,which of the following is a step in the computation?

A)Add the amount goods available for sale to estimated cost of goods sold.
B)Add estimated gross margin to sales.
C)Subtract estimated goods available for sale from beginning inventory.
D)Subtract estimated cost of goods sold from the amount of goods available for sale.

Question 65

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

A)Overstatement of cost of goods sold.
B)Overstatement of total assets.
C)Understatement of net income.
D)Understatement of retained earnings.

Question 66

Inventory turnover is calculated by dividing:

A)cost of goods sold by inventory.
B)sales by inventory.
C)beginning inventory by the ending inventory.
D)inventory by cost of goods sold.

Question 67

Carson Company has an inventory turnover of 12.75,and its inventory amounts to $2,400,000.What is the amount of cost of goods sold?

A)$30,600,000
B)$188,235
C)$26,666,667
D)$51,000

Question 68

When preparing its quarterly financial statements,Pace Co.uses the gross margin method to estimate ending inventory.The following information is available for the 1st quarter of 2016:
What was Pace's estimated inventory on March 31,2016?

A)$236,250
B)$288,750
C)$206,250
D)$258,750

Question 69

Taylor Co.had beginning inventory of $400 and ending inventory of $600.Taylor Co.had cost of goods sold amounting to $1,800.Based on this information,Taylor Co.must have purchased inventory amounting to:

A)$1,600
B)$2,800
C)$2,000
D)$2,400

Question 70

West Corporation's 2015 ending inventory was overstated by $20,000;however,ending inventory for 2016 was correct.Which of the following statements is correct?

A)Net income for 2015 is understated.
B)Retained earnings at the end of 2016 is overstated.
C)Cost of goods sold for 2015 is overstated.
D)Cost of goods sold for 2016 is overstated.

Question 71

The Bradford Company was recently required to record an inventory write-down of $5,200 because the market value of its inventory was less than cost.Assuming the amount of the write-down is not material (the total inventory was over $9,750,000),which of the following is the appropriate journal entry?

Question 72

On December 31,2015,Owings Corporation overstates the ending inventory account by $5,000.How will this affect Retained Earnings in the December 31,2016 balance sheet?

A)Retained Earnings will be correctly stated.
B)Retained Earnings will be understated by $5,000.
C)Retained Earnings will be overstated by $5,000.
D)Cannot be determined with the above information.

Question 73

Under the perpetual inventory system,the best estimate of the amount of inventory is:

A)shown on the previous period's financial statements.
B)the book balance in the inventory account.
C)provided by application of the gross margin method.
D)the beginning inventory balance minus sales for the period.

Question 74

Landis Company is preparing its financial statements.Gross margin is normally 40% of sales.Information taken from the company's records revealed sales of $25,000;beginning inventory of $2,500 and purchases of $17,500.The estimated amount of ending inventory would be:

A)$15,000.
B)$5,000.
C)$8,000.
D)$10,000.

Question 75

The gross margin method requires all but which of the following elements of information?

A)Total sales for the present period.
B)The ending inventory for the present period.
C)Amount of purchases during the present period.
D)The beginning inventory for the present period.

Question 76

At the end of the 2016 accounting period DeYoung Company determined that the market value of its inventory was $79,800.The historical cost of this inventory was $81,400.DeFazio uses the perpetual inventory method.The entry necessary to reduce the inventory to the lower of cost or market will

A)decrease assets and decrease gross margin.
B)decrease assets and decrease net income.
C)increase assets and increase net income.
D)decrease assets,gross margin,and net income.

Question 77

Use the following information for questions


-Given that longer inventory holding periods act to increase expenses,which of the three companies would be expected to have the lowest inventory holding cost?

A)All three companies have equal holding costs
B)Company X
C)Company Y
D)Company Z

Question 78

An error that results in overstating ending inventory would have what effect on the company's financial statements in the current year?

Question 79

Which of the following circumstances is not a reason to compute an estimate of the amount of inventory?

A)To complete the company's annual income tax return.
B)To evaluate the accuracy of a physical count of goods.
C)To prepare monthly or quarterly financial statements without incurring the expense of taking a physical inventory.
D)To support an insurance claim for a loss due to theft of inventory.

Question 80

Why are the inventory and cost of goods sold accounts attractive targets for managerial fraud?

A)There are few if any procedures that can check for fraud in these accounts.
B)There are no adequate methods of record keeping for inventory.
C)These accounts are more significant than most other accounts.
D)Cost of goods sold and Inventory accounts are not attractive targets of fraud.