ch7

ch7Student: ___________________________________________________________________________

1. The use of raw materials in the manufacturing process is reported as an operating expense on the income statement. True False

2. Manufactured goods transferred out of work in process are reported as finished goods on the balance sheet.

True False

3. Inventory inspection costs incurred at the time of purchase are reported as operating expenses on the

income statement. True False

4. Factory overhead manufacturing costs are a component of the cost of the work-in process inventory.

True False

5. A decrease in the merchandise inventory account occurs when inventory purchases are greater than cost of

goods sold. True False

6. Costs of goods available for sale ends up being allocated to both ending inventory and cost of goods sold.

True False

7. The LIFO inventory method will result in the highest gross margin when costs are increasing in comparison

to the specific identification, FIFO and weighted average inventory methods. True False

8. A company can use the LIFO inventory method for income tax purposes and the FIFO inventory method

for financial reporting purposes during a given year. True False

9. A large retail department store probably would use the specific identification inventory costing method for

most of the items in its inventory. True False

10. The FIFO inventory method allocates the most recent inventory purchase costs to ending inventory.

True False

11. The LIFO inventory method allocates the most recent inventory purchase costs to cost of goods sold.

True False

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12. During periods of decreasing prices, use of the LIFO inventory method will result in a larger amount of inventory than will the use of the FIFO inventory method. True False

13. During periods of increasing prices, use of the LIFO inventory method will result in a lower inventory

amount on the balance sheet and a lower net income than will use of the FIFO inventory method. True False

14. During periods of increasing prices, the LIFO inventory method results in lower income taxes.

True False

15. During periods of decreasing prices, use of the FIFO inventory method results in lower gross profit than

would use of the LIFO method. True False

16. The lower-of-cost-or-market (LCM) rule is used because of the conservatism constraint, which allows a

departure from the historical cost principle. True False

17. The journal entry to write-down inventory under the lower-of-cost-or-market (LCM) rule results in a

decrease in both ending inventory and cost of goods sold. True False

18. The journal entry to write-down inventory under the lower-of-cost-or-market (LCM) rule results in a debit

to cost of goods sold and a credit to inventory. True False

19. Inventory turnover is calculated as cost of goods sold divided by average inventory.

True False

20. Inventory turnover under LIFO is greater than inventory turnover under FIFO when prices are increasing.

True False

21. The average days to sell inventory decreases as inventory turnover increases.

True False

22. An increase in inventory is deducted from net income when determining operating activities cash flows.

True False

23. An increase in accounts payable is added to net income when determining operating activities cash flows.

True False

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24. Cash flow from operations increases by $1,000,000 when there is a $3,000,000 decrease in inventory and a $2,000,000 decrease in accounts payable. True False

25. The LIFO Reserve is a contra-asset account which represents the excess of FIFO inventory costs over LIFO

inventory costs. True False

26. In a period of rising costs, the LIFO Reserve account would be deducted from the ending inventory under

LIFO costing to convert it to ending inventory under FIFO costing. True False

27. An understatement of ending inventory results in an overstatement of net income.

True False

28. When a company using the LIFO inventory method reduces its inventory levels at the end of the year, it

can lead to LIFO liquidation. True False

29. An overstatement of the 2011 ending inventory results in an understatement of net income during 2012.

True False

30. An overstatement of the 2011 ending inventory results in an overstatement of stockholders' equity as of the

end of 2012. True False

31. A company reported the following information for its most recent year of operation: purchases, $100,000;

beginning inventory, $20,000; and cost of goods sold, $110,000. How much was the company's ending inventory? A. $10,000B. $20,000C. $15,000D. $30,000

32. Coleman Company has provided the following information: beginning inventory, $100,000; cost of goods

sold, $450,000; and ending inventory, $80,000. How much were Coleman's inventory purchases? A. $450,000B. $410,000C. $430,000D. $420,000

Zachary Glick

Zachary Glick

33. Which of the following statements is incorrect? A. Ending inventory exceeds beginning inventory when purchases are greater than cost of goods sold.B. Cost of goods sold exceeds purchases when ending inventory is less than beginning inventory.C. Cost of goods available for sale will always be equal to or greater than cost of goods sold.D. Ending inventory is greater than beginning inventory when purchases are less than cost of goods sold.

34. Which of the following costs is not included as inventory on the balance sheet?

A. Raw materials currently being used in the manufacturing process.B. Work in process.C. Finished goods.D. Storage costs for finished goods.

35. Which of the following costs will not affect cost of goods sold?

A. Inventory inspection costs.B. Inventory preparation costs.C. Inventory related selling costs.D. Freight charges incurred to acquire inventory.

36. Which of the following statements is incorrect for a manufacturing entity?

A. Inventory is transferred from work in process to finished goods.B. Raw materials used are transferred to work in process.C. Finished goods inventory eventually becomes cost of goods sold.D. Cost of goods sold is recognized when the manufacturing process is complete.

37. A company provided the following data: sales, $500,000; beginning inventory, $40,000; ending inventory,

$45,000; and gross margin, $150,000. What was the amount of inventory purchased during the year? A. $370,000B. $355,000C. $348,000D. $341,000

38. Lauer Corporation uses the periodic inventory system and has provided the following information about

one of their laptop computers:

During the year, 750 laptop computers were sold. What was ending inventory using the FIFO cost flow assumption? A. $60,000B. $52,500C. $52,000D. $40,000

39. Lauer Corporation uses the periodic inventory system and has provided the following information about one of their laptop computers:

During the year, 750 laptop computers were sold. What was cost of goods sold using the FIFO cost flow assumption? A. $717,500B. $730,000C. $703,125D. $725,500



During the year, 750 laptop computers were sold. What was cost of goods sold using the LIFO cost flow assumption? A. $717,500B. $730,000C. $703,125D. $725,500



During the year, 750 laptop computers were sold. What was ending inventory using the LIFO cost flow assumption? A. $40,000B. $52,500C. $60,000D. $55,000

42. Under the FIFO cost flow assumption during a period of inflation, which of the following is false?

A. Income tax expense will be higher than under LIFO.B. Gross margin will be higher than under LIFO.C. Ending inventory will be lower than under LIFO.D. Cost of goods sold will be lower than under LIFO.

43. Under the LIFO cost flow assumption during a period of inflation, which of the following is false? A. Cost of goods sold will be lower than under FIFO.B. Gross margin will be lower than under FIFO.C. Income tax expense will be lower than under FIFO.D. Ending inventory will be lower than under FIFO.

44. Which of the following statements is correct when inventory prices are increasing?

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

45. Which of the following statements is correct when inventory prices are decreasing?

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

46. Which of the following statements is correct?

A. FIFO reports lower income amounts than LIFO when prices are increasing.B. LIFO reports a higher income amount than FIFO when prices are increasing.C. LIFO reports a higher income amount than FIFO when prices are decreasing.D. LIFO reports the same amount of income as FIFO when prices are increasing.


A. The choice of an inventory costing method is dependent upon the actual physical flow of the inventory.B.

LIFO should be used during a period of increasing prices when the objective is to maximize the ending inventory value on the balance sheet.

C.

FIFO should be used during a period of decreasing prices when the objective is to maximize the gross profit reported on the balance sheet.

D.

The average cost method will result in an ending inventory balance which is somewhere between LIFO and FIFO when inventory prices are changing.

48. A corporation has provided the following information about one of their products:

During the year, 400 units were sold. What is ending inventory using the average cost method? A. $48,000B. $64,000C. $50,000D. $62,000


During the year, 400 units were sold. What is cost of goods sold using the average cost method? A. $48,000B. $64,000C. $50,000D. $62,000

50. Which of the following statements is false?

A. Companies do not have to use the same inventory method for all items of inventory.B. Companies do not have to consistently use the same inventory costing methods.C.

Use of the LIFO inventory method during a period of increasing prices may create a conflict of interest between the owners and managers.

D. A company choosing to maximize stockholders' equity during a period of increasing prices should use the FIFO inventory method.

51. Moore Company purchased an item for inventory that cost $20 per unit and was priced to sell at $30. It was

determined that the replacement cost is $18 per unit. Using the lower-of-cost-or- market rule, what amount should be reported on the balance sheet for inventory? A. $18B. $20C. $12D. $30

52. On December 31, 2010, Cruise Company has 10,000 units of an inventory item which cost $40 per

unit when purchased on June 15, 2010. The selling price was $70 per unit. On December 30, 2010, the replacement cost was $38 per unit. At what amount should the 10,000 units of inventory be reported at on the December 31, 2010 balance sheet? A. $100,000B. $120,000C. $350,000D. $380,000

53. Which of the following statements does not accurately describe the lower of cost or market (LCM)

valuation method? A. The journal entry to write-down inventory decreases gross profit.B. The journal entry to write-down inventory decreases current assets.C. The journal entry to write-down inventory does not affect income from operations.D. The journal entry to write-down inventory increases cost of goods sold.

54. Which of the following statements does not accurately describe the effects of a write-down of inventory on December 31, 2010 using the lower of cost or market (LCM) valuation method? A. The 2010 gross profit decreases.B. The 2011 cost of goods sold is effectively decreased if the inventory was sold during 2011.C. The 2010 ending inventory is decreased.D. The 2011 gross profit is not affected when the inventory was sold during 2011.

55. Tinker's 2011 cost of goods sold was $750,000 and 2010 cost of goods sold was $770,000. The inventory

at the end of 2011 was $188,000 and $208,000 at the end of 2010. What was Tinker's inventory turnover during 2011? A. 3.79B. 3.99C. 3.84D. 3.89

56. Tinker's 2011 cost of goods sold was $750,000 and 2010 cost of goods sold was $770,000. The inventory at

the end of 2011 was $188,000 and $208,000 at the end of 2010. What is Tinker's average number of days to sell their inventory during 2011? A. 96.3B. 91.5C. 95.1D. 93.8

57. QV-TV, Inc. provided the following items in their footnotes for the year-end 2010: Cost of goods sold was

$22 billion under FIFO costing and their inventory value under FIFO costing was $2.1 billion. The LIFO Reserve for year-end 2009 was a $0.6 billion credit balance and at year-end 2010 it had increased to a credit balance of $0.8 billion. How much is LIFO inventory value at year-end 2010? A. $1.9 billionB. $2.9 billionC. $2.3 billionD. $1.3 billion

58. QV-TV, Inc. provided the following items in their footnotes for the year-end 2010: Cost of goods sold was

$22 billion under FIFO costing and their inventory value under FIFO costing was $2.1 billion. The LIFO Reserve for year-end 2009 was a $0.6 billion credit balance and at year-end 2010 it had increased to a credit balance of $0.8 billion. How much is the 2010 LIFO cost of goods sold? A. $22.2 billionB. $19.8 billionC. $22.8 billionD. $19.2 billion

59. A $25,000 overstatement of the 2010 ending inventory was discovered after the financial statements

for 2010 were prepared. Which of the following describes the effect of the inventory error on the 2010 financial statements? A. Current assets were overstated and net income was understated.B. Current assets were understated and net income was understated.C. Current assets were overstated and net income was overstated.D. Current assets were understated and net income was overstated.

60. A $25,000 overstatement of the 2010 ending inventory was discovered after the financial statements for 2010 were prepared. Which of the following describes the effect of the inventory error on the 2011 financial statements? A. Net income and stockholders' equity are both understated.B. Net income is understated and stockholders' equity is not affected.C. Net income and stockholders' equity are both overstated.D. Net income and stockholders' equity are both unaffected.

61. Wilmington Company reported pretax income of $25,000 during 2010 and $30,000 during 2011. Later it

was discovered that the ending inventory for 2010 was understated by $2,000 (and not corrected in 2011). What is the correct pretax income for each year?

A. Option AB. Option BC. Option CD. Option D

62. At the end of 2010, a $5,000 understatement was discovered in the amount of the 2010 ending inventory

as reflected in the perpetual inventory records. What were the 2010 effects of the $5,000 inventory error (before correction)? A. Assets were understated by $5,000 and pretax income was understated by $5,000.B. Assets were understated by $5,000 and pretax income was overstated by $5,000.C. Cost of goods sold was understated by $5,000 and pretax income was understated by $5,000.D. Cost of goods sold was overstated by $5,000 and pretax income was overstated by $5,000.

63. An understatement of the ending inventory in Year 1, if not corrected, will cause which of the following?

A. The year 1 net income to be understated and Year 2 net income to be overstated.B. The year 1 net income to be overstated and Year 2 net income to be overstated.C. The year 1 net income to be overstated and Year 2 net income will be correct.D. The year 1 net income to be overstated and Year 2 net income to be understated.

64. Which of the following is correct when beginning inventory is understated by $1,300 and ending inventory

is understated by $700? A. Net income is understated by $600.B. Net income is understated by $2,000.C. Net income is overstated by $600.D. Net income is overstated by $2,000.

Zachary Glick

65. On December 15, 2010, Transport Company accepted delivery of merchandise which it purchased on credit. As of December 31, 2010, the company had neither recorded the transaction nor included the merchandise in its ending inventory amount because the seller's invoice had not been received. The effect of this omission on its balance sheet at December 31, 2010, (end of the accounting period) was that A. assets and stockholder's equity were overstated but liabilities were not affected.B. stockholder's equity was the only item affected by the omission.C. assets and liabilities were understated but stockholders' equity was not affected.D. assets and stockholders' equity were understated but liabilities were not affected.

66. A company using the periodic inventory system correctly recorded a purchase of merchandise, but the

merchandise was not included in the physical inventory count at the end of the accounting period. The error caused which of the following? A. An understatement of both net income and assets.B. An overstatement of inventory, purchases, and accounts payable.C. An understatement of inventory, purchases, and accounts payable.D. An overstatement of net income and assets.

67. Hollander Company hired some students to help count inventory during their semester break.

Unfortunately, the students added incorrectly and the 2010 ending inventory was overstated by $5,000. What would be the effect of this error in ending inventory? A. 2010 net income would be overstated.B. 2010 net income would be understated.C. 2010 ending retained earnings would be understated.D. 2010 cost of goods sold would be overstated.

68. During the audit of Montane Company's 2010 financial statements, the auditors discovered that the 2010

ending inventory had been overstated by $8,000 and that the 2010 beginning inventory was overstated by $5,000. Before the effect of these errors, 2010 pretax income had been computed as $100,000. What should be reported as the correct 2010 pretax income before taxes? A. $113,000B. $87,000C. $105,000D. $97,000

69. RJ Corporation has provided the following information about one of their inventory items:

During the year, 3,000 units were sold. What was ending inventory using the LIFO cost flow assumption? A. $640,000B. $840,000C. $770,000D. $880,000


During the year, 3,000 units were sold. What was ending inventory using the FIFO cost flow assumption? A. $640,000B. $840,000C. $960,000D. $880,000


During the year, 3,000 units were sold. What was ending inventory using the average cost flow assumption? A. $640,000B. $840,000C. $770,000D. $880,000


During the year, 3,000 units were sold. What was cost of goods sold using the average cost flow assumption? A. $11,680,000B. $11,590,000C. $11,480,000D. $11,550,000


During the year, 3,000 units were sold. What was cost of goods sold using the LIFO cost flow assumption? A. $11,680,000B. $11,590,000C. $11,480,000D. $11,550,000


During the year, 3,000 units were sold. What was cost of goods sold using the FIFO cost flow assumption? A. $11,680,000B. $11,590,000C. $11,480,000D. $11,550,000

75. On March 15, 2010, Ryan Company purchased $10,000 of merchandise on credit subject to terms of 2/10,

n/30. Ryan Company records its purchases using the gross amount. The periodic inventory system is used. Which of the following journal entries is correct when Ryan Company pays for these goods on March 30, 2010? A. Accounts payable 9,800B. Cash 9,800C. Accounts payable 10,000D. Cash 10,000E. Accounts payable 10,000F. Cash 9,800G. Purchase discounts 200H. Accounts payable 9,800I. Purchase discounts 200J. cash 10,000

76. On March 15, 2010, Ryan Company purchased $10,000 of merchandise on credit subject to terms of 2/10, n/30. Ryan Company records its purchases using the gross amount. The periodic inventory system is used. Which of the following journal entries is correct when Ryan Company pays for these goods on March 20, 2010? A. Accounts payable 9,800B. Cash 9,800C. Accounts payable 10,000D. Cash 10,000E. Accounts payable 10,000F. Cash 9,800G. Purchase discounts 200H. Accounts payable 9,800I. Purchase discounts 200J. cash 10,000

77. Which of the following journal entries is not consistent with the use of a perpetual inventory system?

A. InventoryB. Accounts payableC. Cost of goods soldD. InventoryE. PurchasesF. Accounts payableG. Accounts receivableH. sales revenue

78. Which of the following journal entries is not consistent with the use of a periodic inventory system?

A. PurchasesB. Accounts payableC. InventoryD. Accounts payableE. Accounts payableF. CashG. Accounts receivableH. Sales revenue

79. Which of the following statements is correct regarding either the perpetual or periodic inventory systems?

A. In a perpetual inventory system, the inventory account is not changed for each purchase during the

accounting period.B. In a perpetual inventory system, cost of goods sold is recorded at the time of each sale during the

accounting period.C. In a periodic inventory system, cost of goods sold is developed from a comparison of beginning

inventory and ending inventory only.D. In a periodic inventory system, the inventory account is increased for each purchase during the

accounting period.

80. When a company uses the periodic inventory system, which of the following is true? A. Purchases are recorded in the cost of goods sold account.B. The inventory account is updated after each sale.C. Cost of goods sold is computed at the end of the accounting period rather than at each sale date.D. The inventory account is updated throughout the year as purchases are made.

81. Carrie Company sold merchandise with an invoice price of $1,000 to Underwood, Inc., with terms of 2/10,

n/30. Which of the following is the correct entry to record the payment by Underwood Inc., within the 10 days if the company uses the periodic inventory system and the gross method to record purchases?


82. Iris Company has provided the following information regarding two of its items of inventory at year-end:

• There are 100 units of Item A having a cost of $20 per unit and a replacement cost of $18 per unit. • There are 50 units of Item B having a cost of $50 per unit and a replacement cost of $55 per unit. How much is the ending inventory using lower of cost or market on an item-by-item basis? A. $4,300B. $4,500C. $4,750D. $4,550

83. Carr Corporation has provided the following information for its most recent month of operation: sales

$8,000; beginning inventory $1,000; ending inventory $2,000 and gross profit $5,000. How much were Carr's inventory purchases during the period? A. $9,000B. $5,000C. $6,000D. $4,000

84. Carp Corporation has provided the following information for its most recent month of operation: sales

$16,000; ending inventory $4,000, purchases $8,000 and gross profit $10,000. How much was Carp's beginning inventory? A. $2,000B. $18,000C. $6,000D. $12,000

Zachary Glick

Zachary Glick

85. Cassie Corporation has provided the following information for its most recent month of operation: sales $32,000, beginning inventory $8,000, purchases $16,000 and gross profit $20,000. How much was Cassie's ending inventory? A. $4,000B. $8,000C. $6,000D. $12,000

86. Which of the following would not be included in Latimer Company's ending inventory?

A. Goods shipped from a supplier with terms of FOB shipping point.B. Goods shipped to customers with terms of FOB destination.C. Samples provided to a customer with the understanding that they would be returned to Latimer at the

beginning of the next year.D. Goods shipped to customers with terms of FOB shipping point.

87. Atomic Company incorrectly recorded a December 2009 credit purchase of inventory during January 2010.

Assuming that the December 31, 2009 ending inventory was correctly determined, what is the effect of this error on the financial statements for the year ended December 31, 2009? A. Net income is not affected.B. Stockholders' equity is not affected.C. Net income is overstated.D. Current assets are understated.

88. Atomic Company incorrectly recorded a December 2009 credit purchase of inventory during January 2010.

Assuming that the December 31, 2009 ending inventory was correctly determined, what is the effect of this error on the financial statements for the year ended December 31, 2010? A. Net income is not affected.B. Stockholders' equity is not affected.C. Net income is overstated.D. Stockholders' equity is overstated

89. Which of the following statements is incorrect?

A. An increase in raw materials inventory means that raw materials purchases exceed raw materials used.B. An increase in work in process inventory means that costs put into work in process exceed cost of goods

manufactured.C. A decrease in work in process inventory means that cost of goods sold exceed cost of goods

manufactured.D. An increase in finished goods inventory means that cost of goods manufactured exceeds cost of goods

sold. 90. Which of the following costs does not become a part of cost of goods manufactured?

A. The cost of raw materials used.B. The cost of factory overhead.C. The cost of rent on the factory building.D. The salary of the company president.

Zachary Glick

91. Which of the following would not be a component of the year-end inventory balance? A. Freight-in costsB. Inventory inspection costsC. Inventory preparation costsD. Inventory related selling costs


A. Cost of goods available for sale is allocated between costs of goods sold and inventory at year-end.B. A purchase of inventory on credit increases both cost of goods available for sale and cost of goods sold.C.

Purchases of inventory during a period less that period's cost of goods sold equals ending inventory regardless of the beginning inventory amount.

D. Cost of goods available for sale equals ending inventory plus purchases. 93. Which of the following businesses would not be as likely to use the specific identification method of

inventory valuation? A. An automobile dealerB. A custom jewelry storeC. A hardware storeD. An art dealer


A.

A year-end purchase of inventory increases the LIFO cost of goods sold when prices are increasing and a periodic inventory system is used.

B.

A year-end purchase of inventory increases the FIFO ending inventory when prices are increasing and a periodic inventory system is used.

C. The choice of an inventory costing method is dependent on the actual flow of goods when inventory is sold.

D.

A year-end purchase of inventory doesn't affect the weighted-average ending inventory when prices are increasing and a periodic inventory system is used.

95. Which of the following statements is incorrect when inventory prices are increasing?

A. LIFO's cost of goods sold will be the largest among the inventory costing methods.B. LIFO's income tax will be the lowest among the inventory costing methods.C. Ending inventory using the average cost method will be larger than the ending inventory when the LIFO

method is used.D. Cost of goods sold using the average cost method will be less than cost of goods sold when the FIFO

method is used. 96. Which of the following statements is correct when inventory prices are decreasing?

A. FIFO's cost of goods sold will be the largest among the inventory costing methods.B. LIFO's income tax will be the lowest among the inventory costing methods.C. Ending inventory using the average cost method will be less than the ending inventory when the LIFO

method is used.D. Cost of goods sold using the average cost method will be greater than cost of goods sold when the LIFO

method is used.

97. Which of the following statements is correct when inventory prices are increasing? A. LIFO's ending inventory will be the largest among the inventory costing methods.B. FIFO's gross profit will be the lowest among the inventory costing methods.C. Inventory turnover will be the largest when the LIFO inventory method is used.D. Use of the LIFO method will result in lower cash flows due to an increased cost of goods sold.


A. Inventory turnover will be the greatest when the average cost inventory method is used.B. FIFO's gross profit will be the highest among the inventory costing methods.C. Inventory turnover will be the largest when the LIFO inventory method is used.D. Use of the LIFO method will result in lower cash flows due to a decreased cost of goods sold.

99. Which of the following statements is correct with respect to the determination of operating cash flows?

A. A decrease in inventory is deducted from net income.B. An increase in accounts payable is deducted from net income.C. An increase in inventory is deducted from net income.D. A decrease in accounts payable is added to net income.

100.What is the net adjustment to net income with respect to the determination of operating cash flows when

inventory increases $100,000 and accounts payable increases $20,000? A. An increase of $120,000.B. A decrease of $120,000.C. An increase of $80,000.D. A decrease of $80,000

101.McMillan Company uses the periodic inventory system. It has compiled the following information in order

to prepare the financial statements at December 31, 2010:

Calculate each of the following: Cost of goods available for sale, cost of goods sold and gross margin.

102.The records of Jimmy Company show 2010 purchases of $90,000. An actual count revealed a 2010 ending inventory of $8,000. The 2010 beginning inventory was $5,000. What was cost of goods sold for 2010?

103.The following income statement is complete except for a few captions with bold lines on the left, and

amounts with dotted lines on the right. You are to fill in the most likely captions and amounts (ignore income taxes):

104.How much were inventory purchases when cost of goods sold was $250,000, beginning inventory was

$20,000, and ending inventory was $25,000?

105.How much was ending inventory when sales revenue was $500,000, purchases were $310,000, beginning inventory was $22,000, and gross margin was $200,000?

106.Compute the missing amounts for the income statement for each independent case.

107.Coulter Company uses the LIFO inventory method under the periodic inventory system. The following data were available for the month of January, 2010:

Compute the following: 1. Beginning inventory 2. Ending inventory 3. Cost of goods available for sale 4. Cost of goods sold 5. Gross margin

108.William Company uses the periodic inventory system and has provided the following data:

109.Jennings Company uses the periodic inventory system and applied FIFO inventory costing. At the end of the annual accounting period, December 31, 2010, the accounting records for the best selling item in inventory showed:

Calculate the following: (round to the nearest dollar.) 1. Goods available for sale 2. Ending inventory 3. Cost of goods sold

110.Freeman Company uses the periodic inventory system and applied LIFO inventory costing. At the end of

the annual accounting period, December 31, 2009, the accounting records in inventory showed

Calculate the following: (round to the nearest dollar.) 1. Cost of goods available for sale 2. Ending inventory 3. Cost of goods sold

111.A. Compute the missing amounts in the income statement under three different inventory costing methods: (Round your answers to the nearest dollar).

B. Explain the results of the weighted-average inventory costing method compared to the FIFO and LIFO costing methods.

112.Hopkins Company reported the following information related to inventory and sales:

113.The inventory records of Martin Corporation reflected the following information for the month of August:

114.The records of Atlantis Company reflected the following for the month of February:

115.Rio Company uses the FIFO inventory costing method and has a perpetual inventory system. All purchases

and sales were cash transactions. The records reflected the following for January, 2010:

116.Given a particular set of facts and assumptions, the following pairs of amounts were computed using FIFO and LIFO. For each pair of amounts, indicate which amount resulted from applying FIFO, and which amount resulted from applying LIFO.

117.The single-step income statement for Clinton Company for 2010 reported the following under two different

assumptions

Answer the following questions (assume a 40% income tax rate): A. Were merchandise inventory costs rising, or falling? Explain your answer. B. What was the amount of the LIFO ending inventory? C. Calculate net income (after tax) for both LIFO and FIFO. D. Under FIFO, would retained earnings on the balance sheet be higher or lower than under LIFO?

118.Boulder, Inc. is computing its inventory at December 31, 2010. The following information relates to the five major inventory items regularly stocked for resale

119.Cutting Edge Technologies reported the following information in their 2010 annual report:

1. Determine the inventory turnover ratio. 2. Determine the average days to sell inventory. 3. Explain the meaning of each number.

120.Quest Inc. provided the following footnote in their annual report: Inventories are stated at the lower of cost or market. The cost of inventories has been determined using last in first out (LIFO) method. Cost of goods sold under LIFO costing were $22.2 billion for 2011 and ending inventory under LIFO was $1.3 billion. Inventory in 2010 under LIFO costing was $1.2 billion. The LIFO Reserve account carried a credit balance of $0.8 billion in 2011 and $0.6 billion in 2010. Compute the following:

121.Dows Company prepared income statements that reflected pretax income of $21,000 for 2010 and $30,000

for 2011. An audit has determined that there were two errors in the inventory amounts as follows:

Determine the correct pretax income amount for each year (show computations assuming the errors were not corrected)

122.For each independent situation given below, determine the effect on pretax income for each. Enter "+" to indicate pretax income is overstated, "-" to indicate pretax income is understated, or "NA" to indicate that pretax income is not affected.

123.Redford Company hired a new store manager in October 2011, who determined the ending inventory on

December 31, 2011, to be $50,000. In March, 2012 the company discovered that the December 31, 2011 ending inventory should have been $58,000. The December 31, 2012, inventory was correct. Ignore income taxes. Complete the following table to show the effects of the inventory error on the four amounts listed. Give the amount of the discrepancy and indicate whether it was overstated (O), understated (U), or had no effect (N).

124.Sideline Company reported net income for 2010 of $70,000 and in 2011 of $84,000 (both after income

taxes at a 30% rate). It was discovered in 2011 that the ending inventory for 2010 was understated by $2,000 (before any income tax effect). Calculate the correct net income (after income tax of 20%) for 2009 and 2010.

125.A company provided the following footnote in its most recent annual report: During the current and prior year, the company reduced certain inventory quantities that were valued at lower LIFO costs prevailing in prior years. The effect of these physical reductions was to increase after tax earnings this year by $90 million, $.30 per share, and $98 million, or $.327 per share last year. 1. Explain why the reduction in inventory quantity increased after tax earnings for this company. 2. If the company had been using FIFO costing, would the reductions in inventory quantity during the two years have increased after tax earnings? Explain.

126.Assume Webster Company buys compact disks at a unit cost of $20 and sells them at a unit price of $26.

There was no beginning inventory. Provide the journal entries required below by entering the account code of the appropriate account and the amount for each debit and credit:

127.Give the journal entries for the transactions listed below under each of the two inventory systems.

ch7 Key

1. The use of raw materials in the manufacturing process is reported as an operating expense on the income statement. FALSEThey become part of work in process inventory.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking AICPA FN: Reporting

Blooms: Remember Difficulty: Easy

Learning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goods sold for typical retailers; wholesalers; and manufacturers.

Libby - Chapter 07 #1 Topic Area: Nature Of Inventory And Cost Of Goods Sold

2. Manufactured goods transferred out of work in process are reported as finished goods on the balance

sheet. TRUEItems transferred from work in process inventory become finished goods inventory.






3. Inventory inspection costs incurred at the time of purchase are reported as operating expenses on the

income statement. FALSEThey are recorded as a component of the cost of the inventory.






4. Factory overhead manufacturing costs are a component of the cost of the work-in process inventory. TRUEWork in process inventory includes direct materials, direct labor, and factory overhead.






5. A decrease in the merchandise inventory account occurs when inventory purchases are greater than cost

of goods sold. FALSEAn increase in the merchandise inventory account occurs when inventory purchases are greater than cost of goods sold.



Blooms: Remember Difficulty: Medium



6. Costs of goods available for sale ends up being allocated to both ending inventory and cost of goods

sold. TRUECost of goods available for sale minus ending inventory equals cost of goods sold.






7. The LIFO inventory method will result in the highest gross margin when costs are increasing in comparison to the specific identification, FIFO and weighted average inventory methods. TRUELIFO reports the highest cost of goods sold and therefore the lowest gross margin during periods of increasing prices.




Learning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods. Libby - Chapter 07 #7

Topic Area: Inventory Costing Methods

8. A company can use the LIFO inventory method for income tax purposes and the FIFO inventory method for financial reporting purposes during a given year. FALSEThe LIFO conformity rule requires the use of LIFO for financial statement preparation if LIFO is used for tax purposes.






9. A large retail department store probably would use the specific identification inventory costing method for most of the items in its inventory. FALSEThe specific identification method is used when expensive unique items are sold.






10. The FIFO inventory method allocates the most recent inventory purchase costs to ending inventory. TRUEFIFO ending inventory consists of the most recent inventory acquisitions.





Topic Area: Nature Of Inventory And Cost Of Goods Sold

11. The LIFO inventory method allocates the most recent inventory purchase costs to cost of goods sold. TRUELIFO cost of goods sold consists of the most recent inventory acquisitions.






12. During periods of decreasing prices, use of the LIFO inventory method will result in a larger amount of inventory than will the use of the FIFO inventory method. TRUELIFO ending inventory consists of the older inventory acquisitions which were at higher prices.



Blooms: Understand Difficulty: Medium

Learning Objective: 07-03 Decide when the use of different inventory costing methods is beneficial to a company. Libby - Chapter 07 #12


13. During periods of increasing prices, use of the LIFO inventory method will result in a lower inventory amount on the balance sheet and a lower net income than will use of the FIFO inventory method. TRUELIFO ending inventory consists of the older inventory acquisitions which were at lower prices. LIFO cost of goods sold reports a lower net income because of the higher cost of goods sold.






14. During periods of increasing prices, the LIFO inventory method results in lower income taxes. TRUELIFO cost of goods sold reports a lower taxable income and therefore lower income taxes because of higher cost of goods sold.






15. During periods of decreasing prices, use of the FIFO inventory method results in lower gross profit than would use of the LIFO method. TRUEFIFO cost of goods sold is the highest among the inventory choices when prices are decreasing. A higher cost of goods sold results in a lower gross profit.



Blooms: Understand Difficulty: Easy



16. The lower-of-cost-or-market (LCM) rule is used because of the conservatism constraint, which allows a departure from the historical cost principle. TRUEGAAP requires inventories to be valued at the lower-of-cost-or-market.




Learning Objective: 07-04 Report inventory at the lower of cost of market (LCM). Libby - Chapter 07 #16

Topic Area: Valuation At Lower Of Cost Or Market

17. The journal entry to write-down inventory under the lower-of-cost-or-market (LCM) rule results in a decrease in both ending inventory and cost of goods sold. FALSECost of goods increases when inventory is written down.






18. The journal entry to write-down inventory under the lower-of-cost-or-market (LCM) rule results in a debit to cost of goods sold and a credit to inventory. TRUECost of goods sold increases and inventory decreases when inventory is written down.






19. Inventory turnover is calculated as cost of goods sold divided by average inventory. TRUECost of goods sold divided by average inventory equals inventory turnover.




Learning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio and analyze the effects of inventory on cash flows. Libby - Chapter 07 #19

Topic Area: Evaluating Inventory Management

20. Inventory turnover under LIFO is greater than inventory turnover under FIFO when prices are increasing. TRUECost of goods sold divided by average inventory equals inventory turnover. LIFO has the highest cost of goods sold and the lowest inventory and therefore the greater inventory turnover.






21. The average days to sell inventory decreases as inventory turnover increases. TRUEAverage days to sell inventory is calculated by dividing 365 by inventory turnover. So an increasing inventory turnover will result in a decreased average days to sell inventory.






22. An increase in inventory is deducted from net income when determining operating activities cash flows. TRUEAn increase in inventory means that inventory purchases exceed cost of goods sold.






23. An increase in accounts payable is added to net income when determining operating activities cash flows. TRUEAn increase in accounts payable means that some inventory purchases haven't been paid for.






24. Cash flow from operations increases by $1,000,000 when there is a $3,000,000 decrease in inventory and a $2,000,000 decrease in accounts payable. TRUEThe decrease in inventory ($3,000,000) is added to net income and the decrease in accounts payable ($2,000,000) is subtracted from net income when calculating cash flow from operations.

AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement

Blooms: Apply Difficulty: Medium



25. The LIFO Reserve is a contra-asset account which represents the excess of FIFO inventory costs over LIFO inventory costs. TRUEThe LIFO Reserve is reported in the notes to the financial statements and is the adjustment to the LIFO inventory reported on the balance sheet.




Learning Objective: 07-06 Compare companies that use different inventory costing methods. Libby - Chapter 07 #25


26. In a period of rising costs, the LIFO Reserve account would be deducted from the ending inventory under LIFO costing to convert it to ending inventory under FIFO costing. FALSELIFO's ending inventory is less than FIFO's ending inventory when prices are increasing. Therefore the LIFO Reserve would be added to the FIFO ending inventory.






27. An understatement of ending inventory results in an overstatement of net income. FALSEAn understatement of ending inventory results in an increase in cost of goods sold and therefore a decrease in net income.




Learning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements. Libby - Chapter 07 #27

Topic Area: Control Of Inventory

28. When a company using the LIFO inventory method reduces its inventory levels at the end of the year, it can lead to LIFO liquidation. TRUELIFO liquidation will occur when inventory levels decrease and older inventory becomes a part of cost of goods sold.




Learning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods. (S) Libby - Chapter 07 #28


29. An overstatement of the 2011 ending inventory results in an understatement of net income during 2012. FALSEThe overstatement of the 2011 ending inventory causes the 2012 beginning inventory and cost of goods sold to be overstated and 2012 net income to be understated.






30. An overstatement of the 2011 ending inventory results in an overstatement of stockholders' equity as of the end of 2012. FALSEThe overstatement of the 2011 ending inventory causes the 2011 net income to be overstated, the 2012 beginning inventory to be overstated and the 2012 net income to be understated. Stockholders' equity as of the end of 2012 is correct because the 2011 net income overstatement is counter-balanced by the understatement of the 2012 net income.






31. A company reported the following information for its most recent year of operation: purchases, $100,000; beginning inventory, $20,000; and cost of goods sold, $110,000. How much was the company's ending inventory? A. $10,000B. $20,000C. $15,000D. $30,000

Cost of goods sold ($110,000) = Beginning inventory ($20,000) + Purchases ($100,000) - Ending inventory ($10,000)

AACSB: Analytic





32. Coleman Company has provided the following information: beginning inventory, $100,000; cost of goods sold, $450,000; and ending inventory, $80,000. How much were Coleman's inventory purchases? A. $450,000B. $410,000C. $430,000D. $420,000

Cost of goods sold ($450,000) = Beginning inventory ($100,000) + Purchases ($430,000) - Ending inventory ($80,000)

AACSB: Analytic






A. Ending inventory exceeds beginning inventory when purchases are greater than cost of goods sold.B. Cost of goods sold exceeds purchases when ending inventory is less than beginning inventory.C. Cost of goods available for sale will always be equal to or greater than cost of goods sold.D. Ending inventory is greater than beginning inventory when purchases are less than cost of goods

sold.

Ending inventory decreases when purchases are less than cost of goods sold.

AACSB: Analytic





34. Which of the following costs is not included as inventory on the balance sheet? A. Raw materials currently being used in the manufacturing process.B. Work in process.C. Finished goods.D. Storage costs for finished goods.

Finished goods storage costs are not reported as inventory. They are a component of operating expenses.

AACSB: Analytic





35. Which of the following costs will not affect cost of goods sold?

A. Inventory inspection costs.B. Inventory preparation costs.C. Inventory related selling costs.D. Freight charges incurred to acquire inventory.

Selling costs are operating costs and don't affect cost of goods sold.






36. Which of the following statements is incorrect for a manufacturing entity?

A. Inventory is transferred from work in process to finished goods.B. Raw materials used are transferred to work in process.C. Finished goods inventory eventually becomes cost of goods sold.D. Cost of goods sold is recognized when the manufacturing process is complete.

Cost of goods sold is recognized when the inventory is taken from finished goods and sold to the customer.






37. A company provided the following data: sales, $500,000; beginning inventory, $40,000; ending inventory, $45,000; and gross margin, $150,000. What was the amount of inventory purchased during the year? A. $370,000B. $355,000C. $348,000D. $341,000

Sales ($500,000) - Cost of goods sold ($350,000) = Gross margin ($150,000) Cost of goods sold ($350,000) = Beginning inventory ($40,000) + Purchases ($355,000) - Ending inventory ($45,000)

AACSB: Analytic







During the year, 750 laptop computers were sold. What was ending inventory using the FIFO cost flow assumption? A. $60,000B. $52,500C. $52,000D. $40,000

Ending inventory ($52,500) = ($1,050 × 50)

AACSB: Analytic






During the year, 750 laptop computers were sold. What was cost of goods sold using the FIFO cost flow assumption? A. $717,500B. $730,000C. $703,125D. $725,500

Cost of goods sold ($717,500) = (100 × $800) + (200 × $900) + (300 × $1,000) + (150 × $1,050)

AACSB: Analytic






During the year, 750 laptop computers were sold. What was cost of goods sold using the LIFO cost flow assumption? A. $717,500B. $730,000C. $703,125D. $725,500

Cost of goods sold ($730,000) = (200 × $1,050) + (300 × $1,000) + (200 × $900) + (50 × $800)

AACSB: Analytic






During the year, 750 laptop computers were sold. What was ending inventory using the LIFO cost flow assumption? A. $40,000B. $52,500C. $60,000D. $55,000

Ending inventory ($40,000) = ($800 × 50)

AACSB: Analytic





42. Under the FIFO cost flow assumption during a period of inflation, which of the following is false? A. Income tax expense will be higher than under LIFO.B. Gross margin will be higher than under LIFO.C. Ending inventory will be lower than under LIFO.D. Cost of goods sold will be lower than under LIFO.

Ending inventory comes from recent inventory purchases and is therefore higher.

AACSB: Analytic





43. Under the LIFO cost flow assumption during a period of inflation, which of the following is false? A. Cost of goods sold will be lower than under FIFO.B. Gross margin will be lower than under FIFO.C. Income tax expense will be lower than under FIFO.D. Ending inventory will be lower than under FIFO.

Cost of goods sold comes from recent inventory purchases and is therefore higher.

AACSB: Analytic





44. Which of the following statements is correct when inventory prices are increasing? A. LIFO will result in lower net income and a higher inventory valuation than will FIFO.B. LIFO will result in higher net income and lower inventory valuation than will FIFO.C. FIFO will result in lower net income and a lower inventory valuation than will LIFO.D. FIFO will result in higher net income and a higher inventory valuation than will LIFO.

FIFO reports a lower cost of goods sold and a higher net income when prices are increasing.

AACSB: Analytic





45. Which of the following statements is correct when inventory prices are decreasing? A. LIFO will result in lower net income and a higher inventory valuation than will FIFO.B. LIFO will result in higher net income and a higher inventory valuation than will FIFO.C. FIFO will result in higher net income and a higher inventory valuation than will LIFO.D. FIFO will result in higher net income and a lower inventory valuation than will LIFO.

LIFO reports a lower cost of goods sold and a higher net income when prices are decreasing.

AACSB: Analytic





46. Which of the following statements is correct? A. FIFO reports lower income amounts than LIFO when prices are increasing.B. LIFO reports a higher income amount than FIFO when prices are increasing.C. LIFO reports a higher income amount than FIFO when prices are decreasing.D. LIFO reports the same amount of income as FIFO when prices are increasing.

LIFO reports a lower cost of goods sold and a higher net income when prices are decreasing.

AACSB: Analytic





47. Which of the following statements is correct? A. The choice of an inventory costing method is dependent upon the actual physical flow of the

inventory.B. LIFO should be used during a period of increasing prices when the objective is to maximize the

ending inventory value on the balance sheet.C. FIFO should be used during a period of decreasing prices when the objective is to maximize the gross

profit reported on the balance sheet.D.

The average cost method will result in an ending inventory balance which is somewhere between LIFO and FIFO when inventory prices are changing.

Use of the average cost method results in cost of goods sold and ending inventory being reported at amounts between the LIFO and FIFO extremes.

AACSB: Analytic






During the year, 400 units were sold. What is ending inventory using the average cost method? A. $48,000B. $64,000C. $50,000D. $62,000

Average cost ($160) = {(200 × $140) + (400 × $160) + (100 × $200)} ÷ 700 units Ending inventory ($48,000) = Average cost ($160) × 300 units

AACSB: Analytic






During the year, 400 units were sold. What is cost of goods sold using the average cost method? A. $48,000B. $64,000C. $50,000D. $62,000

Average cost ($160) = {(200 × $140) + (400 × $160) + (100 × $200)} ÷ 700 units Cost of goods sold ($64,000) = Average cost ($160) × 400 units

AACSB: Analytic





50. Which of the following statements is false? A. Companies do not have to use the same inventory method for all items of inventory.B. Companies do not have to consistently use the same inventory costing methods.C. Use of the LIFO inventory method during a period of increasing prices may create a conflict of

interest between the owners and managers.D. A company choosing to maximize stockholders' equity during a period of increasing prices should

use the FIFO inventory method.

GAAP requires companies to consistently apply their inventory costing methods.






51. Moore Company purchased an item for inventory that cost $20 per unit and was priced to sell at $30. It was determined that the replacement cost is $18 per unit. Using the lower-of-cost-or- market rule, what amount should be reported on the balance sheet for inventory? A. $18B. $20C. $12D. $30

Inventory is reported on the balance sheet at replacement cost when it is less than cost.






52. On December 31, 2010, Cruise Company has 10,000 units of an inventory item which cost $40 per unit when purchased on June 15, 2010. The selling price was $70 per unit. On December 30, 2010, the replacement cost was $38 per unit. At what amount should the 10,000 units of inventory be reported at on the December 31, 2010 balance sheet? A. $100,000B. $120,000C. $350,000D. $380,000

Inventory is reported on the balance sheet at replacement cost ($38) when it is less than cost ($40). The inventory cost ($380,000) equals replacement cost ($38) multiplied by 10,000 units.

AACSB: Analytic





53. Which of the following statements does not accurately describe the lower of cost or market (LCM) valuation method? A. The journal entry to write-down inventory decreases gross profit.B. The journal entry to write-down inventory decreases current assets.C. The journal entry to write-down inventory does not affect income from operations.D. The journal entry to write-down inventory increases cost of goods sold.

The journal entry increases cost of goods sold and therefore decreases income from operations. The journal entry also decreases inventory.






54. Which of the following statements does not accurately describe the effects of a write-down of inventory on December 31, 2010 using the lower of cost or market (LCM) valuation method? A. The 2010 gross profit decreases.B. The 2011 cost of goods sold is effectively decreased if the inventory was sold during 2011.C. The 2010 ending inventory is decreased.D. The 2011 gross profit is not affected when the inventory was sold during 2011.

The 2011 cost of goods sold is decreased because of the write-down of the inventory cost during 2010.

AACSB: Analytic





55. Tinker's 2011 cost of goods sold was $750,000 and 2010 cost of goods sold was $770,000. The inventory at the end of 2011 was $188,000 and $208,000 at the end of 2010. What was Tinker's inventory turnover during 2011? A. 3.79B. 3.99C. 3.84D. 3.89

Inventory turnover (3.79) = Cost of goods sold ($750,000) ÷ Average inventory ($188,000 + $208,000) ÷ 2

AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Measurement




56. Tinker's 2011 cost of goods sold was $750,000 and 2010 cost of goods sold was $770,000. The inventory at the end of 2011 was $188,000 and $208,000 at the end of 2010. What is Tinker's average number of days to sell their inventory during 2011? A. 96.3B. 91.5C. 95.1D. 93.8

Inventory turnover (3.79) = Cost of goods sold ($750,000) ÷ Average inventory ($188,000 + $208,000) ÷ 2 Average days to sell inventory (96.3) = 365 days ÷ Inventory turnover (3.79)

AACSB: Analytic





57. QV-TV, Inc. provided the following items in their footnotes for the year-end 2010: Cost of goods sold was $22 billion under FIFO costing and their inventory value under FIFO costing was $2.1 billion. The LIFO Reserve for year-end 2009 was a $0.6 billion credit balance and at year-end 2010 it had increased to a credit balance of $0.8 billion. How much is LIFO inventory value at year-end 2010? A. $1.9 billionB. $2.9 billionC. $2.3 billionD. $1.3 billion

LIFO inventory ($1.3 billion) = FIFO inventory ($2.1 billion) - LIFO reserve ($0.8 billion)

AACSB: Analytic


Blooms: Apply Difficulty: Hard



58. QV-TV, Inc. provided the following items in their footnotes for the year-end 2010: Cost of goods sold was $22 billion under FIFO costing and their inventory value under FIFO costing was $2.1 billion. The LIFO Reserve for year-end 2009 was a $0.6 billion credit balance and at year-end 2010 it had increased to a credit balance of $0.8 billion. How much is the 2010 LIFO cost of goods sold? A. $22.2 billionB. $19.8 billionC. $22.8 billionD. $19.2 billion

LIFO cost of goods sold ($22.2 billion) = FIFO cost of goods sold ($22 billion) + the increase in LIFO reserve ($0.2 billion)

AACSB: Analytic





59. A $25,000 overstatement of the 2010 ending inventory was discovered after the financial statements for 2010 were prepared. Which of the following describes the effect of the inventory error on the 2010 financial statements? A. Current assets were overstated and net income was understated.B. Current assets were understated and net income was understated.C. Current assets were overstated and net income was overstated.D. Current assets were understated and net income was overstated.

An overstatement of ending inventory overstates current assets and understates cost of goods sold and therefore overstates net income.

AACSB: Analytic





60. A $25,000 overstatement of the 2010 ending inventory was discovered after the financial statements for 2010 were prepared. Which of the following describes the effect of the inventory error on the 2011 financial statements? A. Net income and stockholders' equity are both understated.B. Net income is understated and stockholders' equity is not affected.C. Net income and stockholders' equity are both overstated.D. Net income and stockholders' equity are both unaffected.

The overstatement of the 2010 ending inventory causes the 2010 net income to be overstated and the 2011 net income to be understated. Stockholders' equity at the end of 2011 is not affected because inventory errors are counter-balancing.

AACSB: Analytic





61. Wilmington Company reported pretax income of $25,000 during 2010 and $30,000 during 2011. Later it was discovered that the ending inventory for 2010 was understated by $2,000 (and not corrected in 2011). What is the correct pretax income for each year?


2010 Net income ($27,000) = Reported pretax income ($25,000) + Understatement of ending inventory ($2,000). 2011 Net income ($28,000) = Reported pretax income ($30,000) - Understatement of beginning inventory ($2,000).

AACSB: Analytic





62. At the end of 2010, a $5,000 understatement was discovered in the amount of the 2010 ending inventory as reflected in the perpetual inventory records. What were the 2010 effects of the $5,000 inventory error (before correction)? A. Assets were understated by $5,000 and pretax income was understated by $5,000.B. Assets were understated by $5,000 and pretax income was overstated by $5,000.C. Cost of goods sold was understated by $5,000 and pretax income was understated by $5,000.D. Cost of goods sold was overstated by $5,000 and pretax income was overstated by $5,000.

The understatement of the 2010 ending inventory causes the 2010 cost of goods sold to be overstated and the 2010 pretax income is therefore understated.

AACSB: Analytic





63. An understatement of the ending inventory in Year 1, if not corrected, will cause which of the following? A. The year 1 net income to be understated and Year 2 net income to be overstated.B. The year 1 net income to be overstated and Year 2 net income to be overstated.C. The year 1 net income to be overstated and Year 2 net income will be correct.D. The year 1 net income to be overstated and Year 2 net income to be understated.

The understatement of the year 1 ending inventory causes the year 1 cost of goods sold to be overstated and the year 1 net income is therefore understated. The year 2 cost of goods sold is understated because beginning inventory is understated, which causes the year 2 net income to be overstated.

AACSB: Analytic





64. Which of the following is correct when beginning inventory is understated by $1,300 and ending inventory is understated by $700? A. Net income is understated by $600.B. Net income is understated by $2,000.C. Net income is overstated by $600.D. Net income is overstated by $2,000.

The understatement of the beginning inventory causes net income to be overstated by $1,300 and the understatement of the ending inventory causes net income to be understated by $700.

AACSB: Analytic





65. On December 15, 2010, Transport Company accepted delivery of merchandise which it purchased on credit. As of December 31, 2010, the company had neither recorded the transaction nor included the merchandise in its ending inventory amount because the seller's invoice had not been received. The effect of this omission on its balance sheet at December 31, 2010, (end of the accounting period) was that A. assets and stockholder's equity were overstated but liabilities were not affected.B. stockholder's equity was the only item affected by the omission.C. assets and liabilities were understated but stockholders' equity was not affected.D. assets and stockholders' equity were understated but liabilities were not affected.

The understatement of the ending inventory causes cost of goods sold to be overstated. However, the understatement of purchases causes cost of goods sold to be understated. Therefore, cost of goods sold is not affected, but inventory (assets) and accounts payable (liabilities) are understated.

AACSB: Analytic





66. A company using the periodic inventory system correctly recorded a purchase of merchandise, but the merchandise was not included in the physical inventory count at the end of the accounting period. The error caused which of the following? A. An understatement of both net income and assets.B. An overstatement of inventory, purchases, and accounts payable.C. An understatement of inventory, purchases, and accounts payable.D. An overstatement of net income and assets.

The understatement of the ending inventory causes both net income and assets to be understated.

AACSB: Analytic





67. Hollander Company hired some students to help count inventory during their semester break. Unfortunately, the students added incorrectly and the 2010 ending inventory was overstated by $5,000. What would be the effect of this error in ending inventory? A. 2010 net income would be overstated.B. 2010 net income would be understated.C. 2010 ending retained earnings would be understated.D. 2010 cost of goods sold would be overstated.

The overstatement of the ending inventory causes cost of goods sold to be understated and net income to be overstated.

AACSB: Analytic





68. During the audit of Montane Company's 2010 financial statements, the auditors discovered that the 2010 ending inventory had been overstated by $8,000 and that the 2010 beginning inventory was overstated by $5,000. Before the effect of these errors, 2010 pretax income had been computed as $100,000. What should be reported as the correct 2010 pretax income before taxes? A. $113,000B. $87,000C. $105,000D. $97,000

The overstatement of the beginning inventory causes cost of goods sold to be overstated by $5,000; the overstatement of the ending inventory causes cost of goods sold to be overstated by $8,000. Therefore cost of goods sold is understated by $3,000 and net income is overstated by $3,000.

AACSB: Analytic






During the year, 3,000 units were sold. What was ending inventory using the LIFO cost flow assumption? A. $640,000B. $840,000C. $770,000D. $880,000


AACSB: Analytic






During the year, 3,000 units were sold. What was ending inventory using the FIFO cost flow assumption? A. $640,000B. $840,000C. $960,000D. $880,000


AACSB: Analytic






During the year, 3,000 units were sold. What was ending inventory using the average cost flow assumption? A. $640,000B. $840,000C. $770,000D. $880,000

Average unit cost ($3,850) = {(400 × $3,200) + (800 × $3,600) + (1,200 × $4,000) + (800 × $4,200)} ÷ 3,200 units. Ending inventory ($770,000) = $3,850 × 200 units.

AACSB: Analytic






During the year, 3,000 units were sold. What was cost of goods sold using the average cost flow assumption? A. $11,680,000B. $11,590,000C. $11,480,000D. $11,550,000

Average unit cost ($3,850) = {(400 × $3,200) + (800 × $3,600) + (1,200 × $4,000) + (800 × $4,200)} ÷ 3,200 units. Cost of goods sold ($11,550,000) = 3,000 × $3,850.

AACSB: Analytic






During the year, 3,000 units were sold. What was cost of goods sold using the LIFO cost flow assumption? A. $11,680,000B. $11,590,000C. $11,480,000D. $11,550,000

Cost of goods sold ($11,680,000) = (800 × $4,200) + (1,200 × $4,000) + (800 × $3,600) + (200 × $3,200).

AACSB: Analytic






During the year, 3,000 units were sold. What was cost of goods sold using the FIFO cost flow assumption? A. $11,680,000B. $11,590,000C. $11,480,000D. $11,550,000

Cost of goods sold ($11,480,000) = (400 × $3,200) + (800 × $3,600) + (1,200 × $4,000) + (600 × $4,200).

AACSB: Analytic






The payment was after 10 days, so the discount isn't available.




Learning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goods sold for typical retailers; wholesalers; and manufacturers. (S)



The payment was within 10 days, so the 2% discount can be taken.






77. Which of the following journal entries is not consistent with the use of a perpetual inventory system?

A. InventoryB. Accounts payableC. Cost of goods soldD. InventoryE. PurchasesF. Accounts payableG. Accounts receivableH. sales revenue

The purchases account is used with a periodic inventory system.






78. Which of the following journal entries is not consistent with the use of a periodic inventory system? A. PurchasesB. Accounts payableC. InventoryD. Accounts payableE. Accounts payableF. CashG. Accounts receivableH. Sales revenue

The inventory account is not debited when there is an inventory purchase using the periodic inventory system.






79. Which of the following statements is correct regarding either the perpetual or periodic inventory

systems? A. In a perpetual inventory system, the inventory account is not changed for each purchase during the

accounting period.B. In a perpetual inventory system, cost of goods sold is recorded at the time of each sale during the

accounting period.C. In a periodic inventory system, cost of goods sold is developed from a comparison of beginning

inventory and ending inventory only.D. In a periodic inventory system, the inventory account is increased for each purchase during the

accounting period.

Cost of goods sold is debited when inventory is sold when using a perpetual inventory system.






80. When a company uses the periodic inventory system, which of the following is true? A. Purchases are recorded in the cost of goods sold account.B. The inventory account is updated after each sale.C. Cost of goods sold is computed at the end of the accounting period rather than at each sale date.D. The inventory account is updated throughout the year as purchases are made.

Cost of goods sold is recorded periodically, at the end of the accounting period, under a periodic inventory system.






81. Carrie Company sold merchandise with an invoice price of $1,000 to Underwood, Inc., with terms

of 2/10, n/30. Which of the following is the correct entry to record the payment by Underwood Inc., within the 10 days if the company uses the periodic inventory system and the gross method to record purchases?


The purchase discount is applicable given that payment was within the ten-day period.






82. Iris Company has provided the following information regarding two of its items of inventory at year-end: • There are 100 units of Item A having a cost of $20 per unit and a replacement cost of $18 per unit. • There are 50 units of Item B having a cost of $50 per unit and a replacement cost of $55 per unit. How much is the ending inventory using lower of cost or market on an item-by-item basis? A. $4,300B. $4,500C. $4,750D. $4,550

Ending inventory ($4,300) = (100 × $18) + (50 × $50)

AACSB: Analytic





83. Carr Corporation has provided the following information for its most recent month of operation: sales $8,000; beginning inventory $1,000; ending inventory $2,000 and gross profit $5,000. How much were Carr's inventory purchases during the period? A. $9,000B. $5,000C. $6,000D. $4,000

Sales ($8,000) - Cost of goods sold ($3,000) = Gross profit ($5,000) Beginning inventory ($1,000) + Purchases ($4,000) - Ending inventory ($2,000) = Cost of goods sold ($3,000)

AACSB: Analytic





84. Carp Corporation has provided the following information for its most recent month of operation: sales $16,000; ending inventory $4,000, purchases $8,000 and gross profit $10,000. How much was Carp's beginning inventory? A. $2,000B. $18,000C. $6,000D. $12,000


AACSB: Analytic





85. Cassie Corporation has provided the following information for its most recent month of operation: sales

$32,000, beginning inventory $8,000, purchases $16,000 and gross profit $20,000. How much was Cassie's ending inventory? A. $4,000B. $8,000C. $6,000D. $12,000


AACSB: Analytic





86. Which of the following would not be included in Latimer Company's ending inventory? A. Goods shipped from a supplier with terms of FOB shipping point.B. Goods shipped to customers with terms of FOB destination.C. Samples provided to a customer with the understanding that they would be returned to Latimer at the

beginning of the next year.D. Goods shipped to customers with terms of FOB shipping point.

Title passes to the customer when the goods are shipped FOB shipping point.






87. Atomic Company incorrectly recorded a December 2009 credit purchase of inventory during January

2010. Assuming that the December 31, 2009 ending inventory was correctly determined, what is the effect of this error on the financial statements for the year ended December 31, 2009? A. Net income is not affected.B. Stockholders' equity is not affected.C. Net income is overstated.D. Current assets are understated.

The 2009 purchases are understated, which causes cost of goods sold to be understated and net income to be overstated.

AACSB: Analytic





88. Atomic Company incorrectly recorded a December 2009 credit purchase of inventory during January 2010. Assuming that the December 31, 2009 ending inventory was correctly determined, what is the effect of this error on the financial statements for the year ended December 31, 2010? A. Net income is not affected.B. Stockholders' equity is not affected.C. Net income is overstated.D. Stockholders' equity is overstated

Inventory related errors including purchase cutoff errors are self-correcting on the balance sheet after two periods.

AACSB: Analytic





89. Which of the following statements is incorrect? A. An increase in raw materials inventory means that raw materials purchases exceed raw materials

used.B. An increase in work in process inventory means that costs put into work in process exceed cost of

goods manufactured.C. A decrease in work in process inventory means that cost of goods sold exceed cost of goods

manufactured.D. An increase in finished goods inventory means that cost of goods manufactured exceeds cost of

goods sold.

Finished goods inventory is increased by cost of goods manufactured and decreased by cost of goods sold.






90. Which of the following costs does not become a part of cost of goods manufactured? A. The cost of raw materials used.B. The cost of factory overhead.C. The cost of rent on the factory building.D. The salary of the company president.

The president's salary is an operating expense and is not considered a manufacturing cost.






91. Which of the following would not be a component of the year-end inventory balance?

A. Freight-in costsB. Inventory inspection costsC. Inventory preparation costsD. Inventory related selling costs

Inventory selling costs are considered to be selling, general and administrative expenses.







A. Cost of goods available for sale is allocated between costs of goods sold and inventory at year-end.B. A purchase of inventory on credit increases both cost of goods available for sale and cost of goods

sold.C.

Purchases of inventory during a period less that period's cost of goods sold equals ending inventory regardless of the beginning inventory amount.

D. Cost of goods available for sale equals ending inventory plus purchases.

Cost of goods available for sale minus ending inventory equals cost of goods sold.






93. Which of the following businesses would not be as likely to use the specific identification method of inventory valuation? A. An automobile dealerB. A custom jewelry storeC. A hardware storeD. An art dealer

A hardware store likely has many large quantities of similar items, which makes it impractical to use the specific identification method.






94. Which of the following statements is incorrect? A.

A year-end purchase of inventory increases the LIFO cost of goods sold when prices are increasing and a periodic inventory system is used.

B. A year-end purchase of inventory increases the FIFO ending inventory when prices are increasing and a periodic inventory system is used.

C. The choice of an inventory costing method is dependent on the actual flow of goods when inventory is sold.

D.

A year-end purchase of inventory doesn't affect the weighted-average ending inventory when prices are increasing and a periodic inventory system is used.

The actual flow of goods is irrelevant when choosing an inventory costing method.






95. Which of the following statements is incorrect when inventory prices are increasing? A. LIFO's cost of goods sold will be the largest among the inventory costing methods.B. LIFO's income tax will be the lowest among the inventory costing methods.C. Ending inventory using the average cost method will be larger than the ending inventory when the

LIFO method is used.D. Cost of goods sold using the average cost method will be less than cost of goods sold when the FIFO

method is used.

FIFO has the lowest cost of goods sold during a period of increasing prices.






96. Which of the following statements is correct when inventory prices are decreasing? A. FIFO's cost of goods sold will be the largest among the inventory costing methods.B. LIFO's income tax will be the lowest among the inventory costing methods.C. Ending inventory using the average cost method will be less than the ending inventory when the

LIFO method is used.D. Cost of goods sold using the average cost method will be greater than cost of goods sold when the

LIFO method is used.

FIFO has the largest cost of goods sold during a period of decreasing prices.






97. Which of the following statements is correct when inventory prices are increasing? A. LIFO's ending inventory will be the largest among the inventory costing methods.B. FIFO's gross profit will be the lowest among the inventory costing methods.C. Inventory turnover will be the largest when the LIFO inventory method is used.D. Use of the LIFO method will result in lower cash flows due to an increased cost of goods sold.

LIFO has the largest cost of goods sold and the lowest ending inventory and therefore the largest inventory turnover ratio.

AACSB: Application



Learning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods. Learning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio and analyze the effects of inventory on cash flows.

Libby - Chapter 07 #97 Topic Area: Inventory Costing Methods, Evaluating Inventory Management


A. Inventory turnover will be the greatest when the average cost inventory method is used.B. FIFO's gross profit will be the highest among the inventory costing methods.C. Inventory turnover will be the largest when the LIFO inventory method is used.D. Use of the LIFO method will result in lower cash flows due to a decreased cost of goods sold.

LIFO has the lowest cost of goods sold, the highest gross profit and taxable income. LIFO will therefore result in a higher tax burden and lower cash flows.

AACSB: Application


Blooms: Understand Difficulty: Hard

Learning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods. Learning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio and analyze the effects of inventory on cash flows.

Libby - Chapter 07 #98 Topic Area: Inventory Costing Methods, Evaluating Inventory Management

99. Which of the following statements is correct with respect to the determination of operating cash flows?

A. A decrease in inventory is deducted from net income.B. An increase in accounts payable is deducted from net income.C. An increase in inventory is deducted from net income.D. A decrease in accounts payable is added to net income.

An increase in inventory is deducted from net income because purchases exceed cost of goods sold.

AACSB: Application





100. What is the net adjustment to net income with respect to the determination of operating cash flows when inventory increases $100,000 and accounts payable increases $20,000? A. An increase of $120,000.B. A decrease of $120,000.C. An increase of $80,000.D. A decrease of $80,000

An increase in inventory is deducted from net income and an increase in accounts payable is added to net income.

AACSB: Application





101. McMillan Company uses the periodic inventory system. It has compiled the following information in order to prepare the financial statements at December 31, 2010:

Calculate each of the following: Cost of goods available for sale, cost of goods sold and gross margin. Answers will vary Feedback: Cost of goods available for sale ($850,000) = Beginning inventory ($100,000) + Purchases ($750,000) Cost of goods sold ($730,000) = Cost of goods available for sale ($850,000) - Ending Inventory ($120,000) Gross margin ($1,220,000) = Net sales ($2,000,000 - $50,000) - Cost of goods sold ($730,000)

AACSB: Analytic





102. The records of Jimmy Company show 2010 purchases of $90,000. An actual count revealed a 2010 ending inventory of $8,000. The 2010 beginning inventory was $5,000. What was cost of goods sold for 2010? Answers will vary Feedback: Cost of goods sold ($87,000) = Beginning inventory ($5,000) + Purchases ($90,000) - Ending inventory ($8,000)

AACSB: Analytic


Blooms: Apply Difficulty: Easy



103. The following income statement is complete except for a few captions with bold lines on the left, and amounts with dotted lines on the right. You are to fill in the most likely captions and amounts (ignore income taxes):

Answers will vary

Feedback:

AACSB: Analytic





104. How much were inventory purchases when cost of goods sold was $250,000, beginning inventory was $20,000, and ending inventory was $25,000? Answers will vary Feedback: Beginning inventory ($20,000) + Purchases ($255,000) - Ending inventory ($25,000) = Cost of goods sold ($250,000)

AACSB: Analytic


Blooms: Apply Difficulty: Easy



105. How much was ending inventory when sales revenue was $500,000, purchases were $310,000,

beginning inventory was $22,000, and gross margin was $200,000? Answers will vary Feedback: Beginning inventory ($22,000) + Purchases ($310,000) - Ending inventory ($32,000) = Cost of goods sold ($500,000 - $200,000)

AACSB: Analytic





106. Compute the missing amounts for the income statement for each independent case.

Answers will vary

Feedback:

AACSB: Analytic





107. Coulter Company uses the LIFO inventory method under the periodic inventory system. The following data were available for the month of January, 2010:

Compute the following: 1. Beginning inventory 2. Ending inventory 3. Cost of goods available for sale 4. Cost of goods sold 5. Gross margin Answers will vary Feedback: 1. 200 x $5.00 = $1,000 2. (200 x $5.00) + (100 x $5.50) = $1,550 3. (200 x $5.00) + (400 x $5.50) + (700 x $6.00) = $7,400 4. $7,400 - $1,550 = $5,850 5. (500 x $12.00) + (500 x $13.00) - $5,850 = $6,650

AACSB: Analytic





108. William Company uses the periodic inventory system and has provided the following data:

Answers will vary

Feedback:

AACSB: Analytic





109. Jennings Company uses the periodic inventory system and applied FIFO inventory costing. At the end of the annual accounting period, December 31, 2010, the accounting records for the best selling item in inventory showed:

Calculate the following: (round to the nearest dollar.) 1. Goods available for sale 2. Ending inventory 3. Cost of goods sold Answers will vary Feedback: Goods available for sale: (500 x $100) + (600 x $105) + (400 x $110) = $157,000 Ending inventory: 300 units x $110 = $33,000 Cost of goods sold: $157,000 - $33,000 = $124,000

AACSB: Analytic





110. Freeman Company uses the periodic inventory system and applied LIFO inventory costing. At the end of the annual accounting period, December 31, 2009, the accounting records in inventory showed

Calculate the following: (round to the nearest dollar.) 1. Cost of goods available for sale 2. Ending inventory 3. Cost of goods sold Answers will vary Feedback: Cost of goods available for sale: (300 x $20) + (500 x $21) + (400 x $22) = $25,300 Ending inventory: 300 units x $20 = $6,000 Cost of goods sold: GAFS - EI = COGS, $25,300 - $6,000 = $19,300

AACSB: Analytic





111. A. Compute the missing amounts in the income statement under three different inventory costing methods: (Round your answers to the nearest dollar).

B. Explain the results of the weighted-average inventory costing method compared to the FIFO and LIFO costing methods. Answers will vary

Feedback: A. Computations: A. 2,000 units x $12 = $24,000 B. (1,000 units x $10) + (1,000 units x $12) = $22,000 C. ($70,000 ÷ 6,000) units x 2,000 units = $23,333 OR $70,000 ÷ 6,000 units = $11.67 (rounded) $11.67 x 2,000 units = $23,340 b. Net income under the weighted average method will fall between the results of FIFO and LIFO costing because it averages the unit cost over all the units available for sale. Under FIFO, we assign the more recent, higher unit costs to ending inventory units and under LIFO, we assign the older, lower unit costs to ending inventory units.

AACSB: Analytic





112. Hopkins Company reported the following information related to inventory and sales:

Answers will vary

Feedback:

AACSB: Analytic





113. The inventory records of Martin Corporation reflected the following information for the month of

August: Answers will vary

Feedback:

AACSB: Analytic





114. The records of Atlantis Company reflected the following for the month of February:

Answers will vary Feedback: Goods available for sale: (600 x $3) + (500 x $4) + (600 x $5) + (900 x $6) = 12,200

AACSB: Analytic





115. Rio Company uses the FIFO inventory costing method and has a perpetual inventory system. All purchases and sales were cash transactions. The records reflected the following for January, 2010:

Answers will vary

Feedback:

AACSB: Analytic





116. Given a particular set of facts and assumptions, the following pairs of amounts were computed using FIFO and LIFO. For each pair of amounts, indicate which amount resulted from applying FIFO, and which amount resulted from applying LIFO.

Answers will vary Feedback: A. 1. FIFO 2. LIFO B. 1. LIFO 2. FIFO C. 1. LIFO 2. FIFO D. 1. LIFO 2. FIFO

AACSB: Analytic





117. The single-step income statement for Clinton Company for 2010 reported the following under two different assumptions

Answer the following questions (assume a 40% income tax rate): A. Were merchandise inventory costs rising, or falling? Explain your answer. B. What was the amount of the LIFO ending inventory? C. Calculate net income (after tax) for both LIFO and FIFO. D. Under FIFO, would retained earnings on the balance sheet be higher or lower than under LIFO? Answers will vary Feedback: A. Rising; Cost of goods sold increased under LIFO with the same volume. B. $120,000 - $100,000 = $20,000 C. FIFO: $120,000; LIFO: $60,000 D. Higher

AACSB: Analytic





118. Boulder, Inc. is computing its inventory at December 31, 2010. The following information relates to the five major inventory items regularly stocked for resale

Answers will vary

Feedback:

AACSB: Analytic





119. Cutting Edge Technologies reported the following information in their 2010 annual report:

1. Determine the inventory turnover ratio. 2. Determine the average days to sell inventory. 3. Explain the meaning of each number. Answers will vary Feedback: 1. 6.50 = ($11,010/$1,695). 2. 56.2 days, (365 days/6.50). 3. The inventory turnover ratio identifies how many times the inventory was sold or liquidated during the year's time while the average days to sell shows the volume of sales that can be supported in terms of number of days' stock on hand. As the inventory turnover increases, the company will carry less stock in terms of days' sales.

AACSB: Analytic





120. Quest Inc. provided the following footnote in their annual report: Inventories are stated at the lower of cost or market. The cost of inventories has been determined using last in first out (LIFO) method. Cost of goods sold under LIFO costing were $22.2 billion for 2011 and ending inventory under LIFO was $1.3 billion. Inventory in 2010 under LIFO costing was $1.2 billion. The LIFO Reserve account carried a credit balance of $0.8 billion in 2011 and $0.6 billion in 2010. Compute the following:

Answers will vary Feedback: 1. $1.8 billion, ($1.2 billion LIFO inventory plus $0.6 billion LIFO reserve). 2. $2.1 billion, ($1.3 billion plus $0.8 billion LIFO reserve). 3. $22.0 billion, ($22.2 billion LIFO COGS minus $0.2 billion increase in the LIFO reserve). 4. 17.76, ($22.2 billion divided by [$1.3 + $1.2 billion divided by 2]) 5. 11.28, ($22.0 billion divided by [$2.1 + $1.8 billion divided by 2]).

AACSB: Analytic





121. Dows Company prepared income statements that reflected pretax income of $21,000 for 2010 and $30,000 for 2011. An audit has determined that there were two errors in the inventory amounts as follows:

Determine the correct pretax income amount for each year (show computations assuming the errors were not corrected) Answers will vary Feedback: 2010: $21,000 - $1,000 = $20,000 2011: $30,000 + $1,000 - $2,000 = $29,000

AACSB: Analytic





122. For each independent situation given below, determine the effect on pretax income for each. Enter "+" to indicate pretax income is overstated, "-" to indicate pretax income is understated, or "NA" to indicate that pretax income is not affected.

Answers will vary

Feedback:

AACSB: Analytic





123. Redford Company hired a new store manager in October 2011, who determined the ending inventory on December 31, 2011, to be $50,000. In March, 2012 the company discovered that the December 31, 2011 ending inventory should have been $58,000. The December 31, 2012, inventory was correct. Ignore income taxes. Complete the following table to show the effects of the inventory error on the four amounts listed. Give the amount of the discrepancy and indicate whether it was overstated (O), understated (U), or had no effect (N).

Answers will vary

Feedback:

AACSB: Analytic





124. Sideline Company reported net income for 2010 of $70,000 and in 2011 of $84,000 (both after income taxes at a 30% rate). It was discovered in 2011 that the ending inventory for 2010 was understated by $2,000 (before any income tax effect). Calculate the correct net income (after income tax of 20%) for 2009 and 2010. Answers will vary Feedback: 2010: $70,000 + ($2,000 x .70) = $71,400; 2011: $84,000 - ($2,000 x .70) = $82,600

AACSB: Analytic





125. A company provided the following footnote in its most recent annual report: During the current and prior year, the company reduced certain inventory quantities that were valued at lower LIFO costs prevailing in prior years. The effect of these physical reductions was to increase after tax earnings this year by $90 million, $.30 per share, and $98 million, or $.327 per share last year. 1. Explain why the reduction in inventory quantity increased after tax earnings for this company. 2. If the company had been using FIFO costing, would the reductions in inventory quantity during the two years have increased after tax earnings? Explain. Answers will vary Feedback: 1. The reduction of the physical level of inventory forced the release of older costs assigned to those units from the balance sheet to the income statement once they were sold. Obviously the company had been in a period of inflation and these older costs attached to the inventory units were far below the current inventory replacement costs. 2. The reductions in inventory would not have increased after tax earnings because the costs that would have been released from the balance sheet for the units sold would have been reflecting current costs and not older, lower costs as they were under LIFO.

AACSB: Analytic



Learning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods. (S) Libby - Chapter 07 #125


126. Assume Webster Company buys compact disks at a unit cost of $20 and sells them at a unit price of $26. There was no beginning inventory. Provide the journal entries required below by entering the account code of the appropriate account and the amount for each debit and credit:

Answers will vary

Feedback:






127. Give the journal entries for the transactions listed below under each of the two inventory systems.

Answers will vary

Feedback:






ch7 Summary

Category # of QuestionsAACSB: Analytic 71AACSB: Application 4AACSB: Reflective Thinking 52AICPA BB: Critical Thinking 127AICPA FN: Measurement 5AICPA FN: Reporting 57AICPA FN: Reporting, Measurement 65Blooms: Apply 72Blooms: Remember 27Blooms: Understand 28Difficulty: Easy 21Difficulty: Hard 18Difficulty: Medium 88Learning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goods sold for typical retailers; wholesalers; and manufacturers.

27


9

Learning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods. 37Learning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods. (S) 2Learning Objective: 07-03 Decide when the use of different inventory costing methods is beneficial to a company. 8Learning Objective: 07-04 Report inventory at the lower of cost of market (LCM). 9Learning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio and analyze the effects of inventory on cash flows.

14

Learning Objective: 07-06 Compare companies that use different inventory costing methods. 4Learning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements.

19

Libby - Chapter 07 127Topic Area: Control Of Inventory 19Topic Area: Evaluating Inventory Management 16Topic Area: Inventory Costing Methods 44Topic Area: Inventory Costing Methods, Evaluating Inventory Management 2Topic Area: Nature Of Inventory And Cost Of Goods Sold 37Topic Area: Valuation At Lower Of Cost Or Market 9

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