Ch10 Recording And Evaluating Revenue Process Full Test Bank

Chapter 10

Recording and Evaluating Revenue Process Activities

MATCHING

1. Match each of the following terms with the descriptions below.

A. FIFO

B. LIFO

C. Specific Identification

_____ 1. This costing system assumes that the last items in are the first items sold.

_____ 2. A costing system where the actual cost of the item sold is matched with the

sale of the item.

_____ 3. The ending inventory represents the most recent purchase.

_____ 4. This costing system assumes the first item purchased is the first item sold

_____ 5. The cost of goods sold represents the most recent purchases.

_____ 6. In periods of inflation this inventory method will result in the lowest income

tax.

2. Match each of the following terms with the descriptions below.

A. First-in, first out (FIFO)

B. Last-in, last out (LIFO)

C. Net realizable value

D. Sales discount

E. Sales price variance

F. Sales quantity variance

G. Sales returns and allowances

H. Specific identification method

_____ 1. A temporary account that keeps track of the cost of customer dissatisfaction

_____ 2. This provides the perfect match of the cost of an inventory item and the

revenue it generates.

_____ 3. The amount of total account receivables a company expects to collect after

subtracting estimated uncollectible accounts

_____ 4. Ending inventory will represent the cost of the most recent purchases as a

result of this cost flow assumption.

_____ 5. A variance that indicates the difference in revenue due to a change in sales

volume

_____ 6. A temporary account that keeps track of the cash discounts taken by

customers who purchased merchandise on credit

_____ 7. A costing method that assumes that the last items purchased will be the first

items sold

_____ 8. A variance created by the difference between the actual selling price and the

budgeted sale price

4. Which of the following revenue process events is a business but not an accounting event?

A) Receiving payment from customer

B) Determining marketing and distribution channels

C) Delivering goods and services

D) Providing customer support

5. Revenues are recognized when they are:

A) earned and have received cash.

B) received cash.

C) earned and realized.

D) realized.

6. Which of the following does not indicate that a revenue has been realized?

A) Cash has been received.

B) A valid promise to pay has been received.

C) The revenue has been earned.

D) The net assets (assets – liabilities) have been increased.

7. For the revenue process, which of the following document sequences is correct?

A) Customer order, bill or lading, sales order, packing slip

B) Sales order, packing slip, customer order, bill of lading

C) Customer order, packing slip, sales order, bill of lading

D) Customer order, sales order, packing slip, bill of lading

8. For the collection process, which of the following sequences of events is correct?

A) Remittance advice received, deposit slip prepared, cash recorded in journal

B) Remittance advice received, cash recorded in journal, deposit slip prepared

C) Deposit slip prepared, remittance advice received, cash recorded in journal

D) Cash recorded in journal, deposit slip prepared, remittance advice received

9. In the following journal entry, revenue is being recognized:

A) at the same time cash is collected.

B) before the cash is collected.

C) after the cash is collected.

D) on an installment basis.

10. In the following journal entry, revenue is being recognized:

Cash XXX

Customer Deposit XXX

A) after the cash is collected.

B) before the cash is collected.

C) no revenue is being recognized.

D) at the same time cash is collected.

11. In the following journal entry, revenue is being recognized:

Cash XXX

Unearned Revenue XXX

A) after the cash is collected.

B) before the cash is collected.

C) no revenue is being recognized.

D) at the same time cash is collected.

12. The account "Advances from Customers" is a(n):

A) asset account.

B) liability account.

C) revenue account.

D) contra-revenue account.

13. The journal entry to record the return of merchandise from a credit customer would include a:

A) credit to sales returns and allowances.

B) credit to accounts receivable.

C) debit to sales revenue.

D) debit to cash.

14. The journal entry to record a sales discount taken by a customer would include:

A) a debit to Accounts Receivable and Sales Discount.

B) a debit to Cash and Sales Discount.

C) a debit to Sales and a credit to Accounts Receivable.

D) a debit to Cash and a credit to Sales Discoun.

15. One example of a contra-revenue account is:

A) allowance for doubtful accounts.

B) sales returns and allowances.

C) accumulated depreciation.

D) sales revenue.

16. One example of a contra-asset is:

A) sales discount.

B) sales returns and allowances.

C) uncollectible accounts expense.

D) None of the above are contra assets.

17. The credit terms for an $10,000 sale are 1/10, n/60. The amount of discount allowed on this sale is:

A) $1,000.

B) $100.

C) $60.

D) $600.

18. The journal entry to record a customer’s payment within the discount period would include a:

A) credit to cash.

B) debit to sales discounts.

C) debit to accounts payable.

D) credit to sales.

19. The journal entry to record a customer’s payment within the discount period would include all but one of the following:

A) debit to cash.

B) debit to sales discount.

C) credit to sales.

D) credit to accounts receivable.

20. The account that is reported at its net realizable value is:

A) sales returns and allowances.

B) accounts receivable.

C) notes payable.

D) equipment.

21. Which of the following would be part of the entry to record a sales return?

A) Credit to sales returns and allowances

B) Debit to accounts receivable

C) Debit to sales returns and allowances

D) Debit to cash

22. The journal entry to record a sales return made by a customer would include:

A) a debit to Accounts Receivable and a credit to Sales Returns.

B) a debit to Cash and Sales Returns.

C) a debit to Sales Returns and a credit to Accounts Receivable.

D) a debit to Accounts Receivable and a credit to Cash.

23. The journal entry to remove a specific customer’s account, once it is identified as uncollectible, would include a:

A) credit to allowance for doubtful accounts.

B) debit to uncollectible accounts expense.

C) credit to accounts receivable.

D) debit to sales revenue.

24. The journal entry to remove a specific customer’s account, once it is identified as uncollectible, would include a:

A) debit to allowance for doubtful accounts.

B) debit to uncollectible accounts expense.

C) debit to accounts receivable.

D) debit to sales revenue.

25. The journal entry to remove a specific customer’s account, once it identified as uncollectible, would ______ net accounts receivable.

A) increase

B) decrease

C) not affect

D) eliminate

26. The Accounts Receivable account is reported on the balance sheet as a:

A) contra asset.

B) current asset.

C) long-term asset.

D) current liability.

27. The Customer Deposits account is reported on the balance sheet as a:

A) contra asset.

B) current asset.

C) current liability.

D) long-term asset.

28. A cash sale would impact the:

A) income statement only.

B) balance sheet and income statement only.

C) balance sheet and statement of cash flows only.

D) balance sheet, income statement, and statement of cash flows.

29. Sedlacek Corporation reported sales revenue of $785,000, accounts receivable of $42,600 at the beginning of the year, and accounts receivable of $66,200 at the end of the year. Cash collections from customers during the year were:

A) $808,600.

B) $785,000.

C) $761,400.

D) $827,600.

30. Kozicek Corporation reported credit sales of $200,000, accounts receivable of $110,000 at the beginning of the year, and accounts receivable of $150,000 at the end of the year. During the year Kozicek wrote off $10,00 as bad debt. Cash collections from customers during the year were:

A) $160,000.

B) $200,000.

C) $300,000.

D) $150,000.

31. Crete Carrier Corporation reported sales revenue of $1,724,000, accounts receivable of $179,000 at the beginning of the year, and accounts receivable of $201,000 at the end of the year. Cash collections from customers during the year were:

A) $1,702,000.

B) $1,724,000.

C) $1,746,000.

D) $1,423,000.

32. Worldwide Resources, Inc. reported sales revenue of $525,000, beginning and ending accounts receivable of $43,200 and $37,600, respectively, and beginning and ending customer deposits of $20,000 and $28,500, respectively. Cash collections from customers during the year were:

A) $510,900.

B) $515,900.

C) $525,000.

D) $539,100.

33. Voyager Products, Inc. reported sales revenue of $295,000, beginning and ending accounts receivable of $24,600 and $31,800, respectively, and beginning and ending customer deposits of $18,600 and $14,500, respectively. Cash collections from customers during the year were:

A) $306,300.

B) $295,000.

C) $283,700.

D) $277,700.

34. A data storage device listing each customer, along with all the credit sales made to, as well as payments received on account from that customer is called a(n):

A) aging schedule.

B) marketing survey.

C) sales returns and allowances report.

D) subsidiary accounts receivable ledger.

35. On December 1, 2010, Commonwealth Industries received a $10,000 deposit from a customer for a special order of merchandise to be manufactured and shipped in February 2011. Commonwealth made the following journal entry on December 1, 2010:

The financial statements dated December 31, 2010, would be

A) correctly stated.

B) in error, understating liabilities and overstating assets.

C) in error, overstating net income and understating liabilities.

D) in error, understating net income and understating stockholders’ equity.

36. On December 31, 2010, Aurora Enterprises failed to make the necessary adjusting entry for estimated uncollectible accounts. This error would cause an:

A) understatement of net income and an understatement of liabilities.

B) overstatement of net income and an understatement of liabilities.

C) overstatement of net income and an overstatement of assets.

D) understatement of assets and stockholders’ equity.

37. Allowance for Doubtful Accounts had a beginning and ending balance of $3,500 and $4,600, respectively. If uncollectible accounts expense was $9,500 for the period, the total dollar amount of accounts written off during the period was:

A) $13,000.

B) $8,400.

C) $10,600.

D) $ 9,500.

38. Accounts receivable written off during the year totaled $61,500, whereas the beginning and ending balance of Allowance for Doubtful Accounts were $51,300 and $55,700, respectively. The amount of uncollectible accounts expense for the period was:

A) $57,100.

B) $65,900.

C) $61,500.

D) cannot be determined from the information given

39. Uncollectible Accounts Expense and Allowance for Doubtful Accounts are shown on the:

A) balance sheet.

B) income statement.

C) balance sheet and income statement, respectively.

D) income statement and balance sheet, respectively.

40. Candle Corporation’s adjusted trial balance includes Allowance for Doubtful Accounts at $37,500, Uncollectible Accounts Expense at $18,700, Notes Receivable at $25,000, and Accounts Receivable at $136,800. Net accounts receivable amounts to:

A) $ 99,300.

B) $118,000.

C) $124,300.

D) $143,000.

41. Coast Starlight Company reported cash received from customers of $1,358,500 for the year ended June 30, 2010. Comparative balance sheets for June 30, 2009 and 2010, reported net accounts receivable balances of $85,600 and $79,300, respectively. Net sales reported on the income statement for the year ended June 30, 2010 were:

A) $1,279,200.

B) $1,352,200.

C) $1,364,800.

D) $1,437,800.

42. A transaction involving the receipt of a $10,000 retainer by an attorney’s prior to any works being performed on behalf of the client would:

A) decrease assets.

B) increase liabilities.

C) increase net income.

D) decrease stockholders’ equity.

43. A transaction involving the receipt of a $10,000 by a CPA prior to any works being performed on behalf of the client would:

A) decrease assets and increase liabilities.

B) increase liabilities and increase assets.

C) increase net income and increase assets.

D) increase stockholders’ equity and increase assets.

44. The sale of merchandise on account to a customer would:

A) increase assets.

B) increase liabilities.

C) decrease revenues.

D) decrease stockholders’ equity.

45. A firm has accounts receivable of $100,000 and allowance for doubtful accounts of $15,000. How will this be reported on the financial statements?

A) $85,000 asset

B) $85,000 revenue

C) $100,000 asset and $15,000 liability

D) Revenue of $100,000 and expense of $15,000

46. Constanza Company had a beginning and ending allowance for doubtful accounts balance of $23,000 and $27,000, respectively. If $12,000 of accounts were written off during the period, what was the uncollectible accounts expense?

A) $27,000

B) $16,000

C) $12,000

D) $ 4,000

47. Carpenter Company had a beginning and ending allowance for doubtful accounts balance of $13,000 and $15,000, respectively. Its beginning and ending accounts receivable balances were $75,000 and $83,000, respectively. If $16,000 of accounts were written off during the period, what was the net accounts receivable at the end of the period?

A) $67,000

B) $68,000

C) $71,000

D) $83,000

48. Anthony Company sold merchandise on account to a customer at a price of $5,000. The merchandise cost Anthony $4,200. The terms of the sale were 3/10, n/30. If the customer paid within the discount period, by how much did this transaction increase Anthony’s net income?

A) $5,000

B) $ 800

C) $ 650

D) $ 300

49. Cady, Inc. had beginning and ending accounts receivable balances of $35,000 and 32,000, respectively. During the period, $100,000 was collected from credit customers. What was the amount of credit sales during the period?

A) $135,000

B) $132,000

C) $100,000

D) $97,000

50. The beginning balance in the allowance for uncollectible accounts of Pankhurst Corporation was $26,000. During the period, $17,000 of accounts receivable were written off. At the end of the period, Pankhurst estimates that $30,000 of its accounts receivable will be uncollectible. What amount of uncollectible accounts expense should the firm report?

A) $9,000

B) $17,000

C) $21,000

D) $30,000

51. The inventory costing system that charges inventory to cost of goods sold in chronological order of its purchase is referred to as:

A) FIFO.

B) LIFO.

C) specific identification.

D) periodic identification.

52. Which of the following is not an advantage of LIFO over FIFO?

A) Lower income taxes

B) Better inventory figure on balance sheet

C) Better matching of revenues and costs on the income statement

D) Cost of goods sold better approximates current replacement cost

53. In times of rising prices, ______ generally result(s) in the ______ cost of goods sold.

A) LIFO and FIFO, same

B) FIFO, higher

C) LIFO, lower

D) FIFO, lower

54. In times of rising prices, ______ generally result(s) in the ______ ending inventory.

A) LIFO and FIFO, same

B) LIFO, higher

C) FIFO, lower

D) LIFO, lower

55. In times of declining prices, ______ generally result(s) in the ______ net income.

A) LIFO, lower

B) FIFO, higher

C) LIFO, higher

D) LIFO and FIFO, same

56. The IRS requires that any firm using ______ for tax purposes must use ______ for financial statement reporting purposes.

A) FIFO, LIFO

B) LIFO, LIFO

C) FIFO, FIFO

D) LIFO, FIFO

57. The cost of goods sold for the June 5 sale is:

A) $525.

B) $600.

C) $500.

D) $550.

58. The cost of goods sold for the June 16 sale is:

A) $780.

B) $755.

C) $715.

D) $650.

59. The cost of goods sold for the June 21 sale is:

A) $480.

B) $400.

C) $440.

D) $560.

62. The cost of goods sold for the June 5th sale is:

A) $500.

B) $550.

C) $600.

D) $700.

63. The cost of goods sold for the June 16th sale is:

A) $650.

B) $665.

C) $715.

D) $780.

64. The cost of goods sold for the June 21st sale is:

A) $1,260.

B) $1,080.

C) $1,065.

D) $ 990.

65. The cost of goods sold for the June 30th sale is:

A) $1,320.

B) $1,440.

C) $1,460.

D) $1,680.

66. The ending inventory on June 30 is:

A) $2,310.

B) $1,880.

C) $1,715.

D) $1,650.

67. Under which method are the most recent costs included in ending inventory?

A) LIFO

B) FIFO

C) Average

D) Specific identification

68. Under which method are the most recent costs included in cost of goods sold?

A) LIFO

B) FIFO

C) Average

D) Specific identification

69. Under which costing method is cost of good sold not systematically determined?

A) LIFO

B) FIFO

C) Average

D) Specific identification

70. If a firm uses LIFO for income tax purposes, what method must be used for financial accounting purposes?

A) Any method may be used

B) Either FIFO or LIFO

C) FIFO

D) LIFO

71. The inventory method that results in the highest net income during periods of rising prices is:

A) LIFO.

B) FIFO.

C) average.

D) specific identification.

72. The inventory method that results in the highest net income during periods of declining prices is:

A) LIFO.

B) FIFO.

C) average.

D) specific identification.

73. During the current year, cost of goods sold was higher under the LIFO method than under the FIFO method. Which of the following statements about price changes is true?

A) Prices were unchanged.

B) Prices were decreasing.

C) Prices were increasing.

D) Unable to determine from the information given

74. During the current year, ending inventory was higher under the LIFO method than under the FIFO method. Which of the following statements about price changes is true?

A) Prices were unchanged.

B) Prices were decreasing.

C) Prices were increasing.

D) Unable to determine from the information given

75. Which of the following statements about LIFO is false?

A) It results in a higher cost of goods sold during periods of rising prices.

B) If inventory declines, it will result in a matching of current revenues and old costs

C) The cost of ending inventory will probably be very different from current replacement cost.

D) Firms that use LIFO run the risk of inventory obsolescence because they are keeping old goods on hand.

76. Libretto, Inc. uses the FIFO method and had ending inventory for 2010 of $35,000. If Libretto had used the LIFO method, its ending inventory would have been $32,000. Assume equal beginning inventories for the two methods. If Libretto had used the LIFO method instead of the FIFO method in 2010, how would its income before income tax have changed?

A) Decrease of $35,000

B) Increase of $35,000

C) Decrease of $3,000

D) Increase of $3,000

77. If ending inventory is too big, which of the following statements is true?

A) Cost of Goods Sold is too big and income is too big.

B) Cost of Goods Sold is too small and income is too big.

C) Cost of Goods Sold is too small and income is too small.

D) Cost of Goods Sold is too big and income is too small.

78. If beginning inventory is too big, which of the following statements is true?

A) Cost of Goods Sold is too big and income is too big.

B) Cost of Goods Sold is too small and income is too big.

C) Cost of Goods Sold is too small and income is too small.

D) Cost of Goods Sold is too big and income is too small.

79. A favorable sales price variance means that:

A) the cost of products has decreased increasing the profit from the product.

B) the actual selling price is greater than what was budgeted.

C) the company has sold more products than was anticipated.

D) the company sales price decreased causing more product to be sold.

80. An unfavorable sale quantity variance reflects:

A) Fewer units sold than budgeted.

B) A lower actual selling price than budgeted.

C) An increase in the cost of products causing a decrease in income for the period.

D) An increase in the number of units sold.

81. What is a revenue and what determines when revenues should be recorded? Give an example of a revenue.

82. Explain how the write-off of an accounts receivable will not affect the amount of net accounts receivable.

83. One of the basic principles of accounting is objectivity. Why, then, do businesses estimate their uncollectible accounts expense instead of waiting to see which accounts receivable will not be collected. That would be objective, wouldn’t it?

84. Briefly describe the makeup of ending inventory under the FIFO and LIFO methods.

85. In periods of rising prices, LIFO result in lower income tax expense than FIFO? Explain why this occurs.

86. According to generally accepted accounting principles, the objective in choosing a cost flow assumption is "matching of appropriate costs against revenues in order that there may be a proper determination of the realized income" [ARB43, ch4, ¶4]. In light of this statement, is FIFO or LIFO more appropriate? Justify your answer.

87. If prices don’t change over time, what will be the differences between LIFO and FIFO?

88. What is the International Accounting Standards Board’ s position on LIFO and what would be the impact on U.S. accounting if it switched to IASB standards?

89. Graphite Industries sells tennis racquets to sporting goods stores throughout the northeastern United States. Selected transactions relating to accounts receivable are presented below. Prepare journal entries as appropriate and indicate how each transaction affected the net accounts receivable balance.

(a) Identified the Borg Company account as uncollectible and wrote off the $6,700 balance.

(b) Identified the Connors Company account balance of $2,500 as uncollectible, and wrote it off.

(c) Allowance for Doubtful Accounts had a $1,000 credit balance at December 31, 2008 prior to adjustment. An analysis of the accounts receivables indicates that the company expects $19,000 of the receivables will be uncollectible.

Answers:

90. KPMD is a CPA firm that provides audits, tax work, and management advisory services to the Yellowstone region of Wyoming. On December 31, 2009 the end of KPMD’s fiscal year it had Accounts Receivable of $70,000 and a debit balance in its Allowance for Doubtful Accounts of $1,000. On December 31 KPMD estimated that $4,000 of the accounts receivable would be uncollectible. Then on February 5, 2010 they wrote off Shirley Logston’s receivable for $500.

Required:

1. Make the entry to record the year-end adjustment of Accounts Receivable.

2. Show how Accounts Receivable would be presented on the 12/31/09 Balance Sheet.

3. Make the entry to write of Shirley Logston’s Accounts Receivable on February 5, 2010.

4. How much will the assets of KPMD be reduced when Shirely’s Accounts Receivable

is written off?

Answers:

1. Uncollectible Accounts Expense $5,000

Allowance for Doubtful Accounts $5,000

2. Current Assets

Accounts Receivable $70,000

Less: Allowance for Doubtful Accounts 4,000 $66,000

3. Allowance for Doubtful Accounts $500

Accounts Receivable – Shirley L $500

4. No change in the assets because both A/R and the Allowance account were

reduced by the same amount.

91. Magnesium, Inc. gathered the following information at the end of each of its three most recent fiscal years:

Determine the amount of cash received from customers for all accounting periods for which sufficient information is given.

92. Prepare all journal entries necessary to record the following transactions of Zion Enterprises for the month of May.

May 4 Sold a $2,000 rug to Grand & Associates on account, terms 2/10, n/30. The rug

had a cost of $750.

7 Received a $100 deposit from Canyon Industries for a rug, which was to be

cleaned. An additional balance of $100 will be collected at the time of pick-up.

11 Sold a rug for $1,450 cash. The rug had a cost of $800.

13 Received payment from Grand & Associates for the rug purchased on May 4th,

less the applicable discount.

16 Canyon Industries picked up its cleaned rug and paid the balance due.

18 Sold a $4,500 rug to Bryce Corporation on account, terms 1/10, n/60. The rug had

a cost of $2,900.

21 Bryce Corporation requested a reduction in the price of the rug because of a

defect. Zion granted a $200 allowance to Bryce.

1. Received payment from Bryce for the May 18th sale, less the allowance and the

discount.

Answers:

93. Gillman Company maintains a perpetual inventory system and uses the FIFO method of inventory costing. Gillman reported the following events during the month of May:

Assume Gillman sells each unit of inventory for $225.

Required:

1. Make the entries for May 5 and May 8 assuming all purchases and sales are made on

credit.

2 Determine the cost of goods sold and the gross margin for May

3. Determine the number of units in ending inventory.

4. Determine the cost of the ending inventory at May 31.

Answers:

1. May 5 Inventory $229,500

A/P $229,500

May 8 A/R $371,250

Sales $371,250

Cost of Goods Sold $247,500

Inventory $247,500

2.

May 8 Cost of Sale 1,650 × $150 $247,500

Number of units sold:

1,650 + 900 + 1,300 + 1,800 = 5,650 × $225 selling price = $1,271,250 Sales Revenue

Sales Revenue – Cost of Goods Sold = Gross Margin

$1,271,250 – $869,150 = $402,100

3. Units available for sale:

2,000 + 1,500 + 1,450 + 2,250 = 7,200 – 5,650 units sold = 1,550 units in ending inventory

4. 1,550 × $160 = $248,000 cost of ending inventory

94. Reeves Company maintains a perpetual inventory system inventory costing. Reeves

reported the following events during the month of June:

Assume Reeves sells each unit of inventory for $150

Required:

1. Assuming LIFO, determine the cost of goods sold, the gross margin and the cost of ending inventory for June.
2. Assuming FIFO, determine the cost of goods sold, the gross margin and the cost of the ending inventory for June.
3. Explain why the income and ending inventory are different and the strengths of each system.

Answers:

A. Inventory

Date Purchases Cost of Goods Sold Balance

Beg Bal 500 × $120

June 4 600 × $126 500 × $120

600 × $126

June 7 450 × $126 = $56,700 500 × $120

150 × $126

June 11 900 × $128 500 × $120

150 × $126

900 × $128

June 14 850 × $128 = $108,800 500 × $120

150 × $126

50 × $128

June 17 50 × $128 = $ 6,400 500 × $120

110 × $126 = $13,860 40 × $126

June 25 1,000 × $130 500 × $120

40 × $126

1,000 × $130

June 30 980 × $130 = $127,400 500 × $120

40 × $126

20 × $130

$313,160

Units Sold 450 + 850 + 160 + 980 = 2,440

Total Sales 2440 × $150 $366,000

Cost of Goods Sold 313,160

Gross Profit $ 52,840

Ending Inventory 500 × $120 = $60,000

40 × $126 5,040

20 × $130 2,600

$67,640

B. Inventory

Date Purchases Cost of Goods Sold Balance

Beg Bal 500 x $120

June 4 600 x $126 500 x $120

600 x $126

June 7 450 x $120 = $54,000 50 x $120

600 x $126

June 11 900 x $128 50 x $120

600 x $126

900 x $128

June 14 50 x $120 = $ 6,000

600 x $126= $75,600

200 x $128 = $25,600 700 x $128

June 17 160 x $128 = $20,480 540 x $128

June 25 1,000 x $130 540 x $128

1000 x $130

June 30 540 x $128 = $69,120

440 x $130 = $57,200 560 x $130

$308,000

Units Sold 450 + 850 + 160 + 980 = 2,440

Total Sales 2440 x $150 $366,000

Cost of Goods Sold 308,000

Gross Profit $105,600

Ending Inventory 560 x $130 = $72,800

C. Because inventory prices change over time and FIFO and LIFO assume different cost flow assumptions, the income and ending inventory amounts differ. FIFO ending inventory represents the most recent purchases because it assumes the older items are sold first. On the other hand, LIFO assumes the newer items are sold first and, therefore, the ending inventory is made up of older items. LIFO matches more current cost with current revenue, whereas FIFO matches older cost with current revenue. As a result, LIFO creates a more realistic measure of income, whereas FIFO gives a better measure of Inventory on the balance sheet.

95. In December 2010, the Farmer Corporation developed a sales budget for January 2009 that estimated the sale of 3,500 units at $200 per unit with a cost per unit of $124. On February 2, the report for January sales indicated that 3,650 units were sold at a sales price of $190 at a cost of $110. Given this information, calculated the sale price variance and the sales quantity variance for January sales and indicate whether they are favorable or unfavorable. What is your assessment of January’s performance?

Answers:

Sales price variance = ($200 - $190) x 3,650 = $36,500 Unfavorable

Sales quantity variance = (3,650 - 3,500) x $200 = $30,000 favorable

Although sales volume increased, the benefit was more than offset by the decline in the sale price.

Sales Expected 3,500 x $200 = $700,000

Actual Sales 3,650 x $190 = $693,500

The difference between budgeted and actual sale is $6,500, which is the difference between the favorable sales quantity variance and the unfavorable sales price variance.