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Exam 6: Inventories and Cost of Sales

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Question 1

True/False

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A merchandiser's ability to pay its short-term obligations depends on many factors including how quickly it sells its merchandise inventory.

A) True
B) False

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Question 2

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IFRS reporting currently does not allow which method of inventory costing?

A) Lower of cost or market.
B) Weighted average.
C) Specific identification.
D) FIFO.
E) LIFO.

F) C) and D)
G) B) and E)

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Question 3

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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?

The ________ is a measure of how quickly a merchandiser sells its merchandise inventory.

Carolina Company uses the LIFO method for valuing its ending inventory. The following financial statement information is available for its first year of operation: $\begin{array}{c}\text {Carolina Company}\\\text {Income Statement}\\\text {For the year ended December 31}\\ \begin{array}{|l|r|}\hline \text { Sales } & \$ 60,000 \\\hline \text { Cost of goods sold } & \underline{23,000} \\\hline \text { Gross profit } & \$ 37,000 \\\hline \text { Expenses } & \underline{13,000} \\\hline\end{array}\end{array}$ $\begin{array} { | l | r | } \hline \text { Expenses } & \underline { 13,000 } \\\hline \text { Income before taxes } & \$ 24,000 \\\hline\end{array}$ Carolina's ending inventory using the LIFO method was $8,700. Carolina's accountant determined that had the company used 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?

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

The inventory turnover ratio:

Use the following information for Ephron Company to compute days' sales in inventory for Year 2. $\begin{array} { | l | r | r | } \hline & \text { Year 2 } & \text { Year 1 } \\\hline \text { Net sales } & \$ 547,500 & \$ 572,000 \\\hline \text { Cost of goods sold } & 348,500 & 370,840 \\\hline \text { Feding inventory } & 75,700 & 81,400 \\\hline\end{array}$

An advantage of the weighted average inventory method is that it tends to smooth out erratic changes in costs.

Sandoval needs to determine its year-end inventory. The warehouse contains 20,000 units, of which 3,000 were damaged by flood and are not sellable. Another 2,000 units were purchased from Markor Company, FOB shipping point, and are currently in transit. The company also consigns goods and has 4,000 units at a consignee's location. How many units should Sandoval include in its year-end inventory?

The simple rule for inventory turnover is that a low ratio is preferable.

Accounting principles require that inventory be reported at the market value (cost) of replacing inventory when cost is lower than market value.

Bedrock Company reported a December 31 ending inventory balance of $412,000. The following additional information is also available: • ^{The ending inventory balance of $412,000 included $72,000 of consigned inventory for which} Bedrock was the consignor. • ^{The ending inventory balance of $412,000 included $22,000 of office supplies that were stored in} the warehouse and were to be used by the company's supervisors and managers during the coming year. Based on this information, the correct balance for ending inventory on December 31 is:

A company had the following purchases and sales during its first month of operations: $\begin{array} { | l | l | } \hline \text { January } 1 & \text { Purchased } 10 \text { units at } \$ 4.00 \text { per unit } \\\hline \text { January } 9 & \text { Sold } 6 \text { units at } \$ 12.00 \text { per unit } \\\hline \text { January } 17 & \text { Purchased 8 units at } \$ 5.50 \text { per unit } \\\hline \text { January } 27 & \text { Sold } 7 \text { units at } \$ 12.00 \text { per unit } \\\hline\end{array}$ Using the Periodic weighted average method, what is the value of cost of goods sold? (Round weighted average cost per unit to 2 decimal places.)

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

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

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.

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

Goods on consignment are goods that are shipped by the owner, called the ________, to another party called the ________ that will sell the goods for the owner.

Identify and describe the four inventory valuation methods.