Financial Accounting: A Business Process Approach 3rd Edition Test Bank – Jane L. Reimers

Financial Accounting A Business Process Approach 3rd Edition Test Bank – Jane L. Reimers

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Title : Financial Accounting: A Business Process Approach

Author : Jane L. Reimers

Edition : 3rd Edition

Type : TestBank

Product Description

Financial Accounting  A Business Process Approach 3rd Edition Test Bank – Jane L. Reimers

Financial Accounting  A Business Process Approach 3rd Edition Test Bank – Jane L. Reimers

Sample

Chapter 5  The Purchase and Sale of Inventory

 

Learning Objective 5-1

 

5.1-1) The operating cycle for a merchandising firm is ________.

  1. A) obtain cash from stockholders, invest cash in equipment, earn more cash
  2. B) borrow cash from lenders, earn cash from customers, repay lenders
  3. C) start with cash, buy inventory, sell inventory to customers, collect cash from customers
  4. D) issue stock to owners, earn a profit, pay dividends to owners

Answer:  C

Diff: 1

Objective:  LO 5-1

 

5.1-2) Which statement below best describes how to account for the costs of purchasing inventory?

  1. A) The costs are initially recorded as expenses and depreciated over the estimated useful life.
  2. B) Inventory costs are initially reported as assets and then maintained in the asset accounts for the life of the business.
  3. C) The costs are initially recorded as assets and become expenses when the inventory has an increase in market value.
  4. D) The costs are initially recorded as assets and become expenses when the inventory is sold.

Answer:  D

Diff: 1

Objective:  LO 5-1

 

5.1-3) Inventory consists of items that ________.

  1. A) are purchased for resale to customers as a normal operating activity
  2. B) are purchased, and will be sold to customers only if they go up in market value
  3. C) are intangible in nature
  4. D) can be stored indefinitely and will be held in the business

Answer:  A

Diff: 1

Objective:  LO 5-1

 

5.1-4) A purchase requisition is a document that is ________.

  1. A) sent to a supplier or vendor requesting that an item be shipped
  2. B) used internally to request that something be purchased
  3. C) used internally to approve a payment for inventory
  4. D) sent to a supplier along with payment for inventory purchased

Answer:  B

Diff: 2

Objective:  LO 5-1

 

5.1-5) A purchase order is a document that is ________.

  1. A) sent to a supplier or vendor requesting that an item be shipped
  2. B) used internally to request that something be purchased
  3. C) used internally to approve a payment for inventory
  4. D) sent to a supplier along with payment for inventory purchased

Answer:  A

Diff: 1

Objective:  LO 5-1

 

5.1-6) Which statement below best explains the credit terms of 2/10, n/30?

  1. A) The buyer will receive a 2 percent discount if it pays within ten days of the purchase.
  2. B) The buyer will receive a 10 percent discount if it pays within two days.
  3. C) The buyer will receive a 10 percent discount if it pays within thirty days.
  4. D) The buyer will receive a 2 percent discount if it pays within thirty days.

Answer:  A

Diff: 1

Objective:  LO 5-1

 

5.1-7) Which of the following costs should be included in the inventory account when inventory is purchased FOB shipping point?

  1. A) insurance while the merchandise is in transit
  2. B) the cost of the warehouse
  3. C) the advertising costs
  4. D) the cost of merchandise returned

Answer:  A

Diff: 1

Objective:  LO 5-1

 

5.1-8) The following information is provided for PO Company:

 

Purchased 100 units of merchandise for $20 each

Paid $50 of freight costs for the merchandise received

Paid $1,200 for an advertising campaign related to the merchandise

Returned 10 of the units purchased because they were broken

Paid the purchasing manager’s monthly salary of $3,000

 

Determine the cost of PO’s inventory at the end of the period.

  1. A) $1,850
  2. B) $3,050
  3. C) $1,800
  4. D) $4,800

Answer:  A

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-9) Up-a-Creek Company had ending inventory of $60,000, purchases of $200,000, beginning accounts payable of $100,000, ending accounts payable of $80,000 and cost of goods sold of $150,000. What was the amount of beginning inventory?

  1. A) $90,000
  2. B) $10,000
  3. C) $30,000
  4. D) $150,000

Answer:  B

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-10) Souper Bowls sold $500 of merchandise to a customer for cash. The sales tax was 5%. How much cash did Souper Bowls receive?

  1. A) $525
  2. B) $371
  3. C) $329
  4. D) $210

Answer:  A

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-11) Which of the following is inventory for an office supply store such as Office Max?

  1. A) paper used to maintain Office Max’s accounting records
  2. B) paper available to sell to Office Max’s customers
  3. C) paper used in Office Max’s employee washroom
  4. D) office supply storage costs

Answer:  B

Diff: 1

Objective:  LO 5-1

 

5.1-12) A company reports its unsold merchandise inventory on the ________.

  1. A) balance sheet as a current asset
  2. B) balance sheet as part of Property, plant & equipment
  3. C) balance sheet as a current liability
  4. D) income statement as an expense

Answer:  A

Diff: 1

Objective:  LO 5-1

 

 

5.1-13) If a company uses a periodic inventory system, it most likely updates its inventory records at the time of every ________.

  1. A) purchase
  2. B) sale
  3. C) return
  4. D) physical inventory count

Answer:  D

Diff: 1

Objective:  LO 5-1

5.1-14) A company with a perpetual inventory system purchases inventory on account. What is the effect of this transaction on the accounting equation?

  1. A) increase one asset and decrease another asset
  2. B) increase an asset and decrease retained earnings
  3. C) increase an asset and decrease a liability
  4. D) increase an asset and increase a liability

Answer:  D

Diff: 1

Objective:  LO 5-1

 

5.1-15) If the terms of purchase are FOB shipping point, title to the goods passes from the vendor to the buyer ________.

  1. A) when the merchandise leaves the vendor’s warehouse
  2. B) halfway between the vendor’s warehouse and the buyer’s warehouse
  3. C) when the merchandise reaches the buyer’s warehouse
  4. D) when the merchandise is sold to the end user

Answer:  A

Diff: 1

Objective:  LO 5-1

 

5.1-16) If the terms of purchase are FOB destination, title to the goods passes from the vendor to the buyer ________.

  1. A) when the merchandise leaves the vendor’s warehouse
  2. B) halfway between the vendor’s warehouse and the buyer’s warehouse
  3. C) when the merchandise reaches the buyer’s warehouse
  4. D) when the merchandise is sold to the end user

Answer:  C

Diff: 1

Objective:  LO 5-1

 

 

5.1-17) A purchase allowance ________.

  1. A) is the amount of cash the purchasing manager is allowed to spend
  2. B) increases the cost of inventory purchased
  3. C) represents the cost of merchandise returned to the vendor
  4. D) is a cost reduction for keeping merchandise that is damaged or defective

Answer:  D

Diff: 1

Objective:  LO 5-1

 

5.1-18) Which of the following DECREASES the cost of inventory purchased?

  1. A) sales tax
  2. B) purchasing merchandise FOB shipping point
  3. C) purchase allowances
  4. D) payment of accounts payable

Answer:  C

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

5.1-19) A vendor offers terms of 3/10, n/30. What is the ANNUAL interest rate the vendor is charging a buyer who does not pay within 10 days? (Assume there are 360 days in the year.

  1. A) 3%
  2. B) 36%
  3. C) 54%
  4. D) 108%

Answer:  C

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-20) A vendor offers terms of 4/10, n/30. What is the ANNUAL interest rate the vendor is charging a buyer who does not pay within 10 days? (Assume there are 360 days in the year.

  1. A) 4%
  2. B) 72%
  3. C) 54%
  4. D) 144%

Answer:  B

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-1

 

 

5.1-21) A vendor offers terms of 2/10, n/30. What is the ANNUAL interest rate the vendor is charging a buyer who does not pay within 10 days? (Assume there are 360 days in the year.

  1. A) 2%
  2. B) 36%
  3. C) 54%
  4. D) 72%

Answer:  B

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-22) A vendor offers terms of 1/10, n/30. What is the ANNUAL interest rate the vendor is charging a buyer who does not pay within 10 days? (Assume there are 360 days in the year.

  1. A) 1%
  2. B) 36%
  3. C) 18%
  4. D) 54%

Answer:  C

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-1

5.1-23) On May 27, Ace Electronics ordered merchandise from Elmo Company. Elmo shipped the merchandise to Ace on May 31, FOB shipping point. The merchandise arrived at Ace’s warehouse on June 2. Ace paid for the merchandise on July 1. When should Elmo recognize revenue?

  1. A) May 27
  2. B) May 31
  3. C) June 2
  4. D) July 1

Answer:  B

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-24) On May 27, Ace Electronics ordered merchandise from Elmo Company. Elmo shipped the merchandise to Ace on May 31, FOB destination. The merchandise arrived at Ace’s warehouse on June 2. Ace paid for the merchandise on July 1. When should Ace record the purchase?

  1. A) May 27
  2. B) May 31
  3. C) June 2
  4. D) July 1

Answer:  C

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-25) On November 27, Acme, Inc. ordered merchandise from Zenith Company. Zenith shipped the merchandise to Acme on November 29, FOB shipping point. The merchandise arrived at Acme’s warehouse on December 1. Acme paid for the merchandise on January 2. When should Zenith recognize revenue?

  1. A) November 27
  2. B) November 29
  3. C) December 1
  4. D) January 2

Answer:  B

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-26) On November 27, Acme, Inc. ordered merchandise from Zenith Company. Zenith shipped the merchandise to Acme on November 29, FOB destination. The merchandise arrived at Acme’s warehouse on December 1. Acme paid for the merchandise on January 2. When should Acme record the purchase?

  1. A) November 27
  2. B) November 29
  3. C) December 1
  4. D) January 2

Answer:  C

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-1

5.1-27) On December 12, Occident, Ltd., a company in Singapore, ordered merchandise from San Francisco Exports. The merchandise was shipped to Occident on December 29, FOB shipping point. The merchandise arrived at Occident’s warehouse on February 1. Occident paid for the merchandise on March 2. When should San Francisco Exports recognize revenue?

  1. A) December 12
  2. B) December 29
  3. C) February 1
  4. D) March 2

Answer:  B

Diff: 2

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-1

 

 

5.1-28) On December 12, Occident, Ltd., a company in Singapore, ordered merchandise from San Francisco Exports. The merchandise was shipped to Occident on December 29, FOB destination. The merchandise arrived at Occident’s warehouse on February 1. Occident paid for the merchandise on March 2. When should Occident record the purchase?

  1. A) December 12
  2. B) December 29
  3. C) February 1
  4. D) March 2

Answer:  C

Diff: 2

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-1

 

5.1-29) Sailors, Inc. sold $100,000 of merchandise to Breyer, Inc. with terms of 1/10, n/30. Five days later, Breyer returned $10,000 of the merchandise. If Breyer pays within the discount period, how much cash will Sailors receive?

  1. A) $100,000
  2. B) $99,000
  3. C) $90,000
  4. D) $89,100

Answer:  D

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-30) Sailors, Inc. sold $100,000 of merchandise to Breyer, Inc. with terms of 1/10, n/30. If Breyer pays the invoice 20 days after receipt of the invoice, how much cash will Sailors receive?

  1. A) $100,000
  2. B) $99,000
  3. C) $90,000
  4. D) $89,100

Answer:  A

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

5.1-31) Zenith Company sold $10,000 of merchandise to Nadir Company, with terms of 2/10, n/30. Five days later, Nadir returned $1,000 of the merchandise. If Nadir does NOT pay within the discount period, how much cash will Zenith receive?

  1. A) 10,000
  2. B) $9,800
  3. C) $9,000
  4. D) $8,820

Answer:  C

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-32) Nadir Company sold $2,000 of merchandise to Acme Company, with terms of 3/10, n/30. Five days later, Acme returned $500 of the merchandise. If Acme pays within the discount period, how much cash will Nadir receive?

  1. A) $2,000
  2. B) $1,940
  3. C) $1,500
  4. D) $1,455

Answer:  D

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-33) Nadir Company sold $2,000 of merchandise to Acme Company, with terms of 3/10, n/30. Five days later, Acme returned $500 of the merchandise. If Acme does NOT pay within the discount period, how much cash will Nadir receive?

  1. A) $2,000
  2. B) $1,940
  3. C) $1,500
  4. D) $1,455

Answer:  C

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-34) Ace Company sells goods FOB destination. The shipping costs ________.

  1. A) will not be paid by Ace
  2. B) appear on Ace’s income statement as a decrease in Net sales
  3. C) appear on Ace’s income statement as an Operating expense
  4. D) appear on Ace’s income statement as an increase in Cost of goods sold

Answer:  C

Diff: 1

Objective:  LO 5-1

5.1-35) Ace Electronics sold $350 of merchandise to a customer on account. The sales tax was 6%. How much sales revenue did Ace earn?

  1. A) $350
  2. B) $371
  3. C) $329
  4. D) $0

Answer:  A

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

 

5.1-36) Inside Outfitters sold $200 of merchandise to a customer for cash. The sales tax was 8%. How much cash did Inside Outfitters receive?

  1. A) $200
  2. B) $16
  3. C) $216
  4. D) $184

Answer:  C

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-37) Inside Outfitters sold $200 of merchandise to a customer for cash. The sales tax was 8%. How much sales revenue did Inside Outfitters earn?

  1. A) $200
  2. B) $0
  3. C) $216
  4. D) $184

Answer:  A

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-38) Acme Enterprise sold $150 of merchandise to a customer for cash. The sales tax was 7%. How much cash did Inside Acme receive?

  1. A) $10.50
  2. B) $160.50
  3. C) $150.00
  4. D) $139.50

Answer:  B

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

5.1-39) Acme Enterprise sold $150 of merchandise to a customer for cash. The sales tax was 7%. How much sales revenue did Acme earn?

  1. A) $10.50
  2. B) $160.50
  3. C) $150.00
  4. D) $139.50

Answer:  C

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

 

5.1-40) Which statement below best explains the credit terms of 2/15, n/30?

  1. A) The buyer will receive a 15 percent discount if it pays within two days of the purchase.
  2. B) The buyer will receive a 15 percent discount if it pays within thirty days.
  3. C) The buyer will receive a 2 percent discount if it pays within fifteen days.
  4. D) The buyer will receive a 2 percent discount if it pays within thirty days.

Answer:  C

Diff: 1

Objective:  LO 5-1

 

5.1-41) Boise Cascade Company purchases $5,000 of merchandise from a vender with credit terms of 2/10, n/30. Assuming that Boise Cascade pays within the discount period, the total cost of the inventory is ________.

  1. A) $5,000
  2. B) $4,900
  3. C) $4,500
  4. D) $3,500

Answer:  B

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-42) On January 5, Boise Cascade Company purchases $5,000 of merchandise from a vendor with credit terms of 2/10, n/30. If Boise Cascade pays the vendor on January 20, the amount of the payment should be ________.

  1. A) $5,000
  2. B) $4,900
  3. C) $4,500
  4. D) $3,500

Answer:  A

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

5.1-43) On January 5, Boise Cascade Company purchases $5,000 of merchandise from a vendor with credit terms of 2/10, n/30. If Boise Cascade pays the vendor on January 13, the amount of the payment should be ________.

  1. A) $5,000
  2. B) $4,900
  3. C) $4,500
  4. D) $3,500

Answer:  B

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

 

5.1-44) Rigby Company purchased merchandise from a supplier in Hong Kong with an invoice cost of $10,000 and shipping terms of FOB destination. The freight costs amount to $1,000. Rigby should record inventory at a cost of ________.

  1. A) $11,000
  2. B) $10,000
  3. C) $9,000
  4. D) $1,000

Answer:  B

Diff: 1

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-1

 

5.1-45) Banner, Inc. purchases $45,000 of merchandise from a vendor with credit terms of 2/10, n/30. Assuming that Banner pays within the discount period, the total cost of the inventory is ________.

  1. A) $45,900
  2. B) $45,000
  3. C) $40,500
  4. D) $44,100

Answer:  D

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-46) Rigby Company buys merchandise from Shoshone Company with an invoice cost of $100,000 and shipping terms of FOB shipping point. The freight costs amount to $1,000. Which of the following statements is TRUE?

  1. A) Rigby Company will record freight-in costs of $1,000.
  2. B) Shoshone Company will record freight-out costs of $1,000.
  3. C) Shoshone Company will record freight-in costs of $1,000.
  4. D) Rigby Company will have inventory cost of $10,000.

Answer:  A

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-1

5.1-47) Rigby Company buys merchandise from Shoshone Company with an invoice cost of $10,000 and shipping terms of FOB destination. The freight costs amount to $7,000. Which of the following statements is TRUE?

  1. A) Rigby Company will record freight-in costs of $7,000.
  2. B) Shoshone Company will record freight-out costs of $7,000.
  3. C) Shoshone Company will record freight-in costs of $7,000.
  4. D) Rigby Company will have inventory cost of $107,000.

Answer:  B

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-48) Horse Creek Company had beginning inventory of $34,000, purchases of $210,000, purchase returns of $13,000, and ending inventory of $40,000. What was the cost of goods sold?

  1. A) $204,000
  2. B) $198,000
  3. C) $157,000
  4. D) $191,000

Answer:  D

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-49) On May, 2, Breyer, Inc. purchases $25,000 of merchandise from a vendor with credit terms of 2/10, n/30. If Breyer pays the vendor on May 10, the amount of the payment should be ________.

  1. A) $25,000
  2. B) $24,500
  3. C) $22,500
  4. D) $27,500

Answer:  B

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-50) Rigby Company buys merchandise from Shoshone Company with an invoice cost of $10,000 and shipping terms of FOB shipping point. The freight costs amount to $1,000. Which of the following statements is TRUE?

  1. A) Rigby Company will record freight-in costs of $1,000.
  2. B) Shoshone Company will record freight-out costs of $1,000.
  3. C) Shoshone Company will record freight-in costs of $1,000.
  4. D) Rigby Company will have inventory cost of $10,000.

Answer:  A

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-51) On February 12, Horseshoe Bend Company purchases $25,000 of merchandise from a vendor with credit terms of 2/10, n/30. On February 15, Horseshoe Bend Company returns $5,000 of the goods because they are defective. If Horseshoe Bend pays the vendor the full amount due on February 20, the amount of the payment is ________.

  1. A) $25,000
  2. B) $20,000
  3. C) $19,600
  4. D) $18,000

Answer:  C

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-52) On February 12, Horseshoe Bend Company purchases $25,000 of merchandise from a vendor with credit terms of 2/10, n/30. If Horseshoe Bend pays the vendor on February 21, the amount of the payment should be ________.

  1. A) $25,000
  2. B) $24,500
  3. C) $22,500
  4. D) $27,500

Answer:  B

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-53) Horse Creek Company had beginning inventory of $900,000, purchases of $2,000,000, purchase returns of $50,000, ending inventory of $800,000, beginning accounts payable of $200,000 and ending accounts payable of $100,000. What was the cost of goods sold?

  1. A) $2,050,000
  2. B) $1,950,000
  3. C) $2,150,000
  4. D) $1,900,000

Answer:  A

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-54) Which of the following costs are included in the inventory account when inventory is purchased FOB shipping point?

  1. A) purchase returns
  2. B) warranty costs
  3. C) freight costs
  4. D) allowance for uncollectible accounts

Answer:  C

Diff: 1

Objective:  LO 5-1

5.1-55) If the shipping terms are FOB shipping point than the shipping costs are paid by the ________.

  1. A) seller and included as part of the cost of the seller’s inventory
  2. B) buyer and included as part of selling expenses at the time of the purchase
  3. C) seller and included as part of the selling expenses at the time of the sale
  4. D) buyer and included as part of the cost of the buyer’s inventory at the time of the purchase

Answer:  D

Diff: 2

Objective:  LO 5-1

 

5.1-56) The Ribbon Company began operations on May 1. The following transactions took place in May:

 

Purchased $400,000 of merchandise on account.

Purchased an additional $200,000 of merchandise for cash.

Paid $3,000 cash for freight to deliver the merchandise purchased.

Paid $25,000 for the store managers’ monthly salaries.

 

The cost of the inventory purchased for the month of May equals ________.

  1. A) $400,000
  2. B) $600,000
  3. C) $603,000
  4. D) $628,000

Answer:  C

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-57) Perch X, Inc. purchased goods with an invoice price of $3,000. Purchase terms are 1/10, n/30 and the invoice is paid one week after it was received. The shipping terms are FOB shipping point and the shipping costs are $300. The cost of the inventory purchased equals _______.

  1. A) $3,000
  2. B) $3,300
  3. C) $2,700
  4. D) $3,270

Answer:  D

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-1

 

 

5.1-58) On December 29, Perch X, Inc. purchased $2,000 of merchandise from a supplier. The shipping terms were FOB shipping point. The merchandise did not arrive until after yearend. Perch X should ______.

  1. A) exclude the merchandise from its inventory but should record the related accounts payable as of yearend.
  2. B) include the merchandise in its inventory and record the related accounts payable.
  3. C) exclude the merchandise from its inventory and the related accounts payable as of yearend.
  4. D) expense the merchandise as cost of goods sold at yearend.

Answer:  B

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-1

5.1-59) On December 29, Perch X, Inc. purchased $2,000 of merchandise from a supplier. The shipping terms were FOB destination. The merchandise did not arrive until after yearend. Perch X should ______.

  1. A) exclude the merchandise from its inventory but should record the related accounts payable as of yearend.
  2. B) include the merchandise in its inventory and record the related accounts payable.
  3. C) exclude both the merchandise from its inventory and the related accounts payable as of yearend.
  4. D) expense the merchandise as cost of goods sold at yearend.

Answer:  C

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-60) Net sales equals ________.

  1. A) sales minus cost of goods sold
  2. B) sales minus sales returns and allowances minus sales discounts
  3. C) sales divided by net income
  4. D) net income divided by sales

Answer:  B

Diff: 1

Objective:  LO 5-1

 

5.1-61) Net sales is net of ________.

  1. A) goods in transit
  2. B) cost of goods sold
  3. C) sales returns and allowances
  4. D) gross profit

Answer:  C

Diff: 1

Objective:  LO 5-1

 

 

5.1-62) Sales returns and allowances and Sales discounts are ________.

  1. A) contra-asset accounts and are netted against Accounts receivable on the balance sheet
  2. B) contra-expense accounts and netted against Cost of goods sold on the income statement
  3. C) expense accounts and added to Sales on the income statement
  4. D) contra-revenue accounts and netted against Sales on the income statement

Answer:  D

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-63) A purchase requisition is completed after merchandise is received from a vendor.

Answer:  FALSE

Diff: 1

Objective:  LO 5-1

 

5.1-64) A purchase allowance is a record of the company’s request to a vendor for goods or services.

Answer:  FALSE

Diff: 1

Objective:  LO 5-1

5.1-65) The purchase of inventory is recorded as an expense called cost of goods sold.

Answer:  FALSE

Diff: 1

Objective:  LO 5-1

 

5.1-66) Credit terms of 2/10, n/30 provide for a 10 percent discount if the buyer pays within 30 days.

Answer:  FALSE

Diff: 1

Objective:  LO 5-1

 

5.1-67) If the shipping terms are FOB destination, the seller has to pay for freight costs.

Answer:  TRUE

Diff: 1

Objective:  LO 5-1

 

5.1-68) If the shipping terms are FOB shipping point, the seller has to pay for freight costs.

Answer:  FALSE

Diff: 1

Objective:  LO 5-1

 

5.1-69) If the shipping terms are FOB shipping point, the buyer has to pay for freight costs.

Answer:  TRUE

Diff: 1

Objective:  LO 5-1

 

 

5.1-70) Freight out is an operating expense recorded on the seller’s books for the costs of shipping merchandise to buyers.

Answer:  TRUE

Diff: 1

Objective:  LO 5-1

 

5.1-71) Sales returns and allowances is a contra-asset account.

Answer:  FALSE

Diff: 1

Objective:  LO 5-1

 

5.1-72) Describe the operating cycle for a merchandising firm.

Answer:  A merchandising company starts with cash, buys inventory, sells that inventory to customers (often creating accounts receivable), and then collects the cash from the customers.

Diff: 1

Skill:  Communication abilities

Objective:  LO 5-1

5.1-73) Describe the function and use of a purchase requisition and a purchase order.

Answer:  A purchase requisition is filled out when someone in an organization needs goods or services. A purchase requisition is a request to buy a good or a service and it is typically sent to the purchasing department or, in a smaller business, to the owner for approval. If the request is approved, then a purchase order is prepared and sent to an outside vendor specifying the items desired.

Diff: 2

Skill:  Communication abilities

Objective:  LO 5-1

 

5.1-74) Shubart Apparel Company purchased 1,000 shirts from Blue Parrot, FOB shipping point. Each shirt had an invoice cost of $18, which includes $1 of tariff paid to import the shirts from Belize. Shubart also paid FedEx $2,000 to have the shirts shipped to its warehouse in Florida, and another $500 to insure the shirts while they were in transit.

Required:

  1. Determine the inventory cost that Shubart should record.
  2. Explain when the costs described above will become expenses.

Answer:  a. $20,500 = ($18 x 1,000 shirts) + 2,000 + 500

  1. All of the costs above become part of inventory and will become expenses when the inventory is sold.

Diff: 1

Skill:  Analytic skills, Communication abilities, Dynamics of the global economy

Objective:  LO 5-1

 

 

5.1-75) Good Health, LLP, completed the following inventory transactions during the month of August:

 

  1. used cash to purchase $620,000 of merchandise
  2. purchased $190,000 of merchandise on account
  3. paid freight costs of $33,000 on merchandise purchased FOB shipping point
  4. returned $12,000 of defective merchandise to the supplier
  5. used cash to purchase $210,000 of merchandise
  6. paid the purchasing manager’s monthly salary of $11,000
  7. purchased $45,000 of merchandise on account
  8. paid the sales staff’s $22,000 salary for the month
  9. paid freight costs of $9,000 on merchandise purchased FOB shipping point
  10. paid the $17,000 utility bill for the month

 

Required: Determine the cost of merchandise purchased for the month.

Answer:   The total cost of the inventory is $1,095,000 =

$620,000 + 190,000 + 33,000 – 12,000 + 210,000 + 45,000 + 9,000

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-76) Montana Company made the following purchases during the month of September:

 

Sept. 8 Purchased $5,600 of merchandise, terms 2/10, n/30,

FOB destination, freight cost $100

Sept. 16 Purchased $12,300 of merchandise, terms 2/15, n/60,

FOB shipping point, freight cost $100

Sept. 21 Purchased $15,000 of merchandise, terms 3/10, n/20,

FOB destination, freight cost $100

Sept. 28 Purchased $10,000 of merchandise, terms 1/15, n/45,

FOB shipping point, freight cost $100

 

Required:

  1. Complete the chart below for each of the four purchases.

 

Sept. 8 Sept. 16 Sept. 21 Sept. 28
a. due date, assuming the discount is taken
b. last day to pay if the discount is NOT taken
c. amount of discount $ $ $ $
d. freight cost paid by Montana Company $ $ $ $

 

  1. Assuming that the selling company accepts all discounts, what is the total cost of purchases for the month?

 

Answer:  1.

Sept. 8 Sept. 16 Sept. 21 Sept. 28
a. Sept. 18 Oct. 1 Oct. 1 Oct. 13
b. Oct. 8 Nov. 15 Oct. 11 Nov. 12
c. $112 $246 $450 $100
d. $0 $100 $0 $100

 

  1. $42,192 = ($5,600 – 112) + (12,300 — 246 + 100) + (15,000 — 450) + 10,000 – 100 + 100

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-77) Idaho Company made the following purchases during the month of October.

 

October 6 Purchased $15,000 of merchandise, terms 2/10, n/30, FOB destination, freight cost $100
October 14 Purchased $12,000 of merchandise, terms 2/15, n/60, FOB shipping point, freight cost $100
October 22 Purchased $18,000 of merchandise, terms 3/10, n/20, FOB destination, freight cost $100
October 31 Purchased $20,000 of merchandise, terms 1/15, n/45, FOB shipping point, freight cost $100

 

Required:

  1. Complete the chart below for each of the four purchases.

 

Oct. 6 Oct. 14 Oct. 22 Oct. 31
a. due date, assuming the

discount is taken

b. last day to pay if the

discount is NOT taken

c. amount of discount $ $ $ $
d. freight cost paid by

Idaho Company

 

$

 

$

 

$

 

$

 

  1. Assuming that the selling company accepts all discounts, what is the total cost of purchases for the month?

 

Answer:  1.

Oct. 6 Oct. 14 Oct. 22 Oct. 31
a. Oct. 16 Oct. 29 Nov. 1 Nov. 15
b. Nov. 5 Dec. 13 Nov. 11 Dec. 15
c. $300 $240 $540 $200
d. $0 $100 $0 $100

 

  1. $63,920 = ($15,000-300) + ($12,000-240 + 100) + ($18,000—540) + ($20,000-200 + $100

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-78) Tiny Toy Company makes toys and sells them to retail stores on account. The company has a December 31 year-end. In the past, Tiny Toy always sold on account but never offered sales discounts to its customers. However, this year on November 1, the beginning of the holiday sales season, Tiny Toy began offering stores terms of 2/90, n/120. The stores can return anything, no questions asked, but only after December 31.

Required:

  1. Why would Tiny Toy offer such a liberal credit and return policy?
  2. Put an X in the appropriate box to describe the effect of this credit and return policy on Tiny Toy’s financial statements for this year.

 

Financial statement item Increase Decrease No effect
Sales
A/R
Inventory

 

  1. Is Tiny Toy’s new credit and return policy ethical?

 

Answer:

  1. Tiny Toy is trying to increase sales for this year by encouraging customers to order extra merchandise, which may well be returned after December 31. (NOTE: Principles students don’t know about creating an allowance for returns.

 

B.

Financial statement item Increase Decrease No effect
Sales X
A/R X
Inventory X

 

  1. No. Tiny Toy is encouraging stores to buy merchandise now that they don’t have to pay for yet, and can easily return in the next fiscal year. This is an attempt to make Tiny Toy look more successful than it really is.

Diff: 3

Skill:  Analytic skills, Ethical understanding and reasoning abilities, Communication abilities

Objective:  LO 5-1

 

5.1-79) For each of the purchases below made by Daily Grind, Inc., fill in the inventory amount net of discounts, and then indicate with an “X” whether you should include or exclude the purchase from Daily Grind’s inventory balance at December 31.

 

Daily Grind purchased ON DECEMBER 31: Amount Include Exclude
1.  $5,000 of merchandise; terms 2/10, n/30,

FOB shipping point. The shipping cost $500.

The merchandise arrived on Jan. 2.

     
2.  $8,000 of merchandise; terms 1/10, n/15,

FOB destination. The shipping cost $80.

The merchandise arrived on Jan 1.

     

 

Answer:

    Amount Include Exclude
1. ($5,000 x .98) + $500 $5,400 X  
2. ($8,000 x .99) $7,920   X

 

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-1

 

5.1-80) Big Company has a policy of always taking the cash discounts offered by vendors, even if it doesn’t pay within the discount period. Big Company thinks that many of the vendors won’t notice, or if they do notice won’t bother to send another bill for a small amount.

On May 5, Big Company bought $5,000 of merchandise from Little Company, terms 2/10, n/30, FOB destination. Freight on the shipment was $40.

  1. How many days does Big Company have to pay the bill and legitimately take the discount?
  2. If Big Company pays within the discount period, how much should it pay Little Company?
  3. Who should pay the freight on the shipment, Big Company or Little Company?
  4. Is it ethical for Big Company to take the cash discount even though it does not pay within the discount period?

Answer:  A. 10 days; B. $4,900 = $5,000 x .98; C. Little Company; D. no

Diff: 1

Skill:  Ethical understanding and reasoning abilities

Objective:  LO 5-1

 

 

5.1-81) Match the items below with the appropriate statements.

 

I = The expenditure should be included in the inventory account.

X = The expenditure should NOT be included in the inventory account.

 

______ 1. ABC, Inc. purchases merchandise and pays $400 of shipping insurance.

______ 2. ABC, Inc. returned $200 of merchandise.

______ 3. ABC, Inc. paid $2,500 to a supplier for merchandise it had purchased on credit two months earlier.

______ 4. ABC, Inc. purchases $2,000 of merchandise on account.

______ 5. ABC, Inc. pays $60 of import tariffs associated with a purchase of merchandise from an overseas supplier.

Answer:  I, X, X, I, I

Diff: 2

Skill:  Dynamics of the global economy

Objective:  LO 5-1

5.1-82) Match the descriptions below with the correct credit or shipping terms. Some terms may be used more than once and others may not be used at all.

 

  1. 2/10, n/30
  2. 1/15, n/45
  3. n/60
  4. 3/10, n/60
  5. FOB destination
  6. FOB shipping point

 

______ 1. credit terms that do not provide a discount for early payment

______ 2. credit terms that allow for a 1% discount for early payment

______ 3. shipping terms that would typically mean that the buyer has to pay the freight charges

______ 4. shipping terms that would typically mean that the seller has to pay the freight charges

______ 5. credit terms that provide for a maximum of one and a half months to satisfy the debt

______ 6. credit terms that provide for a 2% discount for early payment

Answer:  c, b, f, e, b, a

Diff: 2

Objective:  LO 5-1

 

 

5.1-83) Match the items below with the appropriate statements.

 

A = The expenditure should be included in the inventory account.

B = The expenditure should NOT be included in the inventory account.

 

______ 1. UIO Co. pays $330 to insure merchandise while it is on the shelves waiting to be sold.

______ 2. RXD was billed $500 for merchandise that it had already returned to the vendor.

______ 3. YUH Company paid $12,600 to a supplier for merchandise it had purchased on credit two months earlier.

______ 4. TGF Company purchases 500 units of merchandise at a cost of $1.40 each.

______ 5. GLO Company pays $560 of import tariffs associated with a purchase of merchandise from an overseas supplier.

______ 6. EOP Inc. pays for freight on goods that it purchased with credit terms of FOB shipping point.

______ 7. RFV Company pays the purchasing manager a $70,000 annual salary.

Answer:  B, B, B, A, A, A, B

Diff: 2

Skill:  Dynamics of the global economy

Objective:  LO 5-1

5.1-84) Match the descriptions below to the correct credit or shipping terms. Some terms may be used more than once. Others may not be used at all.

 

  1. 2/10, n/30
  2. 1/15, n/45
  3. n/30
  4. 3/10, n/60
  5. FOB destination
  6. FOB shipping point

 

______ 1. would result in a $200 discount for early payment of a $10,000 purchase

______ 2. shipping terms that would typically mean that the buyer has to pay the freight charges

______ 3. credit terms that allow the buyer a maximum of two months to pay the debt

______ 4. credit terms that do not allow a discount for early payment

______ 5. would result in a $150 discount for early payment of a $5,000 purchase

______ 6. credit terms that would set May 2 as the latest payment date to take a discount on an April 17 purchase

Answer:  a, f, d, c, d, b

Diff: 2

Objective:  LO 5-1

 

 

Learning Objective 5-2

 

5.2-1) The perpetual inventory method is a method of record keeping that ________.

  1. A) maintains a constant record of the inventory balance
  2. B) updates the inventory records only at the end of the accounting period
  3. C) can be used only in a computerized accounting system
  4. D) involves calculating cost of goods sold only at the end of the period

Answer:  A

Diff: 1

Skill:  Use of information technology

Objective:  LO 5-2

 

5.2-2) The periodic inventory method is a method of record keeping that ________.

  1. A) maintains a constant record of the inventory balance
  2. B) updates the inventory records only when a sale is made
  3. C) can be used only in a computerized accounting system
  4. D) involves calculating cost of goods sold only at the end of the period

Answer:  D

Diff: 1

Skill:  Use of information technology

Objective:  LO 5-2

5.2-3) Which of the following is an advantage of a perpetual inventory system over a periodic system?

  1. A) Cost of goods sold will be less.
  2. B) Sales will be greater.
  3. C) Inventory shrinkage is separately identified.
  4. D) Sales returns will be less.

Answer:  C

Diff: 2

Skill:  Use of information technology

Objective:  LO 5-2

 

5.2-4) Two systems of inventory record keeping are ________.

  1. A) periodic and perpetual
  2. B) computerized and database
  3. C) purchase returns and purchase discounts
  4. D) merchandising and manufacturing

Answer:  A

Diff: 1

Skill:  Use of information technology

Objective:  LO 5-2

 

 

5.2-5) How does a perpetual inventory system differ from a periodic system?

  1. A) Sales are increased only at the end of the accounting period in a perpetual system.
  2. B) Cost of goods sold is increased only after an inventory count in a perpetual system.
  3. C) Inventory is reduced after each sale in a perpetual system.
  4. D) Inventory is increased after each sale in a periodic system.

Answer:  C

Diff: 2

Skill:  Use of information technology

Objective:  LO 5-2

 

5.2-6) In which way is a perpetual inventory system similar to a periodic system?

  1. A) Sales are increased at the time of sale.
  2. B) Cost of goods sold is increased after an inventory count.
  3. C) Inventory is reduced after each sale.
  4. D) Cost of goods sold is increased after each sale.

Answer:  A

Diff: 2

Skill:  Use of information technology

Objective:  LO 5-2

 

5.2-7) With a perpetual inventory system, cost of goods sold is calculated only when the firm is ready to prepare financial statements.

Answer:  FALSE

Diff: 1

Objective:  LO 5-2

 

5.2-8) The periodic inventory system is a record keeping system that involves calculating cost of goods sold only at the end of the period.

Answer:  TRUE

Diff: 1

Objective:  LO 5-2

5.2-9) A company that uses a perpetual inventory system must calculate cost of goods sold each time it records a sale.

Answer:  TRUE

Diff: 1

Objective:  LO 5-2

 

 

5.2-10) Compare and contrast the perpetual and periodic inventory systems.

Answer:  The perpetual and periodic systems should not be confused with the cost flow methods. The perpetual and periodic systems answer the question of when the company will update the inventory account and calculate the cost of goods sold for the period. Given that even a small company might have thousands or even millions of transactions involving inventory, it is an important decision.

 

The perpetual system is so named because this system updates inventory and records cost of goods sold each time there is a purchase or sale of merchandise. This system is increasing in use because of computer technology and provides managers better controls, but it is more costly to implement.

 

The periodic inventory system reduces record keeping by recording cost of goods sold only at the end of the period after the unsold units are counted— hence the name “periodic” system.

Diff: 2

Skill:  Communication abilities, Use of information technology

Objective:  LO 5-2

 

Learning Objective 5-3

 

5.3-1) FIFO means that the costs of the oldest items in inventory are ________.

  1. A) the costs that attach to ending inventory at the end of the period
  2. B) the costs that attach to the inventory sold during the period
  3. C) reduced to the lower of cost or market value during the period
  4. D) expensed when purchased

Answer:  B

Diff: 1

Objective:  LO 5-3

 

5.3-2) Which method results in the cost of goods sold equaling the exact cost of the actual goods that have been sold?

  1. A) FIFO
  2. B) LIFO
  3. C) Weighted average method
  4. D) Specific identification

Answer:  D

Diff: 2

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3

 

5.3-3) Which method requires the unit cost is calculated by dividing the total cost of goods available for sale by the total number of units available for sale?

  1. A) FIFO
  2. B) LIFO
  3. C) Weighted average method
  4. D) Specific identification

Answer:  C

Diff: 2

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3

 

5.3-4) GAAP for inventory costs ________.

  1. A) allow two cost flow assumptions: FIFO and LIFO
  2. B) require companies to report the same net income regardless of which inventory cost flow assumption is used. This is called the income conformity rule
  3. C) allow for only one inventory cost flow assumption to enhance comparability
  4. D) allow for more than two inventory cost flow assumptions

Answer:  D

Diff: 2

Objective:  LO 5-3

 

5.3-5) Vango, Inc. sells part number 86Z to auto parts stores around the world. Information about part number 86Z is contained in the table below. Vango uses a FIFO periodic inventory system.

 

Number of Units Unit Cost Total Cost
Beginning inventory 2,000 $8.00 $16,000
Purchase 3,000 $8.20 $24,600
Purchase 5,000 $8.60 $43,000
   Totals 10,000 $83,600

 

Determine the cost of goods sold and ending inventory value of part 86Z, if 4,000 units remain unsold in inventory at the end of the accounting period.

  1. A) Cost of goods sold is $49,200 and ending inventory is $34,400.
  2. B) Cost of goods sold is $34,400 and ending inventory is $49,200.
  3. C) Cost of goods sold is $50,160 and ending inventory is $33,440.
  4. D) Cost of goods sold is $51,200 and ending inventory is $32,400.

Answer:  A

Diff: 2

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3

 

5.3-6) Vango, Inc. sells part number 86Z to auto parts stores around the world. Information about part number 86Z is contained in the table below. Vango uses a FIFO perpetual inventory system.

 

Number of Units Unit Cost/Price Total Cost
Beginning inventory 2,000 $8.00 $16,000
Purchase 3,000 $8.20 $24,600
Sale (6,000) $15.00
Purchase 5,000 $8.60 $43,000

 

Determine the cost of goods sold and ending inventory value of part 86Z, if 4,000 units remain unsold in inventory at the end of the accounting period.

  1. A) Cost of goods sold is $49,200 and ending inventory is $34,400.
  2. B) Cost of goods sold is $34,400 and ending inventory is $49,200.
  3. C) Cost of goods sold is $50,160 and ending inventory is $33,440.
  4. D) Cost of goods sold is $51,200 and ending inventory is $32,400.

Answer:  A

Diff: 2

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3

 

5.3-7) Vango, Inc. sells part number 86Z to auto parts stores around the world. Information about part number 86Z is contained in the table below. Vango uses a LIFO periodic inventory system.

 

Number of Units Unit Cost Total Cost
Beginning inventory 2,000 $8.00 $16,000
Purchase 3,000 $8.20 $24,600
Purchase 5,000 $8.60 $43,000
   Totals 10,000 $83,600

 

Determine the cost of goods sold and ending inventory value of part 86Z, if 4,000 units remain unsold in inventory at the end of the accounting period.

  1. A) Cost of goods sold is $49,200 and ending inventory is $34,400.
  2. B) Cost of goods sold is $34,400 and ending inventory is $49,200.
  3. C) Cost of goods sold is $50,160 and ending inventory is $33,440.
  4. D) Cost of goods sold is $51,200 and ending inventory is $32,400.

Answer:  D

Diff: 2

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3

 

5.3-8) Vango, Inc. sells part number 86Z to auto parts stores around the world. Information about part number 86Z is contained in the table below. Vango uses a weighted average cost periodic inventory system.

 

Number of Units Unit Cost Total Cost
Beginning inventory 2,000 $8.00 $16,000
Purchase 3,000 $8.20 $24,600
Purchase 5,000 $8.60 $43,000
   Totals 10,000 $83,600

 

Determine the cost of goods sold and ending inventory value of part 86Z, if 4,000 units remain unsold in inventory at the end of the accounting period.

  1. A) Cost of goods sold is $49,200 and ending inventory is $34,400.
  2. B) Cost of goods sold is $34,400 and ending inventory is $49,200.
  3. C) Cost of goods sold is $50,160 and ending inventory is $33,440.
  4. D) Cost of goods sold is $51,200 and ending inventory is $32,400.

Answer:  C

Diff: 2

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3

 

5.3-9) Fargo Engines Incorporated sells part number 45G to toy manufacturers around the world. Information about part number 45G is contained in the table below. Fargo uses a LIFO periodic inventory system.

 

Number of Units Unit Cost Total Cost
Beginning inventory 2,000 $8.00 $16,000
Purchase 3,000 $8.20 $24,600
Purchase 5,000 $8.60 $43,000
   Totals 10,000 $83,600

 

Determine the cost of goods sold and ending inventory cost of part 45G, if 2,000 units remain unsold in inventory at the end of the accounting period.

  1. A) Cost of goods sold is $67,600 and ending inventory is $16,000.
  2. B) Cost of goods sold is $66,600 and ending inventory is $17,000.
  3. C) Cost of goods sold is $66,200 and ending inventory is $17,400.
  4. D) Cost of goods sold is $8,000 and ending inventory is $2,000.

Answer:  A

Diff: 2

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3

 

5.3-10) Fargo Engines Incorporated sells part number 45G to toy manufacturers around the world. Information about part number 45G is contained in the table below. Fargo uses a weighted-average periodic inventory system.

 

Number of Units Unit Cost Total Cost
Beginning inventory 2,000 $8.00 $16,000
Purchase 3,000 $8.20 $24,600
Purchase 5,000 $8.60 $43,000
   Totals 10,000 $83,600

 

Determine the cost of goods sold and ending inventory cost of part 45G if 2,000 units remain unsold in inventory at the end of the accounting period.

  1. A) Cost of goods sold is $66,133 and ending inventory is $17,467.
  2. B) Cost of goods sold is $66,267 and ending inventory is $25,733.
  3. C) Cost of goods sold is $65,803 and ending inventory is $26,197.
  4. D) Cost of goods sold is $66,880 and ending inventory is $16,720.

Answer:  D

Diff: 2

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3

 

5.3-11) One difference between U.S. GAAP and IFRS is ________.

  1. A) U.S. GAAP allows LIFO and IFRS does not
  2. B) IFRS allows LIFO and U.S. GAAP does not
  3. C) U.S. GAAP allows FIFO and IFRS does not
  4. D) IFRS allows FIFO and U.S. GAAP does not

Answer:  A

Diff: 2

Skill:  Dynamics of the global economy

Objective:  LO 5-3

 

5.3-12) Grand Forks Enterprises sells toy airplanes to retailers such as K-Mart and Wal-Mart. Information about inventory is contained in the table below. The company uses a FIFO perpetual inventory system.

 

Number of Units Unit Cost Total Cost
Beginning inventory 2,000 $2.00 $4,000
Sale (1,200)
Purchase 4,000 $2.25 $9,000
Sale (2,500)
Purchase 5,000 $2.40 $12,000
Sale (6,000)

 

Determine the cost of goods sold.

  1. A) $20,800
  2. B) $21,200
  3. C) $21,880
  4. D) $19,400

Answer:  C

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-13) Grand Forks Enterprises sells toy airplanes to retailers such as K-Mart and Wal-Mart. Information about inventory is contained in the table below. The company uses a LIFO perpetual inventory system and sells inventory for $5.00 per unit.

 

Date Number of Units Unit Cost Total Cost
January 01 Beginning inventory 2,000 $2.00 $4,000
January 10 Sale 1,200
January 15 Purchase 4,000 $2.25 $9,000
January 20 Sale 2,500
January 25 Purchase 5,000 $2.40 $12,000
January 30 Sale 6,000

 

Determine the cost of goods sold for the January 10th sale.

  1. A) $6,000
  2. B) $3,600
  3. C) $2,400
  4. D) $2,600

Answer:  C

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-14) Grand Forks Enterprises sells toy airplanes to retailers such as K-Mart and Wal-Mart. Information about inventory is contained in the table below. The company uses a LIFO perpetual inventory system and sells inventory for $5.00 per unit.

 

Date Number of Units Unit Cost Total Cost
January 01 Beginning inventory 2,000 $2.00 $4,000
January 10 Sale 1,200
January 15 Purchase 4,000 $2.25 $9,000
January 20 Sale 2,500
January 25 Purchase 5,000 $2.40 $12,000
January 30 Sale 6,000

Determine the cost of goods sold for the January 20th  sale.

  1. A) $5,425
  2. B) $5,850
  3. C) $5,625
  4. D) $5,725

Answer:  C

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-15) Grand Forks Enterprises sells toy airplanes to retailers such as K-Mart and Wal-Mart. Information about inventory is contained in the table below. The company uses a LIFO perpetual inventory system and sells inventory for $5.00 per unit.

 

Date Number of Units Unit Cost Total Cost
January 01 Beginning inventory 2,000 $2.00 $4,000
January 10 Sale 1,200
January 15 Purchase 4,000 $2.25 $9,000
January 20 Sale 2,500
January 25 Purchase 5,000 $2.40 $12,000
January 30 Sale 6,000

 

Determine the ending inventory for the period.

  1. A) $2,925
  2. B) $2,600
  3. C) $2,725
  4. D) $3,120

Answer:  C

Diff: 3

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3

 

5.3-16) Philipsburg Corporation sells mugs to fine retailers across the world. Data from its periodic inventory system is presented in the table below. Inventory is sold for $170 per unit. Operating expenses, excluding cost of goods sold, totaled $40,000.

 

Date Number of Units Unit Cost Total Cost
January 1 Beginning inventory 300 $100 $30,000
January 13 Purchase 400 $110 $44,000
January 22 Purchase 500 $120 $60,000

 

Which cost flow method would result in the HIGHEST taxable income for the period?

  1. A) FIFO
  2. B) LIFO
  3. C) Weighted average method
  4. D) Each of the methods would have equal net income for the period.

Answer:  A

Diff: 2

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3

 

5.3-17) Philipsburg Corporation sells mugs to fine retailers across the world.  Data from its periodic inventory system is presented in the table below. Inventory is sold for $170 per unit. Operating expenses excluding cost of goods sold totaled $40,000.

 

Date Number of Units Unit Cost Total Cost
January 1 Beginning inventory 300 $100 $30,000
January 13 Purchase 400 $110 $44,000
January 22 Purchase 500 $120 $60,000

 

Which cost flow method would result in the LOWEST taxable income for the period?

  1. A) FIFO
  2. B) LIFO
  3. C) Weighted average method
  4. D) Only the LIFO cost flow method can be used for tax returns.

Answer:  B

Diff: 2

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3

 

5.3-18) Inventory information for Great Falls Merchandising, Inc. is provided below. Sales for the period were 2,800 units for $8 each. The company uses a FIFO periodic inventory system.

 

Date Number of Units Unit Cost Total Cost
January 1 Beginning inventory 1,000 $3.00 $3,000
January Purchase    600 $3.50 $2,100
February Purchase    800 $4.00 $3,200
March Purchase 1,200 $4.25 $5,100
   Totals 3,600 $13,400

 

Determine the ending inventory at March 31.

  1. A) $3,400
  2. B) $3,800
  3. C) $9,200
  4. D) $10,000

Answer:  A

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-19) Tarheel Company purchases inventory from McGardy Wholesalers. The per unit cost of the items purchased during the current accounting period was $5.50, $5.70, $5.90 and $6.23. Which statement below regarding Tarheel’s choice of inventory cost flow methods is TRUE?

  1. A) Net income will be the same regardless of the cost flow assumption adopted. The choice of an accounting method can’t affect net income.
  2. B) Net income will be greater than taxable income regardless of the inventory method chosen by Tarheel Company.
  3. C) If Tarheel Company uses the LIFO method for financial reporting, then it must also use the LIFO method for tax reporting.
  4. D) If Tarheel Company selects the FIFO method, it will result in a lower net income than the LIFO method would have produced.

Answer:  C

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-20) Inventory information for Great Falls Merchandising, Inc. is provided below. Sales for the period were 2,800 units for $8 each. The company uses a LIFO periodic inventory system.

 

Date Number of Units Unit Cost Total Cost
January 1 Beginning inventory 1,000 $3.00 $3,000
January Purchase    600 $3.50 $2,100
February Purchase    800 $4.00 $3,200
March Purchase 1,200 $4.25 $5,100
   Totals 3,600 $13,400

 

Determine the ending inventory at March 31.

  1. A) $3,400
  2. B) $2,400
  3. C) $10,200
  4. D) $800

Answer:  B

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-21) Inventory information for Missoula Merchandising, Inc. is provided below. Sales for the period were 2,800 units for $8 each. The company uses a weighted average periodic inventory system.

 

Date Number of Units Unit Cost Total Cost
January 1 Beginning inventory 1,000 $2.20 $2,200
January Purchase    600 $3.50 $2,100
February Purchase    800 $4.00 $3,200
March Purchase 1,200 $4.25 $5,100
   Totals 3,600 $12,600

 

Determine the ending inventory at March 31.

  1. A) $2,300
  2. B) $3,300
  3. C) $9,800
  4. D) $2,800

Answer:  D

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-3

 

 

5.3-22) A company would choose to use LIFO so that it can ________.

  1. A) report inventory that best reflects current costs on its balance sheet
  2. B) report lower cost of goods sold and higher income
  3. C) pay less income tax
  4. D) pay less for its purchases of inventory

Answer:  C

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3

5.3-23) On June 1, beginning inventory consists of ten items that cost $100 each. On June 8, ten more items are purchased at $120 each. On June 12, fifteen items are sold for $200 each. On June 28, ten items are purchased at $130 each. Using perpetual FIFO, cost of goods sold for the month ended June 30 equals ________.

  1. A) $1,500
  2. B) $1,600
  3. C) $1,800
  4. D) $3,000

Answer:  B

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-24) On June 1, beginning inventory consists of ten items that cost $100 each. On June 8, ten more items are purchased at $120 each. On June 12, fifteen items are sold for $200 each. On June 28, ten items are purchased at $130 each. Using periodic FIFO, cost of goods sold for the month ended June 30 equals ________.

  1. A) $1,500
  2. B) $1,600
  3. C) $1,800
  4. D) $3,000

Answer:  B

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3

 

 

5.3-25) On June 1, beginning inventory consists of ten items that cost $100 each. On June 8, ten more items are purchased at $120 each. On June 12, fifteen items are sold for $200 each. On June 28, ten items are purchased at $130 each. Using periodic LIFO, cost of goods sold for the month ended June 30 equals ________.

  1. A) $1,600
  2. B) $1,800
  3. C) $1,900
  4. D) $1,950

Answer:  C

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-26) On June 1, beginning inventory consists of ten items that cost $100 each. On June 8, ten more items are purchased at $120 each. On June 12, fifteen items are sold for $200 each. On June 28, ten items are purchased at $130 each. Using perpetual LIFO, cost of goods sold for the month ended June 30 equals ________.

  1. A) $1,700
  2. B) $1,800
  3. C) $1,900
  4. D) $1,950

Answer:  A

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-27) Mighty Ducks, Inc.’s inventory activity in October 2011 was as follows:

 

Inventory, October 1 11 units @ $8 each
Purchase, October 12 22 units @ $11 each
Sale, October 25 23 units @ $24 each

 

Which of the following shows the correct effect on the accounting equation of the October 25 sale on account using the perpetual FIFO method of accounting for inventory?

 

A) Assets Liabilities Shareholders’ equity
(220) Inventory 552 Accounts payable  552  Sales

(220) Cost of goods sold

 

B) Assets Liabilities Shareholders’ equity
 552  Accounts receivable

(250) Inventory

No effect  552  Sales

(250) Cost of goods sold

 

C) Assets Liabilities Shareholders’ equity
 552  Accounts receivable

(220) Inventory

No effect  552  Sales

(220) Cost of goods sold

 

D) Assets Liabilities Shareholders’ equity
(230) Inventory 552 Accounts payable  552  Sales

(230) Cost of goods sold

 

Answer:  C

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-28) Mighty Ducks, Inc.’s inventory activity in October 2011 was as follows:

 

Inventory, October 1 11 units @ $8 each
Purchase, October 12 22 units @ $11 each
Sale, October 25 23 units @ $24 each

 

Which of the following shows the correct effect on the accounting equation of the October 25 sale on account using the perpetual WEIGHTED AVERAGE COST method of accounting for inventory?

 

A) Assets Liabilities Shareholders’ equity
(230) Inventory 552 Accounts payable  552  Sales

(230) Cost of goods sold

 

B) Assets Liabilities Shareholders’ equity
 552  Accounts receivable

(250) Inventory

No effect  552  Sales

(250) Cost of goods sold

 

C) Assets Liabilities Shareholders’ equity
 552  Accounts receivable

(230) Inventory

No effect  552  Sales

(230) Cost of goods sold

 

D) Assets Liabilities Shareholders’ equity
(230) Inventory 552 Accounts payable  552  Sales

(230) Cost of goods sold

 

Answer:  C

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-29) IFRS require publicly-traded corporations to use ________.

  1. A) the periodic inventory system
  2. B) the perpetual inventory system
  3. C) either the periodic or perpetual inventory system
  4. D) the last-in, first-out system

Answer:  C

Diff: 2

Skill:  Use of information technology, Dynamics of the global economy

Objective:  LO 5-3

 

 

5.3-30) A company that uses the first-in, first-out method of valuing cost of goods sold must sell its older inventory before selling any of its newer inventory, even though some of the newer items may be more accessible.

Answer:  FALSE

Diff: 1

Objective:  LO 5-3

5.3-31) FIFO is the cost flow method that attaches the costs of the first-in units to the units in ending inventory.

Answer:  FALSE

Diff: 1

Objective:  LO 5-3

 

5.3-32) LIFO is the cost flow method that attaches the last-in costs to the units sold.

Answer:  TRUE

Diff: 1

Objective:  LO 5-3

 

5.3-33) GAAP allow different cost flow methods to be used when accounting for inventory.

Answer:  TRUE

Diff: 1

Objective:  LO 5-3

 

5.3-34) IFRS do not allow the LIFO cost flow method to be used when accounting for inventory.

Answer:  TRUE

Diff: 2

Objective:  LO 5-3

 

5.3-35) In a period of rising inventory costs, the LIFO method would result in the highest net income.

Answer:  FALSE

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-36) In a period of rising inventory costs, the LIFO method would result in the highest cash flow from operations.

Answer:  TRUE

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3

 

 

5.3-37) Assume that Tango Company had a beginning inventory of 100 units at a cost of $2.00 per unit. Current period purchases were 400 units at a cost of $4.00 per unit. The weighted average cost of each unit is $3.

Answer:  FALSE

Diff: 2

Objective:  LO 5-3

 

5.3-38) In a time of rising prices, the main reason a company would choose to use LIFO is to save on income taxes.

Answer:  TRUE

Diff: 1

Objective:  LO 5-3

5.3-39) In a time of rising prices, the main reason a company would choose to use FIFO is to save on income taxes.

Answer:  FALSE

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-40) The cost flow method a firm uses is disclosed in the notes to the financial statements.

Answer:  TRUE

Diff: 1

Objective:  LO 5-3

 

5.3-41) A company must use the inventory cost flow assumption that most closely resembles the actual physical flow of goods.

Answer:  FALSE

Diff: 1

Objective:  LO 5-3

 

5.3-42) In times of rising prices, a company that uses LIFO will report a higher Accounts payable balance than if it had used FIFO.

Answer:  FALSE

Diff: 1

Objective:  LO 5-3

 

5.3-43) In times of rising prices, a company that uses LIFO will report higher sales than if it had used FIFO.

Answer:  FALSE

Diff: 1

Objective:  LO 5-3

 

 

5.3-44) Compare and contrast FIFO, LIFO, and the weighted-average cost flow methods.

Answer:  FIFO, LIFO and the weighted average cost methods all attempt to attach costs to units either sold or unsold during an accounting period and all are acceptable methods under GAAP accounting rules. None of the methods should be confused with the physical flow of merchandise, which is controlled by the customer and the company. What the cost flow assumptions are doing is merely attaching costs to the units that have been sold and to the units unsold (ending inventory).

 

The FIFO method assumes that the costs of goods sold are the costs of the first units in. Therefore, the cost of the last units in would be attached to the ending inventory.

 

The LIFO method assumes that the costs of the goods sold (COGS) are the costs of the last units purchased. Therefore, the cost of the first units in would be ending inventory. Typically, costs tend to rise in the real world, so LIFO normally creates the highest COGS and the lowest net income reported.

 

The weighted average method attaches the average cost to units sold and to ending inventory. The average cost is calculated by dividing the total cost of goods available for sale by the quantity of inventory units available for sale.

Diff: 2

Skill:  Communication abilities

Objective:  LO 5-3

5.3-45) The following information is from the accounting records of JackCo:

 

Number of Units Unit Cost Total Cost
Beginning inventory 200 $2.50 $500
Purchases 1,000 $2.70 $2,700
Sales 900

 

Required:

  1. Determine the cost of goods sold assuming JackCo uses the first-in, first-out (FIFO) inventory method.
  2. Determine the cost of goods sold assuming JackCo uses the last-in, first-out (LIFO) inventory method.
  3. Which inventory method results in LOWER taxable income for the period? Why?

Answer:  1. FIFO:  $2,390 = (200 X $2.50) + (700 X $2.70

  1. LIFO: $2,430 = (900 X 2.70
  2. The LIFO method results in the lower taxable income because the company is in a period of rising prices. The most recently purchased, higher-cost items are part of cost of goods sold. A higher cost of goods sold results in lower net income.

Diff: 1

Skill:  Analytic skills, Communication abilities

Objective:  LO 5-3

 

 

5.3-46) What are the advantages and disadvantages of using LIFO as a cost flow method?

Answer:  The main advantage is that LIFO results in a lower taxable income during a period of rising inventory purchase costs. This occurs because the LIFO method presents the last-in costs on the income statement as cost of goods sold.  In a period of rising costs, the last-in costs are the highest costs, resulting in a higher cost of goods sold and a lower taxable income. A lower taxable income is significant because it results in a cash savings to the firm because less tax will be paid.

 

LIFO has some potential disadvantages as well. For instance, in a period of rising inventory purchase costs, LIFO will not only reduce taxable income but it will also reduce reported profit. That could be a problem because it will depress stock valuations and managers may have their bonuses tied to profits. Moreover, the record keeping necessary to apply the LIFO method is more complicated. On the balance sheet, LIFO inventory results in a very unrealistically low number for inventory, since the units remaining unsold are valued at older, lower prices.

Diff: 3

Skill:  Analytic skills, Communication abilities

Objective:  LO 5-3

5.3-47) Inventory data for Daisy Cutters, Inc., are provided below. Sales for the month were 500 units sold for $30 each. The company maintains a periodic inventory system.

 

Date Number of Units Unit Cost Total Cost
May 1 Beginning inventory 100 $14.85 $1,485.00
May 3 Purchase 150 $15.23 $2,284.50
May 19 Purchases 200 $16.00 $3,200.00
May 28 Purchases 175 $16.20 $2,835.00

 

Required:

  1. Determine the gross profit for the month assuming the company uses the FIFO cost flow method.
  2. Determine the gross profit for the month assuming the company uses the LIFO cost flow method.
  3. Which method results in a higher cost of goods sold? Explain why.

Answer:  1. Sales: $15,000 = 500 units x $30

COGS: $7,779.50 = (100 x $14.85) + (150 x $15.23) + (200 x $16) + (50 x $16.20

Gross profit = $7,220.50

  1. Sales: $15,000 = 500 units x $30

COGS: $7,938.75 = (175 x $16.20) + (200 x $16) + (125 x $15.23

Gross profit = $7,061.25

  1. The LIFO method results in a higher COGS because it is using the last-in costs, which are the higher costs in this case.

Diff: 2

Skill:  Analytic skills, Communication abilities

Objective:  LO 5-3

 

 

5.3-48) On June 1, Treble Clef, Inc. had one piano in inventory. During June, five additional pianos were purchased–two on June 8, two on June 12, and one on June 25. The company sold three of the pianos on June 13, another one on June 19, and one more on June 28.

 

Part A: Using the LIFO perpetual cost flow method, put the number of pianos in the appropriate column(s) to show:

 

June 1 Inventory June 8 Purchase June 12 Purchase June 25 Purchase
1 Which 3 pianos were recorded as cost of goods sold on June 13?
2 Which one was recorded as cost of goods sold on June 19?
3 Which one was recorded as cost of goods sold on June 28?
4 Which piano will be included in Starnes’ inventory cost calculation at the end of June?

 

Part B: Using the FIFO perpetual cost flow method, put the number of pianos in the appropriate column(s) to show:

 

June 1 Inventory June 8 Purchase June 12 Purchase June 25 Purchase
1 Which 3 pianos were recorded as cost of goods sold on June 13?
2 Which one was recorded as cost of goods sold on June 19?
3 Which one was recorded as cost of goods sold on June 28?
4 Which piano will be included in Starnes’ inventory cost calculation at the end at June 30?

 

 

Answer:  Part A: LIFO perpetual

  June 1

Inventory

June 8 Purchase June 12 Purchase June 25 Purchase
1   1 2  
2   1    
3       1
4 1      

 

Part B: FIFO perpetual

June 1

Inventory

June 8 Purchase June 12 Purchase June 25 Purchase
1 1 2    
2     1  
3     1  
4       1

 

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-3

 

 

5.3-49) On May 1, Starnes TV had two TV sets in inventory. During May, six additional TV sets were purchased–two on May 10, one on May 16, and three on May 24. The company sold two of the TV sets on May 13, another one on May 18, and two more on May 27.

 

Part A: Using the FIFO perpetual cost flow method, fill in the number of TV sets in the appropriate column:

 

May 1 Inventory May 10 Purchase  May 16 Purchase May 24 Purchase
1 Which two TV sets were recorded as cost of goods sold on May 13?
2 Which one was recorded as cost of goods sold on May 18?
3 Which two TV sets were recorded as cost of goods sold on May 27?
4 Which three TV sets will be included in Starnes’ inventory cost calculation at the end of May?

 

Part B: Using the LIFO perpetual cost flow method, fill in the number of TV sets in the appropriate column:

 

May 1 Inventory May 10 Purchase  May 16 Purchase May 24 Purchase
1 Which two TV sets were recorded as cost of goods sold on May 13?
2 Which one was recorded as cost of goods sold on May 18?
3 Which two TV sets were recorded as cost of goods sold on May 27?
4 Which three TV sets will be included in Starnes’ inventory cost calculation at the end of May?

 

 

 

Answer:  Part A:

FIFO perpetual

May 1

Inventory

May 10

Purchase

May 16

Purchase

May 24

Purchase

1. 2      
2.   1    
3.   1 1  
4.       3

 

Part B:

LIFO perpetual

May 1

Inventory

May 10

Purchase

May 16

Purchase

May 24

Purchase

1.   2    
2.     1  
3.       2
4. 2     1

 

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-50) Inventory data for Army & Navy Wear Co. are provided below. Sales for the month were 220 units sold for $12 each. The company maintains a periodic inventory system.

 

Date Number of Units Unit Cost Total Cost
Jan. 01 Beginning inventory   50 $5.00 $   250
Jan. 15 Purchases   70 $6.00 $   420
Jan. 20 Purchases   80 $7.00 $   560
Jan. 27 Purchases 100 $7.50 $   750
   Totals 300 $1,980

 

Required:

  1. Determine the cost of goods sold and ending inventory for the month assuming the company uses the FIFO cost flow method.
  2. Determine the cost of goods sold and ending inventory for the month assuming the company uses the LIFO cost flow method.
  3. Determine the cost of goods sold and ending inventory for the month assuming the company uses the weighted average method.
  4. Which method would you recommend that the company use if its objective is to minimize its income tax liability?

Answer:

  1. COGS: $1,380 = (50 x $5) + (70 x $6) + (80 x $7) + (20 x $7.50

EI: $600 = 80 x $7.50

  1. COGS: $1,550 = (100 x $7.50) + (80 x $7) + (40 x $6

EI: $430 = (50 x $5) + (30 x $6

  1. Weighted average cost per unit: $6.60 = $1,980 / 300

COGS: $1,452 = 220 units x $6.60

EI: $528 = 80 units x $6.60

  1. A company must use the same inventory method for both its financial statements and its federal tax return. LIFO is recommended because in a period of rising costs LIFO results in the largest COGS and lowest taxable income.

Diff: 3

Skill:  Analytic skills, Communication abilities

Objective:  LO 5-3

 

5.3-51) Inventory data for Army & Navy Wear Co. are provided below. Sales for the quarter were 220 units sold for $12 each.

 

Date Number of Units Unit Cost Total Cost
Jan. 01 Beginning inventory 150 $5.00 $   750
Jan. 15 Purchase 70 $6.00 $   420
Feb. 01 Sale 100
Feb. 20 Purchase 180 $7.00 $1,260
March 05 Sale 120
March 19 Purchase 50 $7.50 $   375

 

Required:

  1. Calculate the cost of goods sold for the quarter assuming the company uses a FIFO perpetual inventory system.
  2. Calculate the cost of goods sold for the quarter assuming the company uses a LIFO perpetual inventory system.
  3. Which system (perpetual or periodic) do you think is increasing in use because of computer technology?

Answer:

  1. FIFO COGS: $1,170 = (100 x $5) + ((50 x $5) + (70 x $6)
  2. LIFO COGS: $1,410 = ((70 x $6) + (30 x $5)) + (120 x $7)
  3. The perpetual system is increasing in use because computers make it less labor intensive to keep inventory records.

Diff: 3

Skill:  Use of information technology, Analytic skills, Communication abilities

Objective:  LO 5-2 & LO 5-3

 

5.3-52) The Quiet Gravestone Company has only one product: a large, 3-foot gravestone. Data for inventory during February of the current year are provided below. Assume the company uses a perpetual inventory system and the FIFO cost flow method.

 

Date Number of Units Unit Cost Total Cost
Feb 01 Beginning inventory 5 $40.00 $200
Feb 04 Purchase 10 $42.00 $420
Feb 10 Purchase 12 $44.00 $528
Feb 18 Purchase 8 $45.00 $360
Feb 25 Purchase 14 $46.00 $644

 

Sales for the month were:

February 7:  seven sold at $1,000

February 15:  five sold at $1,050

February 20:  ten sold at $1,100

Required:

  1. What is the cost of goods sold for the February 7 sale?
  2. What is the cost of goods sold for the February 15 sale?
  3. What is the cost of goods sold for the February 20 sale?
  4. If the company used a periodic inventory system and the FIFO cost flow method, what would cost of goods sold be for the month?

Answer:

  1. COGS: $284 = (5 x $40) + (2 x $42
  2. COGS: $210 = 5 x $42
  3. COGS: $434 = (3 x $42) + (7 x $44
  4. COGS: $928 = (5 x $40) + (10 x $42) + (7 x $44

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-2 & LO 5-3

 

5.3-53) The Cemetery Gravestone Company has only one product: a large, 3-foot gravestone. Data for inventory during February of the current year are provided below. Assume the company uses a PERPETUAL inventory system and the LIFO cost flow method.

 

Date Number of Units Unit Cost Total Cost
Feb 01 Beginning inventory 5 $40.00 $200
Feb 04 Purchase 10 $42.00 $420
Feb 10 Purchase 12 $44.00 $528
Feb 18 Purchase 8 $45.00 $360
Feb 25 Purchase 14 $46.00 $644

 

Sales for the month were:

February 7:  seven sold at $1,000

February 15:  five sold at $1,050

February 20:  ten sold at $1,100

Required:

  1. What is the cost of goods sold for the February 7 sale?
  2. What is the cost of goods sold for the February 15 sale?
  3. What is the cost of goods sold for the February 20 sale?
  4. If the company used a PERIODIC inventory system and the LIFO cost flow method, what would the cost of goods sold be for the month?

Answer:

  1. COGS: $294 = 7 x $42
  2. COGS: $220 = 5 x $44
  3. COGS: $448 = (8 x $45) + (2 x $44
  4. COGS: $1,004 = (14 x $46) + (8 x $45

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-2 & LO 5-3

 

 

5.3-54) Merits, Inc.’s inventory activity in June was as follows:

 

Beginning inventory, June 1 400 units @ $10 each
Purchase on account June 12 600 units @ $11 each
Sale on account June 14 700 units @ $15 each

 

Part A: Choose the column that represents the June financial statement where the line item will appear and fill in the dollar amount using the LIFO inventory method.

 

Income Statement Statement of Cash Flows Balance Sheet
1. Cost of goods sold
2. Inventory
3. Sales
4. Gross profit

 

Part B: Choose the column that represents the June financial statement where the line item will appear and fill in the dollar amount using the FIFO inventory method.

 

Income Statement Statement of Cash Flows Balance Sheet
1. Cost of goods sold
2. Inventory
3. Sales
4. Gross profit

 

Answer:  Part A: LIFO

Income Statement Statement of Cash Flows Balance Sheet
1. COGS $7,600

(600 x $11) + (100 x $10)

2. Inventory $3,000

300 x $10

3. Sales $10,500
4. Gross profit $2,900

 

Part B: FIFO

Part B: Income Statement Statement of Cash Flows Balance Sheet
1. COGS $7,300

(400 x $10) + (300 x $11)

2. Inventory $3,300

300 x $11

3. Sales $10,500
4. Gross profit $3,200

 

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-55) FILLO, Inc.’s inventory activity in May was:

 

Inventory, May 1 10 units @ $7 each
Purchase on account, May 7 30 units @ $6 each
Sale on account, May 18 12 units @ $12 each
Purchase on account, May 24 15 units @ $5 each

 

Part A: Choose the column that represents the end of May financial statement where the line item will appear and fill in the dollar amount using the LIFO perpetual method.

 

Income

Statement

Statement of Cash

Flows

Balance Sheet
1. Cost of goods sold      
2. Inventory      
3. Sales      
4. Gross profit      

 

Part B: Choose the column that represents the end of May statement where the line item will appear and fill in the dollar amount using the FIFO perpetual method.

 

Income

Statement

Statement of Cash

Flows

Balance Sheet
1. Cost of goods sold
2. Inventory
3. Sales
4. Gross profit

 

Part C: Select which method is correct by choosing LIFO, FIFO, or Same, if both methods give the same result.

Which method results in the: LIFO FIFO Same
1. higher net income?
2. lower taxes?
3. lower current taxes?
4. lower Accounts receivable on the Balance Sheet?
5. higher Accounts payable on the Balance Sheet?

 

 

Answer:  Part A:

LIFO perpetual Income

Statement

Statement of Cash

Flows

Balance Sheet
1. Cost of goods sold $72  (A)    
2. Inventory     $253  (B)
3. Sales $144    
4. Gross profit $72    

(A) 12 x $6 = $72

(B) (10 x $7) + (18 x $6) + (15 x $5) = $253

 

Part B:

FIFO perpetual Income

Statement

Statement of Cash

Flows

Balance Sheet
1. Cost of goods sold $82  (C)
2. Inventory $243  (D)
3. Sales $144
4. Gross profit $62

(C) (10 x $7) + (2 x $6) = $82

(D) (28 x $6) + (15 x $5) = $243

 

Part C: Notice that prices are falling

LIFO FIFO Same
1. higher net income? X
2. lower taxes? X
3. lower current taxes? X
4. lower Accounts receivable on the Balance Sheet? X
5. higher Accounts payable on the Balance Sheet? X

 

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-56) Buy & Large, Inc.’s inventory activity in May was:

 

Inventory, May 1 10 units @ $60 each
Purchase on account, May 7 30 units @ $70 each
Sale on account, May 18 12 units @ $120 each

 

Required:

  1. What is the cost of goods sold for the May 18 sale using the weighted average (WA) cost flow method?
  2. What is the cost of goods sold for the May 18 sale using FIFO cost flow method?
  3. Select which method is correct by choosing WA or FIFO, or Same, if both methods give the same result.

 

Which method results in the: WA FIFO Same
a. higher gross profit?
b. higher Inventory on the Balance Sheet?
c. higher current assets?
d. higher Accounts payable on the Balance Sheet?

 

Answer:

  1. ((10 x $60) + (30 x $70)/ 40) x 12 = $810
  2. (10 x $60) + (2 x $70) = $740

3.

WA FIFO Same
a. higher gross profit? X
b. higher Inventory on the Balance Sheet? X
c. higher current assets? X
d. higher Accounts payable on the Balance Sheet? X

 

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-3

 

 

5.3-57) Buy & Large, Inc.’s inventory activity in October was:

 

Inventory, October 1 11 units @ $8 each
Purchase, October 12 22 units @ $11 each
Sale, October 25 25 units @ $25 each

Show the correct effect on the accounting equation of the October 25th sale of 25 units on account using the perpetual FIFO method of accounting for inventory.

 

Assets Liabilities Shareholders’ equity

 

Answer:

Assets Liabilities Shareholders’ equity
 625  Accounts receivable

(242) Inventory

No effect  625  Sales

(242) Cost of goods sold

 

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-2 & LO 5-3

 

5.3-58) Buy & Large, Inc.’s inventory activity in October was:

 

Inventory, October 1 11 units @ $8 each
Purchase, October 12 22 units @ $11 each
Sale, October 25 25 units @ $25 each

Show the correct effect on the accounting equation of the October 25th sale on account using the perpetual WEIGHTED AVERAGE COST method of accounting for inventory.

 

Assets Liabilities Shareholders’ equity

 

Answer:

Assets Liabilities Shareholders’ equity
 625  Accounts receivable

(250) Inventory

No effect  625  Sales

(250) Cost of goods sold

 

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-2 & LO 5-3

 

5.3-59) Buy & Large, Inc.’s inventory activity in October was:

Inventory, October 1 11 units @ $8 each
Purchase, October 12 22 units @ $11 each
Sale, October 25 25 units @ $25 each

Show the correct effect on the accounting equation of the October 25th sale on account using the perpetual LIFO method of accounting for inventory.

 

Assets Liabilities Shareholders’ equity

 

Answer:

Assets Liabilities Shareholders’ equity
 625  Accounts receivable

(266) Inventory

No effect  625  Sales

(266) Cost of goods sold

 

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-2 & LO 5-3

 

5.3-60) Buy & Large, Inc.’s inventory activity in May was:

 

Inventory, May 1 100 units @ $7 each
Purchase on account, May 7 300 units @ $6 each
Sale on account, May 18 120 units @ $12 each

 

Required:

  1. What is the cost of goods sold for the May 18 sale using the weighted average (WA) cost flow method?
  2. What is the cost of goods sold for the May 18 sale using the FIFO cost flow method?
  3. Select which method is correct by choosing WA or FIFO, or Same, if both methods give the same result.

 

Which method results in the: WA FIFO Same
a. higher net income?
b. lower current assets?
c. lower Accounts receivable on the Balance Sheet?
d. higher Accounts payable on the Balance Sheet?

 

Answer:

  1. ((100 x $7) + (300 x $6)/ 400) x 120 = $750
  2. (100 x $7) + (20 x $6) = $820

3.

WA FIFO Same
a. higher net income? X
b. lower current assets? X
c. lower Accounts receivable on the Balance Sheet? X
d. higher Accounts payable on the Balance Sheet? X

 

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-61) Match the statements below with the appropriate cost flow method. Some methods may be used more than once and others may not be used at all.

 

F = FIFO

L = LIFO

W = Weighted average method

S = Specific identification method

 

______ 1. the cost flow method that reduces taxable income, relative to the other methods, in a period of rising inventory costs

______ 2. is based on a calculation that divides the cost of goods available for sale by the number of units available for sale

______ 3. would be the best method if inventory costs are rising and the objective is to maximize net income

______ 4. tends to be used only in low-volume businesses

______ 5. matches the oldest costs with sales on the income statement

______ 6. results in the highest current asset balance, relative to the other methods, in a period of rising prices

Answer:  L, W, F,  S, F, F

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3

 

5.3-62) Match the statements below with the appropriate cost flow method. Some methods may be used more than once, and others may not be used at all.

 

F = FIFO

L = LIFO

W = Weighted average method

S = Specific identification method

 

______ 1. matches the costs of the most recently purchased items with sales on the income statement

______ 2. results in the lowest net income in a period of rising inventory purchase costs

______ 3. is difficult to apply when the inventory items are identical

______ 4. results in the highest net income in a period of rising inventory purchase costs

______ 5. results in the highest ending inventory value in a period of falling prices

Answer:  L, L, S, F, L

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3

 

Learning Objective 5-4

 

5.4-1) Philipsburg Corporation sells hats to upscale retailers around the world. Information about inventory is contained in the table below. The company uses a LIFO perpetual inventory system.

 

Date Number of Units Unit Cost Total Cost
January 1 Beginning inventory 500 $9.00 $4,500
January 13 Purchase 1,000 $10.00 $10,000
January 22 Purchase 1,400 $11.00 $15,400

 

Determine the gross profit for the period assuming that the only sale was 1,200 units for $35 each on January 15.

  1. A) $30,200
  2. B) $32,400
  3. C) $36,540
  4. D) $42,000

Answer:  A

Diff: 3

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3 & LO 5-4

 

5.4-2) Head on Straight, Inc. sells hats to fine retailers across the world. It uses a FIFO perpetual inventory system. Inventory data is presented in the table below.

 

Date Number of Units Unit Cost Total Cost
January 1 Beginning inventory 300 $100 $30,000
January 13 Purchase 400 $110 $44,000
January 22 Purchase 500 $120 $60,000

 

Determine the operating income for the period, assuming that 1,000 units were sold for $170 each. Operating expenses excluding cost of goods sold totaled $40,000.

  1. A) $110,000
  2. B) $16,000
  3. C) $65,000
  4. D) $20,000

Answer:  D

Diff: 3

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3 & LO 5-4

 

5.4-3) Up Against the Wall, Inc. sells wallpaper to fine retailers across the world. It uses a LIFO perpetual inventory system. Inventory data is presented in the table below.

 

Date Number of Units Amount per unit
January 1 Beginning inventory 300 $100
January 13 Purchase 600 $110
January 22 Sale 500 $200

 

Determine the gross profit for the period.

  1. A) $55,000
  2. B) $45,000
  3. C) $100,000
  4. D) $48,000

Answer:  B

Diff: 3

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3 & LO 5-4

 

5.4-4) Philipsburg Corporation sells mugs to fine retailers around the world. It uses a FIFO perpetual inventory system. Inventory data is presented in the table below.

 

Date Number of Units Unit Cost Total Cost
January 1 Beginning inventory 300 $100 $30,000
January 13 Purchase 400 $110 $44,000
January 22 Purchase 500 $120 $60,000

 

Determine gross profit for the period, assuming that 1,000 units were sold for $170 each. Operating expenses excluding cost of goods sold totaled $40,000.

  1. A) $80,000
  2. B) $60,000
  3. C) $40,000
  4. D) $170,000

Answer:  B

Diff: 3

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3 & LO 5-4

 

5.4-5) Philipsburg Corporation sells mugs to fine retailers around the world. It uses a FIFO perpetual inventory system. Inventory data is presented in the table below.

 

Date Number of Units Unit Cost Total Cost
January 1 Beginning inventory 300 $100 $30,000
January 13 Purchase 400 $110 $44,000
January 22 Purchase 500 $120 $60,000

 

Determine operating income for the period, assuming that 1,000 units were sold for $170 each. Operating expenses excluding cost of goods sold totaled $40,000.

  1. A) $40,000
  2. B) $34,000
  3. C) $22,000
  4. D) $20,000

Answer:  D

Diff: 3

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3 & LO 5-4

 

5.4-6) Putting on the Ritz, Inc. sells hats to upscale retailers around the world. Information about inventory is contained in the table below. The company uses a LIFO perpetual inventory system.

 

Date Number of Units Unit Cost Total Cost
January 1 Beginning inventory 500 $9.00 $4,500
January 13 Purchase 1,000 $10.00 $10,000
January 22 Purchase 1,400 $11.00 $15,400

 

Determine the gross profit for the period assuming that the only sale was 1,200 units for $35 each on January 15.

  1. A) $30,200
  2. B) $32,400
  3. C) $36,540
  4. D) $42,000

Answer:  A

Diff: 3

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3 & LO 5-4

 

5.4-7) Inventory information for Great Falls Merchandising, Inc. is provided below. Sales for the period were 2,800 units at $8 each. The company uses a FIFO periodic inventory system.

 

Date Number of Units Unit Cost Total Cost
January 1 Beginning inventory 1,000 $3.00 $3,000
January Purchase    600 $3.50 $2,100
February Purchase    800 $4.00 $3,200
March Purchase 1,200 $4.25 $5,100
   Totals 3,600 $13,400

 

Determine the gross profit for the quarter ended March 31.

  1. A) $15,400
  2. B) $12,600
  3. C) $12,400
  4. D) $22,400

Answer:  C

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3 & LO 5-4

 

5.4-8) Inventory data for Missoula Merchandising, Inc. are provided below. Sales for the period were 2,800 units. Each sold for $8. The company maintains a weighted-average periodic inventory system.

 

Date Number of Units Unit Cost Total Cost
January 1 Beginning inventory 1,000 $2.20 $2,200
January Purchases 600 $3.50 $2,100
February Purchases 800 $4.00 $3,200
March Purchases 1,200 $4.25 $5,100
   Totals 3,600 $12,600

 

Determine the gross profit for the quarter ended March 31.

  1. A) $12,635
  2. B) $12,600
  3. C) $13,000
  4. D) $22,400

Answer:  B

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3 & LO 5-4

 

5.4-9) Over the Top, Inc. sells hats to upscale retailers around the world. Information about inventory is contained in the table below. The company uses a FIFO perpetual inventory system.

 

Date Number of Units Unit Cost/Price
January 1 Beginning inventory 500 $9.00
January 13 Purchase 1,000 $10.00
January 22 Sale 1,200 $35.00

 

Determine the gross profit.

  1. A) $42,000
  2. B) $34,750
  3. C) $30,500
  4. D) $30,2500

Answer:  C

Diff: 2

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-3 & LO 5-4

 

5.4-10) Spring Hill, Inc. sells merchandise to customers worldwide in a highly competitive industry. During June, Spring Hill completed the following transactions:

∙ June 1: Purchased 200 units of merchandise for $11 each, FOB shipping point.

∙ June 1: Paid $205 of freight costs for the merchandise.

∙ June 3: Paid $1,200 to the local radio station for an advertising campaign related to the   merchandise.

∙ June 9: Sold 180 units of the merchandise to customers for $26 each.

Required:

  1. Determine the cost of the inventory on the books of Spring Hill, Inc., on June 2.
  2. When will the costs that are included in inventory become expenses?
  3. Which financial statement will report the costs that do NOT attach to inventory?

Answer:  1. $2,405 = (200 x $11) + $205

  1. All of the costs that attach to inventory will eventually become expenses when the inventory is sold.
  2. The income statement, as operating expenses

Diff: 1

Skill:  Analytic skills, Dynamics of the global economy

Objective:  LO 5-1 & LO 5-4

 

5.4-11) Umatilla Tile Company compiled the following inventory information for the current year. Sales for the year were 3,500 units at $25 each. Total operating expenses for the year, excluding cost of goods sold, were $35,000. The company maintains a periodic inventory system.

 

Date Number of Units Unit Cost Total Cost
January 1 Beginning inventory 1,000 $10.08 $10,080
March 10 Purchase 1,200 $11.00 $13,200
July 22 Purchase 1,500 $12.00 $18,000
November 9 Purchase 1,800 $13.00 $23,400
  Totals 5,500 $64,680

 

Required:

  1. Determine the ending inventory cost assuming the company uses the weighted average inventory method.
  2. Determine the net income that will be reported on the income statement assuming the company uses the weighted average inventory method.

Answer:  1. Average unit cost: $11.76 = $64,680/5,500

Ending inventory: $23,520 = $11.76 x 2,000 units

  1. Net income:

Sales   $87,500 = 3,500 units x $25

COGS     41,160 = 3,500 units x $11.76

Operating expenses   35,000

Net income  $11,340

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-3 & LO 5-4

 

5.4-12) Inventory data for Henderson Enterprises are below. Twenty units were sold during the period.

 

Date Number of Units Unit Cost Total Cost
January Beginning inventory 10 $10.00 $100
February Purchase 12 $11.00 $132
March Purchase 15 $12.00 $180
   Total 37 $412

 

Required: Fill in the missing amounts for (A), (B), and (C) in the income statement below. Use the inventory method that will give the highest possible net income.

 

Henderson Enterprises

Income Statement

For the Quarter Ended March 31, 2011

Sales                                                                             $9,000

Cost of goods sold                                        (A)_________

Gross profit                                                      (B)_________

Expenses

Utilities                        $  700

Salaries                          2500

Depreciation                    500

Total expenses                                                                3,700

Net income                                                       (C)_________

 

Answer:   Since prices are rising, FIFO will give the lowest COGS and highest net income

  1. COGS: $210 = (10 x $10) + (10 x $11)
  2. Gross profit: $8,790 = $9,000 — 210

C: Net income:  $5,090 = $9,000 — 210 — 3,700

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-3 & LO 5-4

 

5.4-13) Inventory data for Patterson Enterprises are below. Two hundred units were sold during the quarter.

 

 Date Number of Units Unit Cost Total Cost
January Beginning inventory 100 $100.00 $10,000
February Purchases 120 $105.00 $12,600
March Purchases 150 $112.00 $16,800

 

Required:  Fill in the missing amounts for (A), (B), and (C) in the income statement below. Use the inventory method that will give the lowest possible federal income taxes.

 

Patterson Enterprises

Income Statement

For the Quarter Ended March 31, 2011

Sales                                                                           $80,000

Cost of goods sold                                        (A)_________

Gross profit                                                      (B)_________

Operating expenses

Utilities                     $12,000

Salaries                       25,000

Depreciation               10,000

Total expenses                                                              47,000

Net income                                                       (C)_________

Answer:   LIFO will give the lowest possible federal income taxes.

  1. COGS: $22,050 = (150 x $112) + (50 x $105)
  2. Gross profit: $57,950 = $80,000 — 22,050
  3. Net income: $10,950 = $80,000 — 22,050 — 47,000

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-3 & LO 5-4

 

 

5.4-14) Ana, the accountant, is reviewing the work of a subordinate. Ana’s boss tells her to find as many errors as she can or, if there are no errors, certify that the work is done correctly. All information given relates to the month of January, 2011.

 

EMX Electronics

Income Statement

January 31, 2011

 

Revenues

Sales                                      $60,000

Unearned revenues                 15,000

Accounts receivable                20,000

Total revenues                                                       $95,000

Cost of goods sold                                                 40,000

Gross profit                                                            55,000

Expenses

Utilities                                   $2,000

Salaries                                   13,000

Dividends                                 5,000

Depreciation                             1,000

Total expenses                                                      $48,000

Return on equity                                                    $3,000

 

Additional Information:

  1. The beginning inventory was 200 units, at cost of $200 each. Purchases on January 3 were 100 units at a cost of $202 each and purchases on January 30 were 100 units at a cost of $205 each.
  2. The company sold 150 units during the month for $400 each.
  3. The company uses the weighted average cost flow method and a periodic inventory system.

Required:  Prepare a corrected income statement for the month.

 

 

Answer:                                 EMX Electronics

Income Statement

January 31, 2011

 

Sales revenue                                                        $60,000.00

Cost of goods sold                                           (A) 30,262.50

Gross profit                                                             29,737.50

Expenses

Utilities                                   $2,000

Salaries                                   13,000

Dividends                                 5,000

Depreciation                             1,000

Total expenses                                                            $18,000

Net income                                                            $13,737.50

 

(A) Weighted-average cost:

$201.75 = [(200 x $200) + (100 x $202) + (100 x $205)] / 400

COGS: $30,262.50 = 150 units x $201.75

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-3 & LO 5-4

 

 

5.4-15) FILLO, Inc.’s inventory activity in May 2011 was as follows:

Inventory, May 1 100 units @ $8 each
Purchase, May 7 300 units @ $6 each
Sale, May 18 250 units @ $15 each

 

Part A: Record the effect of the above inventory activity on the accounting equation assuming perpetual weighted average cost is used.

                                        Shareholders’ equity

Transactions in May, 2011: Assets Liabilities CC Retained earnings
5/1 Beginning inventory: FILLO, Inc. still owes for the 100 units @ $8. 800 Inventory 800 Accounts

Payable

5/7 Purchased 300 units @ $6 each on account
5/18 Sold 250 units for $15 each to customers on account. Record the 1) sale and 2) cost of the sale.

 

Part B: Record the effect of the above inventory activity on the accounting equation assuming perpetual first-in, first-out (FIFO) is used.

                                        Shareholders’ equity

Transactions in May, 2011: Assets Liabilities CC Retained earnings
5/1 Beginning inventory: FILLO, Inc. still owes for the 100 units @ $8. 800 Inventory 800 Accounts

Payable

5/7 Purchased 300 nits @ $6 each on account.
5/18 Sold 250 units for $15 each to customers on account. Record the 1) sale and 2) cost of the sale.

 

Part C: Using the information from Parts A and B above, for each item, write in the amount (even if $0) as of or for the Month Ended May 31, 2011. Write in the one financial statement where the line item is found.

Amount Financial Statement
WA FIFO
1. Inventory
2. Cost of goods sold
3. Gross profit
4. Sales
5. Accounts receivable
6. Accounts payable

 

 

Answer:  Part A:                                                                              Shareholders’ equity

Transactions in May, 2011: Assets Liabilities CC Retained earnings
5/7 Purchased 300 units @ $6 each on account 1,800 Inventory 1,800 Accounts

Payable

5/18 Sold 250 units for $15 each to customers on account. Record the 1) sale and 2) cost of the sale. 3,750 Accounts

Receivable

 

(1,625) Inventory

3,750 Sales

 

 

(1,625) COGS

 

 

Part B: Record the effect of the above inventory activity on the accounting equation assuming perpetual first-in, first-out (FIFO) is used.

                                        Shareholders’ equity

Transactions in May, 2011: Assets Liabilities CC Retained earnings
5/7 Purchased 300 units @ $6 each on account. 1,800 Inventory 1,800 Accounts

Payable

5/18 Sold 250 units for $15 each to customers on account. Record the 1) sale and 2) cost of the sale. 3,750 Accounts

receivable

 

(1,700) Inventory

3,750 Sales

 

 

(1,700) COGS

 

Part C: Using the information from Parts A and B above, for each item, write in the amount (even if

Amount Financial Statement
WA FIFO
1. Inventory $975 $900 Balance sheet
2. Cost of goods sold $(1,625) $(1,700) Income statement
3. Gross profit $2,125 $2,050 Income statement
4. Sales $3,750 $3,750 Income statement
5. Accounts receivable $3,750 $3,750 Balance sheet
6. Accounts payable $1,880 $1,880 Balance sheet

 

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-1, LO 5-3, & LO 5-4

 

 

5.4-16) Divide the class into teams of three or four people. Each team member should work the following problem separately outside of class. Then give the students time in class to compare answers with their teammates and put together a final, correct copy of the problem. Each team should turn in only one copy of the problem for grading. All team members will receive the same grade.

 

Phillo, Inc. had the following sales and purchases during its first month of business.

 

Part A: Record the effect of the following transactions on the accounting equation, assuming a LIFO perpetual inventory system. Fill in both the correct dollar amounts and account titles. Use a plus for increases and a minus for decreases.

                                         Shareholders’ equity

Transactions in May, 2011: Assets Liabilities CC Retained earnings
5/3 Purchased 30 units at $11 each on account
5/10 Sold 25 units for $15 each to a customer on accounts.
5/15 Purchased 20 units at $10 each on account.
5/18 Collected its accounts receivable.
5/23 Paid half of its accounts payable.
5/29 Sold 15 units for $15 each to a customer on account.

 

Part B: Record the effect of the following transactions on the accounting equation assuming a FIFO perpetual inventory system. Fill in both the correct dollar amounts and account titles. Use a plus for increases and a minus for decreases.

                                         Shareholders’ equity

Transactions in May, 2011: Assets Liabilities CC Retained earnings
5/3 Purchased 30 units at $11 each on account
5/10 Sold 25 units for $15 each to a customer on accounts.
5/15 Purchased 20 units at $10 each on account.
5/18 Collected its accounts receivable.
5/23 Paid half of its accounts payable.
5/29 Sold 15 units for $15 each to a customer on account.

 


Part C: Put an X in the appropriate box to select the method that gives the result shown by choosing either LIFO, FIFO, or Same (if both methods result in the same amount).

 

Which method results in the: WA FIFO Same
1 higher net income?
2 lower taxes?
3 higher current assets?
4 higher Cash paid to suppliers on the Statement of Cash Flows?
5 higher Accounts payable on the Balance Sheet?

 

Answer:  Part A:                                                                               Shareholders’ equity

LIFO PERPETUAL Assets Liabilities CC Retained earnings
5/3 40 x $11 = $330 +330 inventory +330 A/P
5/10 25 x $15 = $375

25 x $11 = $275

+375 A/R

-275 inventory

+375 sales

-275 COGS

5/15 20 x $10 = $200 +200 inventory +200 A/P
5/18 +375 cash

-375 A/R

5/23 half of $530 = $265 – 265 cash -265 A/P
5/29 15 x $15 = $225 +225 A/R

-150 inventory

+225 sales

-150 COGS

 

Part B:

                                         Shareholders’ equity

FIFO PERPETUAL Assets Liabilities CC Retained earnings
5/3 30 x $11 = $330 +330 inventory +330 A/P
5/10 25 x $15 = $375

25 x $11 = $275

+375 A/R

-275 inventory

+375 sales

-275 COGS

5/15 20 x $10 = $200 +200 inventory +200 A/P
5/18 +375 cash

-375 A/R

5/23 half of $530 = $265 -265 cash -265 A/P
5/29 15 x $15 = $225

(5 x $11) + (10 x $10)

+225 A/R

-155 inventory

+225 sales

-155 COGS

 


Part C:

 (prices are FALLING) WA FIFO Same
1 higher net income? X
2 lower taxes? X
3 higher current assets? X
4 higher Cash paid to suppliers on the Statement of Cash Flows? X
5 higher Accounts payable on the Balance Sheet? X

 

Diff: 3

Skill:  Analytic skills, Team

Objective:  LO 5-3 & LO 5-4

5.4-17) Indicate the financial statement where each item listed below would be found.

 

BS = the balance sheet

IS = the income statement

CF = the statement of cash flows

F  = the notes to the financial statements

N  = The item is NOT part of GAAP-based accounting disclosure.

 

______ 1. cash collected from customers

______ 2. cash paid to suppliers

______ 3. the fair market value of inventory, which includes the desired profit margin

______ 4. the cost flow method adopted for inventory valuation

______ 5. inventory

______ 6. cost of goods sold

______ 7. sales

Answer:  CF, CF, N, F, BS, IS, IS

Diff: 2

Objective:  LO 5-3 & LO 5-4

 

 

Learning Objective 5-5

 

5.5-1) The accountants for QEE Systems use the lower of cost or market (LCM) method to value inventory on the balance sheet in accordance with GAAP. The accountants have gathered the following information:

 

Inventory recorded in the company’s accounting records $150,000
Inventory selling (market) value per managers $180,000
Replacement value $135,000
Gross profit percentage 30%

 

At what amount will inventory will be reported on the balance sheet?

  1. A) $150,000
  2. B) $180,000
  3. C) $135,000
  4. D) $126,000

Answer:  C

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-5

5.5-2) The accountants for Q-Logic Integrated Systems use the lower of cost or market (LCM) method to value inventory on the balance sheet in accordance with GAAP rules. The accountants have gathered the following information:

 

Inventory recorded in the company’s accounting records $400,000
Inventory selling (market) value per managers $900,000
Replacement value $410,000
Gross profit percentage 30%

 

At what amount will inventory will be reported on the balance sheet?

  1. A) $400,000
  2. B) $900,000
  3. C) $410,000
  4. D) $630,000

Answer:  A

Diff: 1

Skill:  Analytic skills, Use of information technology

Objective:  LO 5-5

 

 

5.5-3) Which statement below is TRUE regarding the lower of cost or market rule?

  1. A) Inventory should be reported on the balance sheet at the lower of the replacement value or historical cost.
  2. B) Inventory should be revalued at the end of each period to its market value.
  3. C) Inventory should be reported on the balance sheet at whatever amount management honestly believes it is worth.
  4. D) The LCM rule is based on the cost principle.

Answer:  A

Diff: 1

Objective:  LO 5-5

 

5.5-4) Niteco Company ended its fiscal year with inventory recorded at its cost of $10,000. Niteco believes it will be able to sell the inventory for approximately $12,000.  Due to changes in the market, Niteco would be able to replace this inventory for $9,000.  How much should Niteco show for inventory on its year-end balance sheet?

  1. A) $10,000
  2. B) $12,000
  3. C) $9,000
  4. D) $2,000

Answer:  C

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-5

 

5.5-5) Inventory is reported at its replacement cost when the ________.

  1. A) inventory’s historical cost is higher
  2. B) gross profit is lower
  3. C) market value is higher
  4. D) prices are rising

Answer:  A

Diff: 1

Objective:  LO 5-5

5.5-6) After a lower-of-cost-or-market write down, Inventory will ________.

  1. A) increase by the difference between the historical cost and the replacement cost
  2. B) decrease by the difference between the historical cost and the replacement cost
  3. C) the same
  4. D) decrease by the replacement cost

Answer:  B

Diff: 1

Objective:  LO 5-5

 

 

5.5-7) In times of rising prices, ________ will be more apt to result in a lower-of-cost-or-market write down.

  1. A) the LIFO method
  2. B) the FIFO method
  3. C) the Weighted average cost method
  4. D) Each method is as likely to result in a lower-of-cost-or-market write down as the others are.

Answer:  B

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-5

 

5.5-8) The main objective of the lower-of-cost-or-market rule is to ________.

  1. A) not overstate revenues
  2. B) report a conservative inventory balance
  3. C) not overstate cost of goods sold
  4. D) report a conservative gross profit

Answer:  B

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-5

 

5.5-9) Inventory must be reported at its market value at the end of the period.

Answer:  FALSE

Diff: 1

Objective:  LO 5-5

 

5.5-10) In times of rising prices, a lower-of-cost-or-market write down is more likely if LIFO is used.

Answer:  FALSE

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-5

 

5.5-11) In times of rising prices, a lower-of-cost-or-market write down is more likely if FIFO is used.

Answer:  TRUE

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-5

 

5.5-12) Explain the lower of cost or market (LCM) rule.

Answer:  The conservatism convention supports the application of the LCM rule. Essentially, the rule requires that inventory should be reported at the lower of its historical cost or market value. Market value is defined as the replacement cost.

 

If inventory can be replaced for less than the cost at which it was purchased, then a loss in value has occurred during the current period and the financial reports should reflect that loss in value. It would be misleading to continue to report inventory at a value greater than replacement cost as of the balance sheet date.

Diff: 2

Skill:  Communication abilities

Objective:  LO 5-5

 

5.5-13) The accountants for Ruiz Imports use the lower of cost or market (LCM) method to value inventory on the balance sheet in accordance with GAAP. The accountants have gathered the following information:

 

Inventory cost recorded on the company’s books $50,000
The company’s managers think they can sell the inventory for this amount. $80,000
Replacement cost of inventory $45,000
Gross profit percentage 37.5%
Inventory system Periodic

 

Required:

  1. Determine the amount of inventory that will be reported on the balance sheet.
  2. What principle of accounting supports the lower of cost or market rule for inventory?

Answer:

  1. The lower of the historical cost and replacement cost is $45,000.
  2. The conservatism principle justifies writing inventory down to the lower of its cost or replacement value. The market value of inventory, as subjectively determined by management’s opinion, is irrelevant.

 

Diff: 2

Skill:  Analytic skills, Communication abilities

Objective:  LO 5-5

 

5.5-14) At December 31, Payless, Inc. reported inventory on the balance sheet at its cost of $200,000. However, the market value of the inventory at that date was $190,000. Put an X in the appropriate box to show the effect of continuing to report the inventory at cost:

 

Overstated Understated Correct
1. Current assets
2. Current liabilities
3. Net income

 

Answer:

Overstated Understated Correct
1. Current assets X
2. Current liabilities X
3. Net income X

 

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-5

 

5.5-15) At December 31, Payless, Inc. reported inventory on the balance sheet at its cost of $200,000. However, the market value of the inventory at that date was $190,000. Put an X in the appropriate box to show the effect of continuing to report the inventory at cost:

 

Overstated Understated Correct
1. Inventory
2. Accounts payable
3. Current ratio

 

Answer:

Overstated Understated Correct
1. Inventory X
2. Accounts payable X
3. Current ratio X

 

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-5

 

5.5-16) The accountants for Sandoval Products use the lower of cost or market (LCM) method to value inventory on the balance sheet in accordance with GAAP. The accountants have gathered the following information:

 

Inventory recorded on the company’s books $150,000
Amount company’s managers think they can sell the inventory $180,000
Replacement cost of inventory $135,000
Gross profit ratio 32.00%
Inventory system Periodic

 

Required: Determine the amount of inventory that will be reported on the balance sheet.

 

Answer:  Inventory will be on the balance sheet at $135,000, which is the lower of historical cost and the replacement cost.

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-5

 

5.5-17) Indicate the financial statement where each item listed below would be found.

 

BS = the balance sheet

IS = the income statement

CF = the statement of cash flows

F   = the notes to the financial statements

N  = The item is NOT part of GAAP-based accounting disclosure.

 

______ 1. inventory

______ 2. cost of goods sold

______ 3. sales

______ 4. cash collected from customers

______ 5. accounts payable

______ 6. cash paid to suppliers

______ 7. management’s estimate of inventory’s market value next year

______ 8. the cost flow method adopted for inventory valuation

Answer:  BS,  IS,  IS,  CF,  BS,  CF,  N,  F

Diff: 2

Objective:  LO 5-3, LO 5-4, & LO 5-5

 

 

Learning Objective 5-6

 

5.6-1) Lito & Sons Woodworks has a beginning inventory of $60,000 and ending inventory of $84,000 for the current period. The company had sales of $340,000 and cost of goods sold of $200,000 during the period. What was the inventory turnover?

  1. A) 4.72 times
  2. B) 3.66 times
  3. C) 2.78 times
  4. D) 1.55 times

Answer:  C

Diff: 2

Objective:  LO 5-6

5.6-2) Gaffney & Sons Woodworks has a beginning inventory of $160,000 and ending inventory of $180,000 for the current period. The company had sales of $500,000 and cost of goods sold of $300,000 during the period. What was the inventory turnover?

  1. A) 4.50 times
  2. B) 2.94 times
  3. C) 2.00 times
  4. D) 1.76 times

Answer:  D

Diff: 2

Objective:  LO 5-6

 

5.6-3) Assume Taylor & Sons Cabinet Makers has an inventory turnover ratio of 4.5 for the year ended November 30, 2011. Which statement below is the best interpretation of the ratio?

  1. A) The company was able to sell the inventory 4.5 times faster than last year.
  2. B) The company has 4.5 times as much inventory as it has current liabilities.
  3. C) The company sells its average inventory balance 4.5 times per year.
  4. D) The company sells its inventory at a greater rate than other companies in its industry.

Answer:  C

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-6

 

5.6-4) Assume Taylor & Sons Cabinet Makers had a gross profit ratio of 30%, 35%, and 40% over the most recent three years. Which statement below is the best interpretation of the data?

  1. A) The company may be having trouble selling its inventory.
  2. B) The company is selling more inventory than in prior years.
  3. C) The company is increasing its selling price per unit or having its inventory costs per unit decrease.
  4. D) The company has been decreasing its selling price but selling more units.

Answer:  C

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-6

 

5.6-5) Assume Tyler, Inc. had a gross profit ratio of 30%, 25%, and 20% over the most recent three years. Which statement below is the best interpretation of the data?

  1. A) The company is selling more inventory than in previous years.
  2. B) The company is decreasing its selling price per unit or having its inventory costs per unit increase.
  3. C) The company’s managers are doing a good job of controlling inventory costs and selling price.
  4. D) The company is not selling as much inventory as in previous years.

Answer:  B

Diff: 2

Objective:  LO 5-6

5.6-6) Johnson Supply Company had sales of $1,000,000, Cost of goods sold was $600,000 and operating expenses were $340,000. The beginning cash balance was $400,000 and the ending cash balance was $220,000. Net cash flows from operating activities were $960,000. What is the company’s gross profit ratio?

  1. A) 20%
  2. B) 40%
  3. C) 60%
  4. D) 35%

Answer:  B

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-6

 

5.6-7) Which financial statement(s) do you need to calculate a company’s inventory turnover ratio?

  1. A) only the income statement
  2. B) only the balance sheet
  3. C) both the income statement and the balance sheet
  4. D) both the balance sheet and the statement of cash flows

Answer:  C

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-6

 

5.6-8) Which financial statement(s) do you need to calculate a company’s gross profit ratio?

  1. A) only the income statement
  2. B) only the balance sheet
  3. C) both the income statement and the balance sheet
  4. D) both the balance sheet and the statement of cash flows

Answer:  A

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-6

 

 

5.6-9) Thyme, Inc.’s inventory turnover ratio has been approximately 6 times per year over the past few years. This year Thyme decided to reduce the amount of inventory it keeps on hand. What effect will this new policy have on its inventory turnover ratio for the current year?

  1. A) The ratio will increase.
  2. B) The ratio will decrease.
  3. C) The inventory turnover ratio will stay the same.
  4. D) This is a trick question. The amount of inventory on hand has nothing to do with a company’s inventory turnover ratio.

Answer:  A

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-6

5.6-10) Which of the following companies will probably have the highest inventory turnover ratio?

  1. A) Auto dealership
  2. B) Clothing store
  3. C) Bakery
  4. D) All of these companies will have the same inventory turnover ratio.

Answer:  C

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-6

 

5.6-11) Which of the following companies will probably have the lowest inventory turnover ratio?

  1. A) Auto dealership
  2. B) Clothing store
  3. C) Bakery
  4. D) All of these companies will have the same inventory turnover ratio.

Answer:  A

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-6

 

5.6-12) Gross profit is calculated by deducting ________.

  1. A) current assets from current liabilities
  2. B) revenues from expenses
  3. C) cost of goods sold from net sales
  4. D) ending inventory from cost of goods available for sale

Answer:  C

Diff: 1

Objective:  LO 5-6

 

 

5.6-13) Inventory information for Cut Above, Inc. is provided below. Sales for the period were 2,000 units at $10 each. The company uses FIFO.

 

Date Number of Units Unit Cost
January 1 Beginning inventory 1,000 $3.00
January 10 Purchase 2,000 $4.00
January 15 Purchase 1,200 $4.25

 

Determine the gross profit ratio at January 31.

  1. A) 60%
  2. B) 65%
  3. C) 40%
  4. D) 57.5%

Answer:  B

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-3 & LO 5-6

5.6-14) Which company is most likely to have a higher inventory turnover? A company with ________.

  1. A) higher-priced goods and lower gross profit
  2. B) lower-priced goods and lower gross profit
  3. C) higher-priced goods and higher gross profit
  4. D) a higher gross profit ratio

Answer:  B

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-6

 

5.6-15) Which financial statement(s) is/are needed in order to calculate the average days in inventory?

  1. A) income statement only
  2. B) balance sheets only
  3. C) both the income statement and balance sheets
  4. D) both the statement of cash flows and income statement

Answer:  C

Diff: 1

Skill:  Analytic skills

Objective:  LO 5-6

 

 

5.6-16) If Puffins Turnovers, Inc., has an inventory turnover ratio of 73 times, then its average days in inventory must be ________.

  1. A) 20 days
  2. B) 5 days
  3. C) 0.2 days
  4. D) 2 days

Answer:  B

Diff: 1

Objective:  LO 5-6

 

5.6-17) The gross profit ratio is calculated by dividing gross profit by sales.

Answer:  TRUE

Diff: 1

Objective:  LO 5-6

 

5.6-18) The asset turnover ratio is the most useful way to determine if a merchandising company is selling its inventory effectively.

Answer:  FALSE

Diff: 1

Objective:  LO 5-6

 

5.6-19) The gross profit ratio is the most useful way to determine if a merchandising company is selling its inventory effectively.

Answer:  FALSE

Diff: 1

Objective:  LO 5-6

 

5.6-20) McDonald’s gross profit ratio is higher than The Boeing Company.

Answer:  FALSE

Diff: 1

Objective:  LO 5-6

5.6-21) The gross profit ratio measures the percentage of revenue left over after deducting cost of goods sold from net sales.

Answer:  TRUE

Diff: 1

Objective:  LO 5-6

 

 

5.6-22) When analyzing the operating performance of a merchandise firm, inventory turnover and the gross profit ratio are usually calculated. What do the inventory turnover ratio and gross profit ratio indicate?

Answer:  The inventory turnover ratio indicates how often the average inventory balance is “turned over” or sold during an accounting period. Selling inventory is the most important thing a merchandise firm does, so analysts are keenly focused on trends in the inventory turnover ratio and how a company’s turnover compares with other companies in the industry.

 

The gross profit ratio indicates the percentage of each dollar in revenue that remains after deducting the costs of acquiring merchandise. Again, this is a critical part of a merchandise concern’s performance because it measures the ability to earn profit, before operating costs, from selling merchandise.

Diff: 2

Skill:  Analytic skills, Communication abilities

Objective:  LO 5-6

 

 

5.6-23) Use the following data to answer the questions below:

Nov. 30, 2011 Nov. 30, 2012 Nov. 30, 2013
Sales $3,500,000 $4,000,000 $4,400,000
COGS $2,100,000 $2,400,000 $2,685,000
Inventory $650,000 $700,000 $600,000

 

Required:

  1. Calculate the values required in the chart below:
For the year ended

Nov. 30, 2012

For the year ended

Nov. 30, 2013

Gross profit

 

 

Gross profit ratio

 

 

Inventory turnover ratio

 

 

 

  1. Interpret the meaning of each of the RATIOS you have just calculated.

Answer:  1.

Nov. 30, 2012 Nov. 30, 2013
Gross profit $4,000,000 – 2,400,000 = $1,600,000 $4,400,000 — 2,685,000 =

$1,715,000

Gross profit

ratio

 

$1.6M / $4M = 40%

$1,715,000 / $4,400,000 =

38.98%

Inventory turnover

ratio

3.56 times

 

$2,.400,00/(($650K + 700K)/2)

4.13 times

 

$2,685,000/(($700K+600K)/2)

 

  1. The gross profit ratio indicates the percentage of revenue left over after deducting COGS. It measures the percentage of each dollar in sales that contributes to profitability. For the two years ended 2013, the company has roughly 40 percent of each dollar left over as gross profit, with a slight decline in 2013.

 

The inventory turnover indicates how many times per year the company is selling or “turning over” its inventory. It helps analysts evaluate how well managers deal with the company’s investments in inventory. For the two years calculated, the inventory turnover is 3.55 and 4.13 times per year or roughly every 103 and 88 days respectively. The higher the turnover the better because it indicates the inventory is selling more often.

Diff: 2

Skill:  Analytic skills, Communication abilities

Objective:  LO 5-6

 

 

5.6-24) Use the following data to answer the questions below:

Jan. 31, 2011 Jan. 31, 2012 Jan. 31, 2013
Sales $500,000 $400,000 $380,000
COGS $200,000 $165,000 $144,400
Inventory $12,000 $14,000 $10,500

 

Required:

  1. Calculate the values required in the chart below
For the year ended

Jan. 31, 2012

For the year ended

Jan. 31, 2013

Gross profit

 

 

Gross profit ratio

 

 

Inventory turnover ratio

 

 

 

  1. Interpret the meaning of each of the RATIOS you have just calculated.

Answer:  1.

Jan. 31, 2012 Jan. 31, 2013
Gross profit $400K — 165K = $235K $380,000 — 144,400 = $235,600
Gross profit ratio $235K / $400K = 58.75% $235,600 / $380,000 = 62%
Inventory

turnover

ratio

 

12.7 times

 

$165,000

($12,000 + 14,000) / 2

11.8 times

 

$144,400

($14,000 + 10,500) / 2

 

  1. The gross profit ratio indicates the percentage of revenue left over after deducting cost of goods sold. It measures the percentage of each dollar in sales that contributes to profitability. For the two years ended 2013, the company has roughly 60 percent of each dollar left over as gross profit, with a slight improvement in 2013.

 

The inventory turnover indicates how many times per year the company is selling or “turning over” its inventory. It helps analysts evaluate how well managers deal with the company’s investments in inventory. For the two years calculated, the inventory turnover is 12.7 and 11.8 times per year or roughly every 29 and 31 days. The higher the turnover the better because it indicates the inventory is selling more often. Notice that the inventory is selling slightly more slowly in the second year.

 

Diff: 2

Skill:  Analytic skills, Communication abilities

Objective:  LO 5-6

 

5.6-25) At the end of its first year of business, Payless, Inc. had Sales of $800,000 and Cost of goods sold of $500,000 prior to a lower-of-cost-or-market write down. Payless reported its inventory at the lower market value of $90,000 instead of the cost of $100,000. The adjusting entry to record the write down included a decrease to Inventory and Cost of goods sold.

 

Required: Put an X in the appropriate box to show the effect of lower-of-cost-or-market write down:

 

Increase Decrease Remain the same
1. Inventory turnover
2. Gross profit ratio
3. Current ratio

 

Answer:

Increase Decrease Remain the same
1. Inventory turnover X
2. Gross profit ratio X
3. Current ratio X

 

Diff: 3

Skill:  Analytic skills

Objective:  LO 5-5 & LO 5-6

5.6-26) Using the following information, calculate the gross profit ratio, inventory turnover ratio, and the average days in inventory.

 

Sales $1,000,000
Cost of goods sold $700,000
Inventory at December 31, 2011 $80,000
Inventory at December 31, 2010 $60,000
Net income $3,000

 

  1. Gross profit ratio equals: ________
  2. Inventory turnover ratio equals: ________
  3. Average days in inventory equals: ________.

Answer:  1. 30% = ($1,000,000 — 700,000)/$1,000,000; 2. 10 times = $700,000/(($80,000+60,000)/2)

  1. 36.5 days = 365/10 times

Diff: 2

Skill:  Analytic skills

Objective:  LO 5-6

 

 

5.6-27) Divide the class into teams of three or four people. Each team member should work the following problem separately outside of class. Then give the students time in class to compare answers with their teammates and put together a final, correct copy of the problem. Each team should turn in only one copy of the problem for grading. All team members will receive the same grade.

 

Part A: Enter Tim’s Tams, Inc.’s May transactions and adjustments in the accounting equation.

  1. May 1 Paid $600 cash for 3 months of insurance coverage beginning May 1.
  2. May 2 Collected $8,000 from customers for sales made in April.
  3. May 6 Paid $7,200 of accounts payable from April purchases.
  4. May 6 Purchased 800 caps @ $6.10 each on account, FOB shipping point. Shipping cost $120 also on account.
  5. May 8 Paid $300 cash for supplies.
  6. May 31 During May, Tim’s Tams sold 1,000 baseball caps @ $10 each on account. Tim’s uses a FIFO perpetual inventory system. Beginning inventory consists of 500 caps at $6 each.
  7. May 31 Tim’s Tams declared and paid a $400 cash dividend to its shareholder.
  8. May 31 Adjusted for insurance used during the month. Recall that on May 1, Tim’s Tams paid $600 for 3 months of insurance coverage that began May 1.
  9. May 31 Recorded one month’s straight-line depreciation on the $18,000 truck that has a 6-year useful life and no salvage value.
  10. May 31 Counted the office supplies and found that $100 of supplies have not been used.

 

 

Part B: Complete the financial statement.     Part C: Complete the financial statement.

 

Part D: Complete the financial statement.

 


Part E: Complete the financial statement.

 

Part F: Using the Tim’s Tam financial satatements, answer the following:

 

Answer:  Part A:

 

Part B:                                                    Part C:

 


Part D:

 

Part E:

 

Part F:

  1. 38.75%;
  2. Increases in cost of the goods and decreases in price may explain a decrease in the gross profit ratio;
  3. 2.5 times;
  4. No;
  5. 0.8 to 1.0;
  6. a) lower, b) higher.

Diff: 3

Skill:  Analytic skills, Communication abilities, Team

Objective:  LO 5-2, LO 5-3, LO 5-4, LO 5-5 & LO 5-6

 

 

Learning Objective 5-7

 

5.7-1) An example of a sound control for inventory is ________.

  1. A) requiring authorization for all purchases
  2. B) verifying that the items received are the items ordered
  3. C) physically protecting the inventory with locked storage rooms
  4. D) all of these

Answer:  D

Diff: 1

Objective:  LO 5-7

 

5.7-2) Which of the following would be an example of a WEAKNESS in controls over inventory?

  1. A) having an employee identify reliable vendors from whom to buy merchandise
  2. B) paying for inventory only after it has been checked that all items were received
  3. C) having the employee who keeps inventory records also make payments for the goods
  4. D) limiting access to inventory by using locked warehouses and storage rooms

Answer:  C

Diff: 1

Objective:  LO 5-7

5.7-3) Which statement below is TRUE about the purchase of inventory?

  1. A) Large firms tend to have entire departments for purchasing and for accounts payable.
  2. B) All firms, large and small, need to keep detailed records of what they are buying and paying for.
  3. C) The person who records inventory purchases should not have access to the inventory.
  4. D) All of these statements are true.

Answer:  D

Diff: 1

Objective:  LO 5-7

 

5.7-4) Which statement below is Strength in controls over inventory?

  1. A) Have an employee order the merchandise and also be the one to sign for the delivery of the merchandise ordered.
  2. B) Have the accountant order the merchandise so that the amounts will be accurately reflected in the accounting records.
  3. C) Have the employee who keeps inventory records also make payments for the goods to avoid overpayment of merchandise purchased.
  4. D) The accountant who records inventory purchases should not have access to the inventory.

Answer:  D

Diff: 1

Objective:  LO 5-7

 

 

5.7-5) An example of an internal control procedure to protect inventory is to limit access to inventory deliveries to the accountants.

Answer:  FALSE

Diff: 1

Objective:  LO 5-7

 

5.7-6) An example of an internal control procedure to protect inventory is to prevent the person who records inventory purchases from having access to the inventory.

Answer:  TRUE

Diff: 1

Objective:  LO 5-7

 

5.7-7) Discuss the risks to be avoided and the control procedures associated with purchasing and paying for inventory.

Answer:  Answers may vary widely, but the grader should look for any of the following points:

∙ protecting inventory from damage and theft

∙ selecting a reliable vendor

∙ verifying that the items received are the items ordered

∙ verifying that payments are made only for items received and ordered

∙ limiting access to inventory and physically protecting it

∙ separating the duties of keeping inventory records and having custody of inventory

Diff: 2

Skill:  Communication abilities

Objective:  LO 5-7

5.7-8) Jennifer works the front counter at Burger King. Often her friends drop by when she’s working and she gives them free food (inventory) without ringing up any sales. She figures it’s OK as long as she isn’t caught.

  1. Assume that Burger King uses a perpetual inventory system. Describe how a perpetual inventory system helps to identify inventory shrinkage.
  2. Is it ethical to give your friends free food as long as you aren’t caught?

Answer:

  1. With a perpetual inventory system, the inventory account is updated every time merchandise (hamburgers) is purchased or sold. When the company takes an actual physical count, it can compare the numbers from the count with the perpetual records. In this case, because inventory is given away but not recorded as a sale, the perpetual records will show more inventory on hand than the physical count.
  2. No. It doesn’t matter whether you will be caught. It is unethical to give away your

employer’s inventory.

Diff: 2

Skill:  Communication abilities, Ethical understanding and reasoning abilities

Objective:  LO 5-2 & LO 5-7

 

 

5.7-9) Match each of the following with the internal control that best minimizes the related risk. There is only one best answer for each.

 

  Internal Controls (I/C):
A. Limiting access
B. Selection of Reliable Vendors
C. Segregation of duties

 

      I/C
1. Bart Simpson, the purchasing agent, always orders the company’s inventory from Uncle Crusty.
2. The employee at the receiving dock steals some of the inventory without being caught because she writes down a lower number of goods received on the receiving report.
3. Customers steal inventory from the warehouse.  

 

Answer:  1. B;  2. C;  3. A

Diff: 2

Objective:  LO 5-7

5.7-10) Match the risk with the related internal control that best minimizes the risk. There is only one best answer for each.

 

  Internal Controls (I/C):
A. Segregation of duties
B. Selection of Reliable Vendors
C. Limiting access

 

    I/C
1. The unscrupulous bookkeeper, while unloading the delivery truck, steals inventory and then makes an adjusting entry to remove the inventory from the accounting records so as not to be detected.
2. Companies use sensors on their inventory to prevent customers from leaving the store with merchandise.
3. The company is paying too much for its merchandise because it is ordered from an employee’s friend who charges more than competitors.  

 

Answer:  1. A;  2. C;  3. B

Diff: 2

Objective:  LO 5-7

 

 

Learning Objective 5-8 (Appendix 5A)

 

5.8-1) Z Company uses a periodic inventory system. If ending inventory is overstated, net income will be ________.

  1. A) overstated
  2. B) understated
  3. C) unaffected by the inventory error
  4. D) impossible to determine from the information given

Answer:  A

Diff: 1

Skill:  Analytic skills

Objective:  LO 5A-8 (Appendix 5A)

 

5.8-2) Which of the following 2011 financial statement line items will be affected if the 2011 ending inventory balance is overstated?

  1. A) Cost of goods sold will be understated.
  2. B) Current assets will be understated.
  3. C) Net income will be understated.
  4. D) Current liabilities will be overstated.

Answer:  A

Diff: 3

Skill:  Analytic skills

Objective:  LO 5A-8 (Appendix 5A)

5.8-3) Which financial statement line item will be misstated if the 2011 ending inventory balance is overstated?

  1. A) 2011 Balance sheet only
  2. B) 2011 and 2012 Balance sheets only
  3. C) 2011 and 2012 Income statements and 2011 Balance sheet only
  4. D) 2011 and 2012 Income statements only

Answer:  C

Diff: 3

Skill:  Analytic skills

Objective:  LO 5A-8 (Appendix 5A)

 

 

5.8-4) Newcastle Company has the following inventory data for the current period:

 

Beginning inventory                               $ 10,000

+ Purchases                                              130,000

Cost of goods available for sale               140,000

– Ending inventory                                     20,000

Cost of goods sold                                 $120,000

 

Assume that the ending inventory is understated by $5,000. What is the effect on the current period’s net income?

  1. A) It will be overstated by $5,000.
  2. B) It will be understated by $5,000.
  3. C) It will be understated by $20,000.
  4. D) The inventory error will have no effect on net income.

Answer:  B

Diff: 2

Skill:  Analytic skills

Objective:  LO 5A-8 (Appendix 5A)

 

5.8-5) Newcastle Company has the following inventory data for the current period:

 

Beginning inventory                               $ 10,000

+ Purchases                                              130,000

Cost of goods available for sale              140,000

– Ending inventory                                     20,000

Cost of goods sold                                $120,000

 

Assume that the ending inventory is overstated by $5,000. What is the effect on the current period’s net income and on the following period’s net income?

  1. A) Net Income this period will be overstated by $5,000 and next period will be understated by $5,000.
  2. B) Net income this period will be understated by $5,000 and next period will be understated by $5,000.
  3. C) Net income this period will be overstated by $5,000, but next period will be correctly stated.
  4. D) Net income this period will be understated by $5,000 and next period will be overstated by $5,000.

Answer:  A

Diff: 3

Skill:  Analytic skills

Objective:  LO 5A-8 (Appendix 5A)

 

5.8-6) A company uses a periodic inventory system. If the ending inventory is understated, the error will affect only the current accounting period.

Answer:  FALSE

Diff: 2

Objective:  LO 5A-8 (Appendix 5A)

 

5.8-7) If ending inventory is overstated, the error will affect two income statement periods.

Answer:  TRUE

Diff: 2

Skill:  Analytic skills

Objective:  LO 5A-8 (Appendix 5A)

 

5.8-8) An error in ending inventory in 2011 will cause ending inventory in 2012 to be misstated as well.

Answer:  FALSE

Diff: 2

Skill:  Analytic skills

Objective:  LO 5A-8 (Appendix 5A)

 

5.8-9) Assume TFG Company uses a periodic inventory system and overstates its ending inventory by $12,000. In other words, the company counts and states that its ending inventory is $50,000, when in fact the correct ending inventory balance should have been $38,000. Describe how this mistake of overstating inventory affects the income statement.

Answer:  Overstating or understating inventory is a serious mistake because inventory is typically one of the largest assets for a manufacturing or a merchandising firm. In this case, if ending inventory is overstated by $12,000, then cost of goods sold will be understated by $12,000. That is because cost of goods sold is calculated by subtracting ending inventory from cost of goods available for sale. The greater the ending inventory the lower the cost of goods sold will be. As a result, net income will be overstated by $12,000 for the current period. The error will carry over to the next accounting period because beginning inventory will be overstated by $12,000, which means that cost of goods sold will be overstated by $12,000 and net income understated by $12,000.

Diff: 2

Skill:  Communication abilities

Objective:  LO 5A-8 (Appendix 5A)

 

5.8-10) Determine the effect on net income of each of the following errors. Treat each part of this question as an independent case and assume that the error given is the only error during the year.

  1. Ending inventory is overstated by $5,000.
  2. Beginning inventory is overstated by $7,000.
  3. Ending inventory is understated by $4,000.
  4. Beginning inventory is understated by $6,000.
  5. Ending inventory is overstated by $2,500.
  6. Beginning inventory is overstated by $9,500.
  7. Ending inventory is understated by $6,200.

Answer:

  1. Net income in the current year will be overstated by $5,000.

Net income will be understated by $5,000 in the following year.

  1. Net income in the current year will be understated by $7,000.

Net income for the previous year was overstated by $7,000.

  1. Net income for the current year will be understated by $4,000.

Net income for the following year will be overstated by $4,000.

  1. Net income for the current year will be overstated by $6,000.

Net income for the previous year was understated by $6,000.

  1. Net income for the current year will be overstated by $2,500.

Net income for the following year will be understated by $2.500.

  1. Net income for the current year will be understated by $9,500.

Net income for the previous year was overstated by $9,500.

  1. Net income for the current year will be understated by $6,200.

Net income for the following year will be overstated by $6,200.

Diff: 3

Skill:  Analytic skills

Objective:  LO 5A-8 (Appendix 5A)

 

5.8-11) The following inventory information comes from the records of Hoboken Widget Company.

 

Beginning inventory $120,000
Ending inventory $80,000
Cost of goods sold $540,000

 

A physical inventory count revealed that the inventory was actually $75,000. If this error were not corrected, what effect would it have on the income statements for this fiscal year and the following fiscal year?

Answer:  Cost of goods sold will be understated by $5,000 on this year’s income statement. Net income will be overstated this year by $5,000 if this error is not corrected.

 

Next year, beginning inventory will be overstated, which will make cost of goods sold overstated and net income understated by $5,000.

Diff: 2

Skill:  Analytic skills, Communication abilities

Objective:  LO 5A-8 (Appendix 5A)

 

5.8-12) The following inventory data are from the records of Hobo Widget Company:

 

Beginning inventory $100,000
Ending inventory $70,000
Cost of goods sold $230,000

 

A physical inventory count revealed that the inventory was actually $75,000. If this error were not corrected, what effect would it have on the income statements for this fiscal year and the following fiscal year?

Answer:  If ending inventory is understated by $5,000, then COGS will be overstated and net income will be understated on this year’s income statement by $5,000. Next year, beginning inventory will be understated and COGS will be understated by $5,000, making net income overstated by $5,000.

Diff: 2

Skill:  Analytic skills, Communication abilities

Objective:  LO 5A-8 (Appendix 5A)

 

 

5.8-13) Records for the Short Company showed the following at the end of the year:

 

Beginning inventory $10,000
Ending inventory 30,000
Cost of goods sold 80,000

 

A physical inventory was taken and showed that the ending inventory was actually $29,000.

 

Required: Put an X in the appropriate box to show the effect the error will have on the following financial statement line items for the year if Short Company fails to correct it:

 

Overstated Understated Correct
1 Current assets
2 Current liabilities
3 Cost of goods sold
4 Gross profit
5 Income taxes
6 Retained earnings

 

Answer:

Overstated Understated Correct
1 Current assets X
2 Current liabilities X
3 Cost of goods sold X
4 Gross profit X
5 Income taxes X
6 Retained earnings X

 

Diff: 3

Skill:  Analytic skills

Objective:  LO 5A-8 (Appendix 5A)

 

Learning Objective 5-9 (Appendix 5b)

 

5.9-1) The accountant for Rock Springs, Inc. needs to estimate the ending inventory balance so that she can prepare quarterly financial statements. The accountant has gathered the following information:

 

Beginning inventory $14,000,000
Sales $42,000,000
Purchases $30,000,000
Gross profit percentage 40%

 

Use the gross profit method to estimate the cost of the ending inventory.

  1. A) $22,300,000
  2. B) $18,800,000
  3. C) $15,600,000
  4. D) $16,800,000

Answer:  B

Diff: 2

Skill:  Analytic skills

Objective:  LO 5B-9 (Appendix 5B)

 

5.9-2) The accountant for Buy & Large, Inc. needs to estimate the ending inventory balance so that he can prepare quarterly financial statements. The accountant has gathered the following information:

 

Beginning inventory $10,000
Sales $100,000
Purchases $80,000
Gross profit percentage 40%

 

Use the gross profit method to estimate the cost of the ending inventory.

  1. A) $30,000
  2. B) $40,000
  3. C) $20,000
  4. D) $42,000

Answer:  A

Diff: 2

Skill:  Analytic skills

Objective:  LO 5B-9 (Appendix 5B)

 

5.9-3) Minoan Company lost its entire inventory during an earthquake. The following key inventory information was recovered from backup data stored electronically at a remote location:

 

Beginning inventory $150,000
Sales $300,000
Purchases $225,000
Gross profit percentage 38%

 

Use the gross profit method to estimate the cost of the ending inventory.

  1. A) $189,000
  2. B) $211,000
  3. C) $199,000
  4. D) $186,000

Answer:  A

Diff: 2

Skill:  Analytic skills, Use of information technology

Objective:  LO 5B-9 (Appendix 5B)

 

5.9-4) Santorini Company lost its entire inventory during an earthquake. The following key inventory information was reconstructed from backup data stored electronically at a remote location:

 

Beginning inventory $750,000
Sales $800,000
Purchases $200,000
Gross profit percentage 40%

 

Use the gross profit method to estimate the cost of the ending inventory.

  1. A) $500,000
  2. B) $480,000
  3. C) $470,000
  4. D) $320,000

Answer:  C

Diff: 2

Skill:  Analytic skills, Use of information technology

Objective:  LO 5B-9 (Appendix 5B)

 

 

5.9-5) Explain what information is needed in order to estimate a company’s ending inventory cost using the gross profit method. Why would a company need to estimate inventory?

Answer:  To apply the gross profit method, a firm needs to know the beginning inventory cost (available on the balance sheet as of the end of the previous period), the cost of merchandise purchased during the current period (net of discounts and returns), the sales for the period, and the company’s past gross profit ratio.

There are various reasons for estimating inventory cost. A company might want to prepare monthly or quarterly financial statements without taking the time to count inventory. Or a company might need an estimate of inventory for an insurance claim if inventory has been stolen or destroyed.

Diff: 1

Skill:  Communication abilities

Objective:  LO 5B-9 (Appendix 5B)

5.9-6) The accountants for Ruiz Imports need to estimate the ending inventory balance so that they can prepare quarterly financial statements. The accountants have gathered the following information:

 

Beginning inventory $96,950
Sales $138,500
Purchases $13,850
Gross profit ratio 40%

 

Required: Use the gross profit method to estimate the ending inventory.

Answer:  Cost of Goods Available for Sale (COGAS): $110,800 = $96,950 beginning inventory + $13,850 purchases

Cost of goods sold (COGS):  $83,100 = 60% x $138,500

Ending inventory of $27,700 = $110,800 COGAS – $83,100 COGS

Diff: 2

Skill:  Analytic skills

Objective:  LO 5B-9 (Appendix 5B)

 

 

5.9-7) The El Paso Chili Pepper Company lost its entire inventory during a fire that started when the hot sauce it was making overheated. Fortunately, the company’s accounting records were not lost in the fire. Key inventory data follow:

 

Beginning inventory $1,000,000
Purchases (up to date of fire) $850,000
Sales (up to date of fire) $2,200,000
Gross profit ratio 30%

 

Required:  Use the gross profit method to estimate the cost of the inventory lost in the fire.

Answer:  Cost of Goods Sold (COGS):  $1,540,000 = .70 X $2,200,000 in sales.

Cost of Goods Available for Sale (COGAS):  $1,850,000 = $1,000,000 BI + $850,000 purchases

EI:  $310,000 = $1,850,000 COGAS minus $1,540,000 COGS

Diff: 2

Skill:  Analytic skills

Objective:  LO 5B-9 (Appendix 5B)

 

5.9-8) The Morris Lest, Inc. lost its entire inventory during a hurricane. Fortunately, the company’s records were not lost in the same disaster. Key inventory data follow:

 

Beginning inventory $100,000
Purchases (up to date of quake) $800,000
Net sales (up to date of quake) $1,000,000
Gross profit ratio 30%

 

Use the gross profit method to estimate the cost of the inventory lost in the earthquake.

Answer:  Cost of Goods Sold (COGS): $700,000 = .70 X $1,000,000

Cost of Goods Available for Sale (COGAS): $900,000 = $100,000 BI + $800,000 purchases

EI: $200,000 = $900,000 COGAS minus $700,000 COGS

Diff: 2

Skill:  Analytic skills

Objective:  LO 5B-9 (Appendix 5B)

 

5.9-9) The accountants for Gonzalez Furniture Imports need to estimate the ending inventory balance so that they can prepare quarterly financial statements. The accountants have gathered the following information:

 

Beginning inventory $60,000
Sales $105,000
Purchases $80,000
Gross profit ratio 35%

 

Required: Use the gross profit method to estimate the ending inventory.

Answer:  Cost of Goods Sold (COGS):  $68,250 = .65 x $105,000 sales

Cost of Goods Available for Sale (COGAS): $140,000 = $60,000 beginning inventory + $80,000 purchases

Ending inventory:  $71,750 = $140,000 COGAS – 68,250

Diff: 2

Skill:  Analytic skills

Objective:  LO 5B-9 (Appendix 5B)

Financial Accounting  A Business Process Approach 3rd Edition Test Bank – Jane L. Reimers

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