Problem Inventory – Test Bank | 10e

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Student name:__________

FILL IN THE BLANK. Write the word or phrase that best completes each statement or answers the question.
1) Goods that are in transit and were shipped FOB shipping point should be included in the inventory of the _______________________.

2) Goods that are in transit and were shipped FOB destination should be included in the inventory of the _______________________.

3) Goods on consignment are goods that are sent by the owner, called the _______________, to another party called the ______________________ that will sell the goods for the owner.

4) _______________________ is the sales price of damaged goods minus the cost of making the sale.

5) A __________________ is recorded when damage or obsolescence occurs.

6) Inventory costs include _____________, plus any other costs such as shipping, storage, import duties, and insurance.

7) When purchase costs regularly rise, the ___________________ method of inventory costing yields the highest gross profit and net income.

8) When purchase costs regularly rise, the ___________________ method of inventory costing yields the lowest gross profit and net income.

9) An advantage of the _________________ method of inventory costing is that it tends to smooth out the effect of erratic changes in costs.

10) An overstated beginning inventory will ______________ cost of goods sold and _____________ net income.

11) The ________________________ ratio reflects how much inventory is available in terms of days' sales.

12) _____________________ is a measure of how many times a company turns over (sells) its inventory in a period.

13) The ______________________ method of assigning costs to inventory and cost of goods sold exactly matches the costs of particular items with the revenues they generate and would be used when items can be easily traced to the purchase invoice cost.

14) The _____________________ method of assigning costs to inventory and cost of goods sold assumes that the inventory items are sold in the order acquired.

15) The ______________________ method of assigning costs to inventory and cost of goods sold assumes that the most recent purchases are sold first.

16) The ______________________ method of assigning costs to inventory and cost of goods sold requires that we divide the cost of goods available for sale by the units of inventory available at the time of each sale (when using perpetual system).

17) Regardless of what inventory method or system is used, cost of goods available for sale must be allocated between ___________________ and ___________________.

18) When applying the lower of cost or market method of inventory valuation for LIFO, market is defined as the ______________________.

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

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
20) Match the inventory costing method from the list below that is being described in each situation in letters a-e. In all cases, assume a period of rising prices.

_________ a. The method that is used if each inventory item can be matched with a specific purchase and invoice.
_________ b. The method that will cause the company to have the lowest income taxes.
_________ c. The method that will cause the company to have the lowest cost of goods sold.
_________ d. The method that will assign a value to inventory that approximates current cost.
_________ e. The method that will tend to smooth out erratic changes in costs.

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

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

23) Describe the internal controls that must be applied when taking a physical count of inventory.

24) Explain the effects of inventory costing methods on the cost of ending inventory, income, and income taxes.

25) What is the LIFO conformity rule?

26) What is the effect of an error in the ending inventory balance on the accounts reported in the income statement?

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

28) Identify and describe the four inventory costing methods.

29) Explain how the lower of cost or market rule is used to value inventory.

30) Explain the terms FOB shipping point and FOB destination. In your explanation, discuss when ownership is transferred.

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

32) Explain the reason a company might use gross profit inventory method for valuing inventory.

33) When inventory costs are declining, explain the impact to the balance sheet and income statement using the FIFO method.

34) The company's inventory manager receives compensation that includes a bonus based on gross profit. You discover that the inventory manager has knowingly overstated ending inventory by $2 million. What effect does this error have on the financial statements of the company and specifically gross profit? Why would the manager knowingly overstate ending inventory? Would this be considered an ethics violation?

35) Mary's Antiques does not have its own retail location, instead maintains inventory in its warehouse and sells merchandise through Oldtime Antique Mall. Oldtime does not assume responsibility for goods until they are sold to customers at which time it takes a commission for items sold and sends the sale proceeds to Mary's. Identify which company has the role of the consignor and the consignee. Which company should include any unsold goods as part of its inventory?

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

37) Patrick Randall of Sports Supplies finds that maintaining appropriate levels of inventories while controlling costs is a major challenge. What are the challenges Patrick refers to?

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
38) Carolina Company uses the perpetual LIFO method for valuing its ending inventory. The following financial statement information is available for its first year of operation:

Carolina's ending inventory using the perpetual LIFO method was $8,700. Carolina's accountant determined that had the company used perpetual FIFO, the ending inventory would have been $9,100.
a. Determine what the income before taxes would have been, had Carolina used the FIFO method of inventory valuation instead of LIFO.
b. What would be the difference in income taxes between LIFO and FIFO, assuming a 30% tax rate?
c. If Carolina wanted to lower the amount of income taxes to be paid, which method would it choose?

39) Evaluate each inventory error separately and determine whether it overstates or understates cost of goods sold and net income.

40) The Community Store reported the following amounts on their financial statements for Year 1, Year 2, and Year 3

It was discovered early in Year 4 that the ending inventory on December 31, Year 1 was overstated by $6,000, and the ending inventory on December 31, Year 2 was understated by $2,500. The ending inventory on December 31, Year 3 was correct. Ignoring income taxes determine the correct amounts of cost of goods sold, net income, total current assets, and equity for each of the years Year 1, Year 2, and Year 3.

41) A company reported the following data:

Required:
1. Calculate the company's inventory turnover for each year.
2. Comment on the company's efficiency in managing its inventory.

42) A company reported the following data:

Required:
1. Calculate the days' sales in inventory for each year.
2. Comment on the trend in inventory management.

43) A company made the following purchases during the year:

On December 31, there were 28 units in ending inventory. These 28 units consisted of 2 from the January 10 purchase, 3 from the March 15 purchase, 4 from the April 25 purchase, 11 from the July 30 purchase, and 8 from the October 10 purchase. Using specific identification, calculate the cost of the ending inventory.

44) A company's inventory records indicate the following data for the month of July:

If the company uses the weighted average inventory valuation method and the perpetual inventory system, what would be the cost of its ending inventory?

45) A company's inventory records indicate the following data for the month of April:

If the company uses the first-in, first-out (FIFO) method and the perpetual inventory system, what would be the cost of the ending inventory?

46) A company's inventory records indicate the following data for the month of January

If the company uses the LIFO perpetual inventory system, what would be the cost of the ending inventory?

47) A company's inventory records indicate the following data for the month of January:

If the company uses the LIFO perpetual inventory system, what is the amount of cost of goods sold for January?

48) A company's inventory records indicate the following data for the month of April:

If the company uses the first-in, first-out (FIFO) method and the perpetual inventory system, what is the amount of cost of goods sold for April?

49) Calculate the ending inventory using FIFO for a company that uses a perpetual inventory system, using the information given below.

50) Calculate the ending inventory using LIFO for a company that uses a perpetual inventory system, using the information given below.

51) Using the information given below for a company that uses a perpetual inventory system, calculate the ending inventory using weighted average.

52) Use the information below to determine the sales revenue, cost of goods sold and gross profit that would be reported for the company related to the March 16 sale assuming the company uses FIFO inventory valuation and a perpetual inventory system.

53) Use the information below to determine the sales revenue, cost of goods sold and gross profit that would be reported for the company related to the March 16 sale assuming the company uses LIFO inventory valuation and a perpetual inventory system.

54) Use the information below to determine the sales revenue, cost of goods sold and gross profit that would be reported for the company related to the March 16 sale assuming the company uses weighted average inventory valuation and a perpetual inventory system.

55) A company reported the following data related to its ending inventory:

Calculate the lower-of-cost-or-market on the inventory applied separately to each product.

56) A company had the following ending inventory costs:

Required:
Calculate the lower of cost or market (LCM) value for each individual item.

57) A company uses the periodic inventory system, and the following information is available. All purchases and sales are on credit. The selling price for the merchandise is $11 per unit.

Required:
Determine the cost of the ending inventory and the cost of goods sold for June using the LIFO method.

58) A company made the following merchandise purchases and sales during the month of May:

There was no beginning inventory. If the company uses the weighted average periodic method, what would be the cost of the ending inventory?

59) A company made the following merchandise purchases and sales during the month of May:

There was no beginning inventory. If the company uses the LIFO periodic inventory method, what would be the cost of the ending inventory?

60) A company made the following merchandise purchases and sales during the month of May:

There was no beginning inventory. If the company uses the FIFO periodic inventory method, what would be the cost of the ending inventory?

61) A company's store was destroyed by an earthquake on February 10 of the current year. The only information for the current period that could be salvaged included the following:

Historically, the company's gross profit ratio has been 30%. Estimate the value of the destroyed inventory using the gross profit method.

62) Apply the retail method to the following company information to estimate the cost of the ending inventory for the current period.

63) A company uses the retail inventory method and has the following information available concerning its most recent accounting period:

1. What is the cost-to-retail ratio using the retail method?
2. What is the estimated cost of the ending inventory?

64) Forever Young Game Stores (FYG) has taken a physical count of its inventory at March 31, its fiscal year-end. After reviewing the accounting records and documentation, the following items have been discovered:

(a) An invoice from Shreck Company indicates that $30,000 of games were shipped to FYG on March 27, terms FOB shipping point. The games and invoice did not arrive at FYG until April 2 and were not included in the physical count.
(b) An invoice from Gamers, Incorporated indicates that $8,000 of games were shipped to FYG on March 29, terms FOB destination. The games and invoice did not arrive at FYG until April 2 and were not included in the physical count.
The physical count and cost assignment on March 31 prior to these two items is $440,000. The cost of goods sold for FYG is $2,100,000.

1. Calculate the amount that should be reported as ending inventory for FYG.
2. Calculate the days' sales in inventory before and after the appropriate adjustments for inventory.

65) A company reported the current month purchase and sales data for its only product and uses the perpetual inventory system. Determine the cost assigned to ending inventory and cost of goods sold using FIFO.

66) A company reported the current month purchase and sales data for its only product and uses the perpetual inventory system. Determine the cost assigned to ending inventory and cost of goods sold using LIFO.

67) A company uses the retail inventory method and has the following information available concerning its most recent accounting period:

1. Use the retail inventory method to estimate the company's year-end inventory at cost.
2. A year-end physical count at retail prices yields a total inventory of $404,800. Prepare a calculation showing the company's loss from shrinkage at cost and at retail.

Answer Key

Test name: John Wild Ch05 Problem Material

1) purchaser or buyer

2) seller

3) [consignor, consignee]

4) Net realizable value

5) loss

6) invoice price minus any discount

7) [First in, first out (FIFO)]

8) [Last in, first out (LIFO)]

9) weighted average

10) [overstate, understate]

11) days' sales in inventory

12) Inventory turnover

13) specific identification

14) [first in, first out (FIFO)]

15) [last in, first out (LIFO)]

16) weighted average (or average cost)

17) [cost of goods sold, ending inventory]

18) replacement cost

19) gross profit

20) a. SI; b. LIFO; c. FIFO; d. FIFO; e. WA

21) Merchandise inventory consists of goods owned by a company and held for resale. Three special cases involving ownership decisions are goods in transit, consigned goods, and damaged goods. Goods in transit are included in the inventory of the company that owns the goods (based on shipping terms). Consigned goods are included in the inventory of the consignor. Damaged goods are valued at net realizable value.

22) The costs of merchandise inventory include the invoice price minus any discounts, plus any added or incidental costs necessary to put the inventory in a place and condition for sale. Incidental costs include import duties, shipping, storage, and insurance.

23) The internal controls should include (1) prenumbered tickets that are all accounted for; (2) counters of inventory who are not responsible for the inventory; (3) counters who must confirm the existence, amount, and condition of inventory; (4) a second count by a different counter; and (5) confirmation that all inventories are ticketed once and only once.

24) The specific identification method exactly identifies the costs of the inventory items sold. The weighted average method tends to smooth out erratic changes in costs by "averaging" inventory costs. However, LIFO and FIFO provide different amounts in periods of rising or falling costs. For example, in periods of rising costs, LIFO provides a lower income and thus lower taxes. In periods of falling costs, LIFO provides a higher income and thus higher taxes. FIFO calculations provide both higher income and taxes in periods of rising costs and lower income and taxes in periods of declining costs.

25) The IRS requires that when LIFO is used for tax reporting, it also must be used for financial reporting.

26) An inventory error causes misstatements in cost of goods sold, gross profit, and net income. It also causes misstatements in the next period's cost of goods sold and net income.

27) A merchandiser's ability to pay its short-term obligations depends, among other factors, on how quickly it sells its merchandise inventory. The inventory turnover ratio reveals how many times a company turns over (sells) its inventory during a period. A low ratio compared to competitors suggests the company may be holding more inventory than necessary to support its sales volume. On the other hand, a ratio that is too high compared to competitors may suggest that the inventory level is too low and customers may have to back order merchandise. The days' sales in inventory ratio helps to better interpret inventory turnover. It can be interpreted as the number of days one can sell from inventory if no new items are purchased, and can be viewed as a measure of the buffer against out-of-stock inventory.

28) The specific identification method assigns costs to each inventory item based on specific invoice costs. The weighted average method assigns costs by using the total cost of inventory and dividing it by the number of units to arrive at a cost per unit at each sale. This cost per unit is then multiplied by the number of units in ending inventory. The first-in-first-out method assigns cost to items sold assuming that the first units purchased are the first to be sold. The last-in-first out method assumes that the last units purchased are the first to be sold.

29) The lower of cost or market rule compares the acquisition cost of inventory with the current replacement cost (for LIFO) or for the net realizable value (for non-LIFO methods). The lower of these two values is then selected as the amount to be reported. Lower of cost or market can be used on the inventory as a whole, major categories of inventory, or on individual items of inventory.

30) FOB shipping point and FOB destination are the shipping terms for goods in transit. If the terms are FOB shipping point, the buyer pays for the transportation and the ownership transfers from the seller to the buyer once the goods are shipped. If the terms are FOB destination, the seller pays for the transportation, and the ownership does not transfer to the buyer until the items arrive at the buyer’s location.

31) The retail method is generally used to prepare interim statements because it avoids the time-consuming and expensive process of taking a physical inventory. It uses the cost to retail ratio to give an estimated ending inventory at cost. Some companies use the retail inventory to estimate inventory when inventory is damaged or destroyed.

32) The gross profit method is often used when inventory is destroyed, lost or stolen. The cost of ending inventory is estimated by applying the gross profit ratio to net sales at retail. Companies may need an estimate of inventory to file a claim on a loss with its insurer.

33) In a period of declining inventory costs, FIFO will yield the lowest gross profit and income of all the costing methods. The balance sheet will approximate the current declining costs.

34) By overstating ending inventory, the cost of goods sold is understated, causing the gross profit to be overstated and net income to be overstated. By overstating the gross profit, this would increase the manager's bonus. The assets and equity would also be overstated. Since the manager's bonus is based on gross profit, the error would result in a larger bonus since gross profit would be overstated. Yes, this would be considered an ethics violation since the manager intentionally overstated ending inventory and the financial statements would contain errors that could affect decisions made by the users of the financial statements.

35) Mary's Antiques is the consignor; Oldtime Antiques Mall is the consignee. Mary's Antiques should include any unsold goods as part of its inventory.

36) Advances in technology have greatly reduced the cost, and effort to manage, a perpetual inventory system. The perpetual inventory system updates the inventory balance as transactions affecting inventory occur, the balance is increased for purchases and decreased for sales. The subsidiary ledger also enables companies to get detailed records for each inventory item without a lot of extra effort. Knowing the exact amount of inventory may avoid the risk of lost sales and also help management reduce the level of inventory, thereby increasing the inventory turnover and decreasing the required number of days' sales in inventory. The reduced level of inventory also reduces costs. Many companies are now asking whether they can afford not to have a perpetual inventory system because timely access to inventory information is a competitive advantage.

37) Any entrepreneur who sells inventory must constantly balance the need to have adequate inventory available to meet customers' demands while also minimizing the amount of investment in inventory. Maintaining too little inventory can result in stock-outs (lost sales due to a lack of available inventory) but maintaining too much inventory wastes the company's resources (by requiring funds be invested in inventory and not in other more productive assets). Randy knew that to meet his customers' needs, he would need sound inventory accounting. By implementing inventory management tools, he learned how to fill orders, collect money, and maintain the right inventory.

38) a. If ending inventory is $400 higher using FIFO ($9,100 − $8,700), then the cost of goods sold would be $400 lower, gross profit $400 higher, and income before taxes would be $400 higher. Therefore, income before taxes would be $24,000 + $400 = $24,400.

b.

<br> Income taxes would be $120 higher using FIFO than LIFO.<br> <br> c. Carolina would choose the LIFO method because it results in lower income taxes.

39)

40)

41) 1. Year 1 $317,500/72,000 = 4.41<br> Year 2 $279,100/93,000 = 3.00<br> <br> 2. The company's efficiency in managing its inventory is decreasing as its sales of merchandise decrease. This is a negative reflection on inventory management.

42) 1. Year 1 ($140,000/$425,000) × 365 = 120 days
Year 2 (175,000/$486,000) × 365 = 131 days

2. The company has a trend of increasing the number of days it takes to sell its inventory.
This is a negative reflection on inventory management.

43)

44)

45)

46)

47)

48)

49)

50)

51)

<br> *$108,000/1,000 units = $108.00/unit<br> **$46,080/400 units = $115.20/unit

52) Sales = 40 × $16 = $640
Cost of goods sold = 40 × $10 = $400
Gross profit = $640 − $400 = $240

53) Sales = 40 × $16 = $640
Cost of goods sold = 40 × $12 = $480
Gross profit = $640 − $480 = $160

54) Sales = 40 × $16 = $640
Cost of goods sold = 40 × $10.75* = $430
Gross profit = $640 − $430 = $210

*[(100 × $10) + (60 × $12)]/160 = $10.75

55)

56)

57) Ending Inventory:<br>

<br> <br> Cost of goods sold:<br>

58)

59)

Cost of ending inventory = 150 × $15 each = $2,250

60)

Cost of ending inventory = 150 × $22 each = $3,300.

61)

62)

63)

64) 1. The ending inventory should be adjusted to $470,000. Only the $30,000 invoice needs to be added since it was shipped FOB shipping point, the owner FYG should include the inventory in the ending balance. ($440,000 + $30,000 = $470,000)
2. Before adjustment: $440,000/$2,100,000 × 365 = 76.5 days
After adjustment: $470,000/$2,100,000 × 365 = 81.7 days

65)

66)

67) 1.
$729,190/1,325,800 = 0.55
$1,325,800 − $900,200 = $425,600
$425,600 × 0.55 = $234,080

2.
$425,600 − $404,800 = $20,800 inventory shrinkage at retail
$20,800 × 0.55 = $11,440 inventory shrinkage at cost