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Exam 6: Inventories and Cost of Sales

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Question 71

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Identify the items that are included in merchandise inventory. (In your answer address the special situations of goods in transit, consigned goods, and damaged goods.)

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Merchandise inventory consists of goods ...

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Question 72

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Regardless of the inventory costing system used, cost of goods available for sale must be allocated at the end of the period between

A) net purchases during the period and ending inventory.
B) beginning inventory and cost of goods sold.
C) ending inventory and beginning inventory.
D) ending inventory and cost of goods sold.
E) beginning inventory and net purchases during the period.

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Question 73

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Which of the following inventory costing methods will always result in the same values for ending inventory and cost of goods sold regardless of whether a perpetual or periodic inventory system is used?

How do the consistency concept and the full disclosure principle affect inventory valuation?

Hasham purchases inventory from overseas and incurs the following costs: the merchandise cost is $80,000, credit terms 1/10, n/30, applicable only to the $80,000; FOB shipping point freight charges are $2,500; insurance during transit is $300; and import duties are $1,500. Hasham paid within the discount period. Compute the cost that should be assigned to the inventory.

Some companies choose to avoid assigning incidental costs of acquiring merchandise to inventory by recording them as cost of goods sold when incurred. The principle that supports this is called:

Determining the unit costs assigned to inventory items is one of the most important decisions in accounting for inventory.

A company has inventory with a selling price of $451,000, a market value of $223,000 and a cost of $241,000. According to the lower of cost or market, the inventory should be written down to $223,000.

A company had the following purchases and sales during its first year of operations: $\begin{array} { | l | l | l | } \hline & \text { Purchases } & \text { Sales } \\\hline \text { January: } & 10 \text { units at } \$ 120 & 6 \text { units } \\\hline \text { February: } & 20 \text { units at } \$ 125 & 5 \text { units } \\\hline \text { May: } & 15 \text { units at } \$ 130 & 9 \text { units } \\\hline \text { September: } & 12 \text { units at } \$ 135 & 8 \text { units } \\\hline \text { November: } & 10 \text { units at } \$ 140 & 13 \text { units } \\\hline\end{array}$ On December 31, there were 26 units remaining in ending inventory. Using the Perpetual FIFO inventory valuation method, what is the cost of the ending inventory? (Assume all sales were made on the last day of the month.)

A company's inventory records report the following in November of the current year: $\begin{array} { | l | l | l | } \hline \text { Beginning } & \text { November 1 } & 5 \text { units } @ \$ 20 \\\hline \text { Purchase } & \text { November } 2 & 10 \text { units } @ \$ 22 \\\hline \text { Purchase } & \text { November 12 } & 6 \text { units } @ \$ 25 \\\hline\end{array}$ On November 8, it sold 12 units for $54 each. Using the LIFO perpetual inventory method, what amount of gross profit was earned from the 12 units sold?

The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to net sales.

An error in the period-end inventory balance will cause an error in the calculation of cost of goods sold.

The reasoning behind the retail inventory method is that if we can get a good estimate of the cost-to-retail ratio, we can multiply ending inventory at retail by this ratio to estimate ending inventory at cost.

Decisions management must make in accounting for inventory cost include all of the following except:

Days' sales in inventory is calculated as:

The reliability of the gross profit method depends on a good estimate of the gross profit ratio.

Grays Company has inventory of 10 units at a cost of $10 each on August 1. On August 3, it purchased 20 units at $12 each. 12 units are sold on August 6. Using the FIFO perpetual inventory method, what amount will be reported as cost of goods sold for the 12 units that were sold?

A company had the following purchases and sales during its first year of operations: $\begin{array} { | l | l | l | } \hline & \text { Purchases } & \text { Sales } \\\hline \text { January: } & 10 \text { units at } \$ 120 & 6 \text { units } \\\hline \text { February: } & 20 \text { units at } \$ 125 & 5 \text { units } \\\hline \text { May: } & 15 \text { units at } \$ 130 & 9 \text { units } \\\hline \text { September: } & 12 \text { units at } \$ 135 & 8 \text { units } \\\hline \text { November: } & 10 \text { units at } \$ 140 & 13 \text { units } \\\hline\end{array}$ On December 31, there were 26 units remaining in ending inventory. Using the Perpetual LIFO inventory valuation method, what is the value of cost of goods sold? (Assume all sales were made on the last day of the month.)

What advantages does a perpetual inventory system have over periodic inventory system?

On March 31 a company needed to estimate its ending inventory to prepare its first quarter financial statements. The following information is available: Beginning inventory, January 1: $4,000 Net sales: $80,000 Net purchases: $78,000 The company's gross margin ratio is 25%. Using the gross profit method, the cost of goods sold would be: