Accounting Ch 6

Front 1

When the terms of a sale are FOB destination, legal title to the goods passes to the buyer when the goods reach the buyer's place of business.

Back 1

True;Sales terms of FOB destination indicate that the seller holds title until the goods reach the destination.

Front 2

Merchandising firms usually classify their inventory into raw materials, work in process and finished goods.

Back 2

false. Manufacturers, not merchandisers usually classify their inventory as raw materials, work in process and finished goods.

Front 3

When is a physical inventory usually taken?

Back 3

A physical inventory count is usually taken at the end of the company’s fiscal year.

Front 4

Which of the following should not be included in the physical inventory of a company?

Back 4

Goods held on consignment from another company
Inventory should include all goods owned by the company regardless of whether the company holds physical possession or not. Goods held on consignment are owned by others and should not be included.

Front 5

As a result of a thorough physical inventory, Railway Company determined that it had inventory worth $180,000 at December 31, 2014. This count did not take into consideration the following transactions:

● Rogers Consignment store currently has goods worth $35,000 on its sales floor that belong to Railway but are being sold on consignment by CityplaceRogers. The selling price of these goods is $50,000.
● Railway purchased $13,000 of goods that were shipped on December 27, FOB destination, that will be received by Railway on January 3.
Determine the correct amount of inventory that Railway should report.

Back 5

$215,000
Inventory should include all goods owned by the company regardless of whether the company holds physical possession or not. The correct amount of inventory that should be reported by Railway should be the $180,000 cost of goods in possession plus the $35,000 of cost of the goods that are on consignment. The title to the goods in transit will transfer on January 3 and should not be reported on December 31, 2014. The correct balance = $180,000 + $35,000 = $215,000.
Determine the ownership of inventory in question and include only items for which title has passed to buyer.

Front 6

Which of the following is not an inventory account?

Back 6

Equipment
Equipment is not an inventory account. It is consists of items used in the production of income that are not held for sale. supplie.

Front 7

Which of the following is not a legitimate business reason for taking a physical inventory?

Back 7

To verify the profitability of individual inventory items
The profitability of individual inventory items cannot be assessed from counting the items in the ending inventory of a company. A more indepth analysis must be performed for this.

Front 8

Ownership passes to the buyer when purchased goods are received from a public carrier if the goods are shipped

Back 8

FOB destination.
Under FOB destination, title transfers when the buyer receives the purchased goods from the public carrier, not when the public carrier accepts them from the seller.

Front 9

Ownership passes to the buyer when the public carrier accepts the goods if the goods are shipped

Back 9

FOB shipping point.
Under FOB shipping point, title transfers when the carrier accepts the goods.

Front 10

Which one of the following statements is true?

Back 10

A manufacturing company will normally have raw materials, work in process, and finished goods as inventory account classifications.

A manufacturing operation utilizes raw materials, work in process, and finished goods as inventory account classifications.

Front 11

Cecil gives goods on consignment to Jerry who agrees to try to sell them for a 25% commission. At the end of the accounting period, which of the following parties includes in its inventory the consigned goods?

Back 11

Cecil
Ownership remains with Cecil, so Cecil reports the goods as assets.

Front 12

At December 31, 2013, Sunrise Company’s inventory records indicated a balance of $752,000. Upon further investigation it was determined that this amount included the following:

● $112,000 in inventory purchases made by Sunrise shipped from the seller December 27, 2013 terms FOB destination, but not due to be received until January 2, 2014
● $74,000 in goods sold by Sunrise with terms FOB destination on December 27. The goods are not expected to reach their destination until January 6, 2014
● $6,000 of goods received on consignment from Wallwood Company

What is Sunrise’s correct ending inventory balance at December 31, 2013?

Back 12

$634,000
the balance of $752,000 should not include the $112,000 since ownership passes at destination on January 2. It should include the $74,000 because ownership does not passes at the shipping point on December 27. It should not include the $6,000 on consignment because these goods are not owned by Sunrise. Corrected balance = $752,000 - $112,000 - $6,000 = $634,000.

Front 13

Under FIFO, cost of goods sold consists of the units with the oldest costs.

Back 13

True;Under first-in, first-out, the cost of the oldest units on hand is used to determine the cost of the

Front 14

Inventory costing methods place primary reliance on assumptions about the flow of

Back 14

costs.
The flow of costs determine the inventory costing method.

Front 15

Cost of goods purchased is $540,000, ending inventory is $20,000, and cost of goods sold is $560,000. How much is beginning inventory?

Back 15

$40,000
Ending inventory plus cost of goods sold minus purchases results in beginning inventory: $20,000 + $560,000 -$540,000 = $40,000.

Front 16

Which of the following is not an acceptable inventory costing method?

Back 16

Last-in, last-out
Last in, last-out is not one of the inventory costing methods.

Front 17

Which of the following is true of the FIFO inventory method?

Back 17

It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold.
FIFO assumes the cost of the earliest units purchased are the first to be allocated to cost of

Front 18

Which of the following would most likely employ the specific identification method of inventory costing?

Back 18

Jewelry store
Jewelry stores use the specific identification method because of the high value and uniqueness of many of the inventory items.

Front 19

Which of the following statements is true?

Back 19

Specific identification method inventory valuation requires physical flow of goods to be representative of the cost flow.
The specific identification method has this constraint.There is no requirement for the physical flow of goods under the LIFO or FIFO inventory valuation concepts to match cost flow.

Front 20

Which of the following statements is true?

Back 20

Company management selects the method of inventory costing method a company will use
Correct! A company’s management decides what inventory costing method it wants to use.

Front 21

Kam Company has the following units and costs:

Units Unit Cost
Inventory, Jan. 1 8,000 $11
Purchase, June 19 13,000 12
Purchase, Nov. 8 5,000 13

If 9,000 units are on hand at December 31, what is the cost of the ending inventory under FIFO using a periodic inventory system?

Back 21

$113,000
Ending inventory under FIFO uses the most recent costs in computing ending inventory. Ending inventory = (5,000 × $13) + (4,000 × $12) = $113,000.
Under FIFO periodic, ending inventory will consists of newest items.

Front 22

Kam Company has the following units and costs:

Units Unit Cost
Inventory, Jan. 1 8,000 $11
Purchase, June 19 13,000 12
Purchase, Nov. 8 5,000 13

If 9,000 units are on hand at December 31, what is the cost of the ending inventory under LIFO using a periodic inventory system?

Back 22

$100,000
Ending inventory under LIFO uses the earliest costs in computing ending inventory.
Ending inventory = (8,000 × $11) + (1,000 × $12) = $100,000
Under LIFO periodic, ending inventory will consists of oldest items.

Front 23

Davidson Electronics has the following:

Units Unit Cost
Inventory, Jan. 1 5,000 $ 8
Purchase, April 2 15,000 10
Purchase, Aug. 28 20,000 12

If Davidson has 7,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?

Back 23

$75,250
Ending inventory cost equals average-cost per unit times 7,000 units.Average cost per unit equals the total cost of all inventory amounts divided by the number of inventory units. Average inventory = [(5,000 × $8) + (15,000 × $10) + (20,000 × $12)] ÷ (5,000 + 15,000 + 20,000) = $430,000 ÷ 40,000 units = $10.75 per unit. Ending inventory = $10.75 × 7,000 units = $75,250.
To anwer this question, first calculate the average cost per unit and then calculate total cost of ending inventory.

Front 24

In a period of inflation, LIFO produces a higher net income than FIFO.

Back 24

false. Cost of goods sold will be higher under LIFO since LIFO utilizes the higher market price of the last units purchased which produces a lower net income

Front 25

In periods of rising prices, what will LIFO produce?

Back 25

Lower net income than FIFO
Because cost of good sold includes the most recent costs which are the highest costs, net income under LIFO will be the lowest.
To determine impact on net income, first determine impact of LIFO on cost of goods sold during period of rising prices.

Front 26

Which one of the following is not a consideration that affects the selection of an inventory costing method?

Back 26

Perpetual versus periodic inventory system
the type of inventory system is not a consideration. All other choices can be important considerations in the selection of a cost flow method.

Front 27

A company just starting business made the following purchases in August:

August 1 300 units $1,560
August 12 400 units 2,340
August 24 400 units 2,520
August 30 300 units 1,980
1,400 units $8,400

A physical count of the inventory on August 31 reveals that there are 500 units on hand. What inventory method produces the lowest gross profit for August?

Back 27

LIFO method
The LIFO method will produce the lowest gross profit because LIFO results in the highest cost goods sold in periods of rising prices.

Front 28

In a period of rising prices which inventory method will result in the greatest amount of income tax expense?

Back 28

FIFO
FIFO will result in the lowest cost of goods sold, highest net income, and highest income tax expense.
To answer this question, determine which method will result in the highest net income.

Front 29

With the assumption of costs and prices generally rising, which of the following is correct?

Back 29

LIFO provides the closest valuation of cost of goods sold to replacement cost of inventory sold.

Front 30

In a period of falling prices, which of the following methods will give the largest net income?

Back 30

FIFO
LIFO will provide the highest net income during a period of falling prices.
To achieve the largest net income, use the method that will result in the lowest cost of goods sold.

Front 31

Two companies report the same cost of goods available for sale, but each employs a different inventory costing method. If the price of goods has increased during the period, which statement is true?
The company using

Back 31

The company using FIFO will have the highest ending inventory.
Since the FIFO company will have the most current costs in inventory, the FIFO company will have the highest inventory value on the balance sheet during periods of rising prices.

Front 32

Which situation requires a departure from the cost basis of accounting to the lower-of-cost-or-market basis in valuing inventory?

Back 32

A decline in the value of the inventory
To comply with the concepts of conservatism, inventory should be valued at the lower-of-cost-or-market when there is a decline in inventory value.

Front 33

What accounting concept is employed when using the lower-of-cost-or-market valuation?

Back 33

Conservatism
Conservatism dictates the lower-of-cost-or-market inventory valuation.

Front 34

Hagger Sounds has accumulated the following cost and market data on March 31:

Cost Data Market Data
iPods $24,000 $20,400
Cell phones 18,000 19,000
DVDs 28,000 25,600

Using the lower-of-cost-or-market, how much is the value of the ending inventory? (Apply LCM to each category)

Back 34

$64,000
Cost is compared to market for each inventory category as follows:
iPods $20,400 + cell phones $18,000 + DVDs $25,600 = $64,000
For each of the inventory category, determine the lower value (cost or market), then add values selected to determine total ending inventory value.

Front 35

What is the underlying rationale for the lower-of-cost-or-market rule?

Back 35

The conservatism constraint
Conservatism means to use the lowest value for assets and revenues when in doubt

Front 36

the days in inventory is calculated by dividing the inventory turnover by 365.

Back 36

false. This ratio is calculated by dividing 365 by inventory turnover ratio.

Front 37

If inventory at the end of 2014 and 2013 is $30,000 and $40,000, respectively, and cost of goods sold is $276,000 and $290,000 respectively, inventory turnover for 2014 is 8.3 times.

Back 37

false. Inventory turnover is computed by dividing cost of goods sold by average inventory, or $276,000 /[($30,000 + $40,000)/2] = 7.89.

Front 38

Which of these tranasctions would cause the inventory turnover ratio to increase the most?

Back 38

Decreasing the amount of inventory on hand and increasing sales
Both an increase of sales and a decrease in inventory on hand will cause inventory turnover to increase the most.

Front 39

Carlos Comany had beginning inventory of $80,000, ending inventory of $110,000, cost of goods sold of $285,000, and sales revenue of $475,000. What is Carlos’ days in inventory?

Back 39

121.7 days
Days in inventory equals 365 days ÷ inventory turnover (cost of goods sold ÷ average inventory).365 ÷ ($285,000 ÷ [($80,000 + $110,000) ÷ 2]) = 121.7 days

Front 40

The following information came from the income statement of the Wilkens Company at December 31, 2014: sales revenue $1,800,000; beginning inventory $160,000; ending inventory $240,000; and gross profit $600,000. What is Wilkens' inventory turnover ratio for 2014?

Back 40

6.0 times
Cost of goods sold is the difference between sales revenue and gross profit:
$1,800,000 - $600,000 = $1,200,000
Inventory turnover ratio = Cost of goods sold divided by average inventory:
$1,200,000 / [($160,000 + $240,000) / 2] = 6.0
First determine cost of goods sold, then use it to calculate inventory turnover.

Front 41

The following information came from the income statement of the Wilkens Company at December 31, 2014: sales revenue $1,800,000; beginning inventory $160,000; ending inventory $240,000; and gross profit $600,000. Inventory turnover is 6 times per year. What is Wilkens' days in inventory for 2014?

Back 41

60.8 days
Dividing 365 days of the year by inventory turnover of 6 rsults in an average of 60.8 days in inventory.
frst determine inventory turnover, then compute days in inventory.

Front 42

Net sales are $2,000,000, cost of goods sold is $960,000, and average inventory is $30,000. How many days sales are in inventory?

Back 42

11.4
Days sales in inventory is calculated as 365 days divided by inventory turnover.
Inventory turnover = $960,000 / $30,000 = 32 times
Days sales in inventory = 365 / 32 = 11.4 days
First determine inventory turnover, then compute days in inventory.

Front 43

Inventory turnover ratio is calculated by dividing cost of goods sold by

Back 43

average inventory.
Since inventory turnover is a period ratio, average inventory for the period is used.

Front 44

LIFO reserve must be disclosed by companies using the FIFO inventory method.

Back 44

false. LIFO reserve must be disclosed by companies in the notes to the financial statements if they use the LIFO method of inventory. It helps analysts compare companies to one another

Front 45

Reporting which one of the following allows analysts to make adjustments to compare companies using different cost flow methods?

Back 45

LIFO reserve
When LIFO inventory valuation is used, the disclosure of LIFO Reserve allows comparisons of companies using LIFO and FIFO.

Front 46

In 2014, a company shows inventory of $250,000 using LIFO. If the company had used FIFO, its inventories would have been higher by $40,000 and $30,000 in 2014 and 2013, respectively. How much is the company’s LIFO reserve in 2014?

Back 46

$40,000
The LIFO reserve of $40,000 is the value for 2014.

Front 47

What is the LIFO reserve?

Back 47

The difference between the value of the inventory under LIFO and the value under FIFO
The LIFO reserve is the difference in ending inventory under LIFO and FIFO.

Front 48

Which statement is true in a perpetual inventory system?

Back 48

FIFO cost of goods sold will be the same as in a periodic inventory system.

Front 49

A company just starting business made the following purchases in August:

August 1 300 units $1,560
August 12 400 units 2,340
August 24 400 units 2,520
August 30 300 units 1,980
1,400 units $8,400

A physical count of the inventory on August 31 reveals that there are 500 units on hand. Using the FIFO inventory method in a perpetual inventory system, how much is the value of the ending inventory on August 31?

Back 49

3,240
The units that remain in ending inventory are the units from the most recent purchases.
(200 ×$6.30) + (300 × $6.60) = $3,240
value of ending inventory under FIFO perpetual will consists of newest items.

Front 50

A company just starting business made the following inventory transactions in August:

Purchase on August 1 300 units $1,560
Sale on August 8 200 units 3,400
Purchase on August 12 400 units 1,340
Sale on August 24 350 units 5,950

Using the LIFO inventory method, how much is cost of goods sold for August using a perpetual inventory system?

Back 50

$2,212.50
This represents cost of goods sold under LIFO:
Sale on August 8: 200 × $5.20 = $1,040.
Sale on August 24: 350 units ×$3.35 = $1,172.50
Total cost of goods sold = $2,212.50.
Under LIFO perpetual inventory method, the cost of the newest units available at time of sale will flow to cost of goods sold.

Front 51

A company just starting business made the following inventory transactions in August:

Purchase on August 1 300 units $1,560
Sale on August 8 200 units 3,400
Purchase on August 12 400 units 1,340
Sale on August 24 350 units 5,950

Using the average cost perpetual inventory method, how much is the average cost of the units sold on August 24?

Back 51

$3.72
he average cost per unit on August 12 must consider the 100 remaining units and the August 12 purchase of 400 units [(100 × $5.20) + (400 × $3.35)] / (100 + 400) = $3.72

Under perpetual method, a new average cost is computed whenever a new purchase occurs.

Front 52

If a firm is using a perpetual inventory system and is using the average-cost method of valuation, when is a new average cost computed?

Back 52

After each purchase
When a firm is using a perpetual inventory system and is using the average-cost method of valuation, a new average cost is computed after each purchase.

Front 53

How do the results under FIFO in a perpetual system compare to the results using a periodic system?

Back 53

They are the same.
The results under FIFO in a perpetual system are the same as in a periodic system. Regardless of the system, the costs of first goods acquired are the costs assigned to cost of goods sold.

Front 54

Which is true if the ending inventory is overstated?

Back 54

Net income will be overstated and the stockholders’ equity will be overstated.
If the ending inventory is overstated, cost of goods sold will be understated which causes net income to be overstated. Whenever net income is overstated, stockholders’ equity will be overstated.

Front 55

If there is an error in the ending inventory affecting the net income of the current period, what will happen to the net income of the next accounting period?

Back 55

It will have the reverse effect on the net income during the next accounting period.
An error in the ending inventory of the current period will have a reverse effect on net income of the next accounting period.

Front 56

If the ending inventory is overstated, what occurs?

Back 56

Assets are overstated and stockholders’ equity is overstated.
If the ending inventory is overstated, assets, net income, and stockholders’ equity will be overstated, while the cost of goods sold will be understated.

Front 57

Fran Company’s ending inventory is understated by $4,000. What are the effects of this error on the current year’s cost of goods sold and net income, respectively?

Back 57

Overstated and understated
If ending inventory is understated by $4,000, the amount subtracted from goods available for sale is understated. This causes cost of goods sold to be overstated, which in turn causes net income to be understated

Front 58

Harold Company overstated its ending inventory by $15,000 at December 31, 2013. It did not correct the error in 2013 or 2014. As a result, what was the effect of Harold’s stockholders equity?

Back 58

Overstated at December 31, 2013, and properly stated at December 31, 2014
If the ending inventory is overstated, stockholders’ equity for that period will be overstated since the cost of goods sold will be lower and net income higher than it should be. If the error is not corrected, the combined total net income for the two periods will be correct which causes stockholders’ equity at the end of the two periods to be correct.