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Exam 6: Inventories and Cost of Sales

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Question 61

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LIFO assumes that inventory costs flow in the order incurred.

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Question 62

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On December 31 of the current year, Plunkett Company reported an ending inventory balance of $215,000. The following additional information is also available: -Plunkett sold and shipped goods costing $38,000 to Savannah Enterprises on December 28 with shipping terms of FOB shipping point. The goods were not included in the ending inventory amount of $215,000. -Plunkett purchased goods costing $44,000 on December 29. The goods were shipped FOB destination and were received by Plunkett on January 2 of the following year. The shipment was a rush order that was supposed to arrive by December 31. These goods were included in the ending inventory balance of $215,000. -Plunkett's ending inventory balance of $215,000 included $15,000 of goods being held on consignment from Carole Company. (Plunkett Company is the consignee.) -Plunkett's ending inventory balance of $215,000 did not include goods costing $95,000 that were shipped to Plunkett on December 27 with shipping terms of FOB destination and were still in transit at year-end. Based on the above information, the amount that Plunkett should report in ending inventory on December 31 is:

A) $209,000
B) $156,000
C) $200,000
D) $171,000
E) $194,000

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Question 63

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Explain how the inventory turnover ratio and the days' sales in inventory ratio are used to evaluate inventory management.

The inventory valuation method that identifies each item in ending inventory with a specific purchase and invoice is the:

An understatement of ending inventory will cause

The inventory turnover ratio is calculated as:

When units are purchased at different costs over time, determining the cost per unit assigned to inventory items is simple.

IFRS reporting currently does not allow which method of inventory costing?

Starlight Company has inventory of 8 units at a cost of $200 each on October 1. On October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the LIFO perpetual inventory method, what amount will be reported in cost of goods sold for the 11 units that were sold?

FIFO is preferred when purchase costs are rising and managers have incentives to report higher income for reasons such as bonus plans, job security, and reputation.

An understatement of the ending inventory balance will overstate cost of goods sold and understate net income.

Match the following terms with the appropriate definition.

A company has beginning inventory of 15 units at a cost of $12 each on October 1. On October 5, it purchases 10 units at $13 per unit. On October 12 it purchases 20 units at $14 per unit. On October 15, it sells 30 units. Using the FIFO periodic inventory method, what is the value of the inventory at October 15 after the sale?

The inventory valuation method that results in the lowest taxable income in a period of inflation is:

Explain the reason a company might use the retail inventory method for valuing inventory.

Accounting principles require that inventory be reported at the market value (cost)of replacing inventory when market value is lower than cost.

On April 24 of the current year, The Memphis Pecan Company experienced a tornado that destroyed the company's entire inventory. At the beginning of April, the company reported beginning inventory of $226,750. Inventory purchased during April (until the date of the tornado) was $197,800. Sales for the month of April through April 24 were $642,500. Assuming the company's typical gross profit ratio is 50%, estimate the amount of inventory destroyed in the tornado.

A company must disclose any change in its inventory costing method in its financial statements.

Beckenworth had cost of goods sold of $9,421 million, ending inventory of $2,089 million, and average inventory of $1,965 million. Its days' sales in inventory equals: (Use 365 days a year.)

Most companies do not take a physical count of inventory each year, but rather rely on inventory records to determine the inventory value.