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Exam 6: Inventories and Cost of Sales

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Question 101

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

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The retail method is generally used to p...

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Question 102

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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?

A) FIFO and weighted-average cost
B) FIFO and LIFO
C) Specific identification and FIFO
D) LIFO and weighted-average cost
E) LIFO and specific identification

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Question 103

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What specific costs and deductions are used to determine the final cost of merchandise inventory? Identify all costs including the incidental costs.

A company made the following merchandise purchases and sales during the month of May: $\begin{array} { | l | l | l | l | } \hline \text { May l } & \text { Purchased } & 380 \text { units at } & \$ 15 \text { each } \\\hline \text { May 5 } & \text { Purchased } & 270 \text { units at } & \$ 17 \text { each } \\\hline \text { May 10 } & \text { Sold } & 400 \text { units at } & \$ 50 \text { each } \\\hline \text { May 20 } & \text { Purchased } & 300 \text { units at } & \$ 22 \text { each } \\\hline \text { May 25 } & \text { Sold } & 400 \text { units at } & \$ 50 \text { each } \\\hline\end{array}$ There was no beginning inventory. If the company uses the FIFO periodic inventory method, what would be the cost of the ending inventory?

Salmone Company reported the following purchases and sales for its only product. Salmone uses a periodic inventory system. Determine the cost assigned to cost of goods sold using LIFO. $\begin{array}{|r|l|c|c|}\hline\text { Date } & \text { Activities } & \text { Units Acquired at Cost } & \text { Units Sold at Retail } \\\hline \text { May 1 } & \text { Beginning Inventory } & 150 \text { units @ } \$ 10.00 & \\\hline 5 & \text { Purchase } & 220 \text { units @ } \$ 12.00 & \\\hline 10 & \text { Sales } & & 140 \text { units @ } \$ 20.00 \\\hline 15 & \text { Purchase } & 100 \text { units@ } \$ 13.00 & \\\hline 24 & \text { Sales } && 90 \text { units@ } \$ 21.00\\\hline \end{array}$

Match the following terms with the appropriate definition.

Eastview Company uses a perpetual LIFO inventory system, and has the following purchases and sales: $\begin{array} { | l | l | } \hline \text { January 1 } & 150 \text { units were purchased at \$9 per unit. } \\\hline \text { January 17 } & 120 \text { units were sold } \\\hline \text { January 20 } & 160 \text { units were purchased at \$11 per unit. } \\\hline \text { January 29 } & 150 \text { units were sold } \\\hline\end{array}$ - What is the value of cost of goods sold?

A company's cost of inventory was $219,500. Due to phenomenal demand the market value of its inventory increased to $221,700. This company should record the inventory at its market value.

It can be expected that companies selling perishable goods have a higher inventory turnover than companies selling nonperishable goods.

Salmone Company reported the following purchases and sales of its only product. Salmone uses a perpetual inventory system. Determine the cost assigned to the ending inventory using FIFO. $\begin{array}{|r|l|c|c|}\hline \text { Date } & \text { Activities } & \text { Units Acquired at Cost } & \text { Units Sold at Retail } \\\hline \text { May 1 } & \text { Beginning Inventory } & 150 \text { units @ } \$ 10.00 & \\\hline 5 & \text { Purchase } & 220 \text { units @ } \$ 12.00 & \\\hline 10 & \text { Sales } & & 140 \text { units @ } \$ 20.00 \\\hline 15 & \text { Purchase } & 100 \text { units @\$13.00 } & \\\hline 24 & \text { Sales } & & 90 \text { units @ } \$ 21.00\\\hline \end{array}$

Damaged and obsolete goods that can be sold:

Overstating beginning inventory will understate cost of goods sold and net income.

The cost of an inventory item includes its invoice cost minus any discount, plus any added or incidental costs necessary to put it in a place and condition for sale.

The ________ method is commonly used to estimate the value of inventory that has been destroyed, lost, or stolen.

Explain the effects of inventory valuation methods on the cost of ending inventory, income, and income taxes.

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 cost of the ending inventory? (Assume all sales were made on the last day of the month.)

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

Hull Company reported the following income statement information for the current year: 35 $\begin{array} { | l | l | } \hline & \\\hline \text { Sales } & \$ 410,000 \\\hline \text { Cost of goods sold: } & \\\hline\end{array}$ $\begin{array} { | l | r | } \hline \text { Beginning inventory } & \$ 132,000 \\\hline \text { Cost of goods purchased } & \underline { 273,000 } \\\hline \begin{array} { l } \text { Cost of goods available } \\\text { for sale }\end{array} & 405,000 \\\hline \text { Fnding inventory } & \underline { 144,000 } \\\hline \text { Cost of goods sold } & \underline { 261,000 } \\\hline \text { Gross profit } & \$ 149,000 \\\hline\end{array}$ The beginning inventory balance is correct. However, the ending inventory figure was overstated by $20,000. Given this information, the correct gross profit would be:

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

A company made the following merchandise purchases and sales during the month of May: $\begin{array} { | l | l | l | l | } \hline \text { May l } & \text { Pur chased } & 380 \text { units at } & \$ 15 \text { each } \\\hline \text { May 5 } & \text { Pur chased } & 270 \text { units at } & \$ 17 \text { each } \\\hline \text { May 10 } & \text { Sold } & 400 \text { units at } & \$ 50 \text { each } \\\hline \text { May 20 } & \text { Pur chased } & 300 \text { units at } & \$ 22 \text { each } \\\hline \text { May 25 } & \text { Sold } & 400 \text { units at } & \$ 50 \text { each } \\\hline\end{array}$ There was no beginning inventory. If the company uses the LIFO periodic inventory method, what would be the cost of the ending inventory?