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Chapter 5
INVENTORIES AND COST OF SALES
True / False Questions
1. Goods in transit are automatically included in inventory regardless of whether title has
passed to the buyer.
2. Goods on consignment are goods shipped by their owner, called the consignor, to another
party called the consignee.
3. If obsolete or damaged goods can be sold, they will be included in inventory at their
original cost.
4. If the seller is responsible for paying freight charges, then ownership of inventory passes
when goods arrive at their destination.
5. Net realizable value for damaged or obsolete goods is sales price less the cost of making
the sale.
6. The cost of an inventory item includes its invoice cost plus any added or incidental costs
necessary to put it in a place and condition for sale, and minus any discount..
7. One application of internal control when taking a physical count of inventory is the use of
pre-numbered inventory tickets.
8. Incidental costs for acquiring merchandise inventory, such as import duties, freight, storage,
and insurance, should not be added to the cost of inventory.
9. The Inventory account is a controlling account for the inventory subsidiary ledger that
contains a separate record for each separate product.
10. Most companies do not take a physical count of inventory each year, but rather rely on
inventory records to determine the inventory value.
11. The matching principle is used to determine how much of the cost of goods available for
sale is deducted from sales and how much is carried forward as inventory.
12. The consistency concept allows a company use different accounting methods from period
to period in order to maximize profits.
13. A company must disclose any change in its inventory costing method in its financial
statements.
14. Whether purchase costs are rising or falling, FIFO always will yield the highest gross
profit and net income.
15. An advantage of the weighted average inventory method is that it tends to smooth out
erratic changes in costs.
16. In a period of rising purchase costs, LIFO usually gives a lower taxable income and
therefore, yields a tax advantage.
17. FIFO is preferred when purchase costs are rising and managers have incentives to report
higher income for reasons such as bonus plans, job security, and reputation.
18. The LIFO method of inventory valuation can result in a company’s ending inventory
being valued at less than the inventory’s replacement cost because LIFO inventory leaves the
oldest costs in inventory.
19. The full disclosure principle requires that the notes to the financial statements report any
change in the method of accounting for inventory.
20. An advantage of FIFO is that it assigns the most recent costs to cost of goods sold, and
does a better job of matching current costs with revenues on the income statement.
21. According to IRS guidelines, companies may use FIFO for financial reporting and LIFO
for tax reporting.
22. An error in the period-end inventory balance will cause an error in the calculation of cost
of goods sold.
23. Errors in the period-end inventory balance only affect the current period’s records and
financial statements.
24. An inventory error is sometimes said to be self-correcting because it yields an offsetting
error in the next period.
25. An understatement of the ending inventory balance will overstate cost of goods sold and
understate net income.
26. Overstating beginning inventory will understate cost of goods sold and net income.
27. An understatement of ending inventory will cause an understatement of assets and equity
on the balance sheet.
28. An overstatement of ending inventory will cause an overstatement of assets and an
understatement of equity on the balance sheet.
29. A merchandiser’s ability to pay its short-term obligations depends on many factors
including how quickly it sells its merchandise inventory.
30. The inventory turnover ratio is computed by dividing cost of goods sold by average
merchandise inventory.
31. The days’ sales in inventory ratio is computed by dividing ending inventory by cost of
goods sold and multiplying the result by 365.
32. The simple rule for inventory turnover is that a low ratio is preferable.
33. It can be expected that companies selling perishable goods have a higher inventory
turnover than companies selling nonperishable goods.
34. A company’s cost of goods sold was $15,500 and its average merchandise inventory was
$4,500. Its inventory turnover equals 3.4.
35. Underwood had cost of goods sold of $8 million and its ending inventory was $2 million.
Therefore, its days’ sales in inventory equals 25 days.
36. Determining the unit costs assigned to inventory items is one of the most important
decisions in accounting for inventory.
37. When units are purchased at different costs over time, determining the cost per unit
assigned to inventory items is simple.
38. LIFO assumes that inventory costs flow in the order incurred.
39. The assignment of costs to cost of goods sold and inventory using weighted average
usually yields different results depending on whether a perpetual or periodic system is used.
40. The FIFO inventory method assumes that costs for the latest units purchased are the first
to be charged to the cost of goods sold.
41. The costs of goods purchased will vary under the different inventory methods of specific
identification, FIFO, LIFO, and weighted average.
42. The assignment of costs to the cost of goods sold and to ending inventory using FIFO is
the same for both the perpetual and periodic inventory systems.
43. Under FIFO, the most recent costs are assigned to ending inventory.
44. The choice of an inventory valuation method has little to no impact on gross profit and
cost of sales.
45. In applying the lower of cost or market method to inventory valuation, market is defined
as the current replacement cost.
46. In applying the lower of cost or market method to inventory valuation, market is defined
as the current selling price.
47. A company has inventory with a selling price of $451,000, a market value of $223,000
and a cost of $241,000. According to the lower of cost or market, the inventory should be
written down to $223,000.
48. The lower of cost or market rule for inventory valuation is always applied to individual
units separately rather than to major categories of inventory or to the entire inventory.
49. The conservatism constraint requires that when more than one estimate of the amounts to
be received or paid in the future exists and these estimates are about equally likely, then the
most optimistic amount is used.
50. The lower of cost or market requiring inventory to be reported at market value if it is
lower than cost is an example of applying the conservatism constraint.
51. A company’s total cost of inventory was $329,000 and its current replacement cost is
$307,000. Under the lower cost or market, the amount reported should be $329,000.
52. A company’s cost of inventory was $219,500. Due to phenomenal demand the market
value of its inventory increased to $221,700. This company should write up the value of its
inventory according to the conservatism constraint.
53. When LIFO is used with the periodic inventory system, cost of goods sold is assigned
costs from the most recent purchases at the point of each sale, rather than from the most
recent purchases for the period.
54. The retail inventory method estimates the cost of ending inventory by applying the gross
profit ratio to net sales.
55. The reasoning behind the retail inventory method is that if we can get a good estimate of
the cost-to-retail ratio, we can multiply ending inventory at retail by this ratio to estimate
ending inventory at cost.
56. The reliability of the gross profit method depends on a good estimate of the gross profit
ratio.
57. In the retail inventory method of inventory valuation, the retail amount of inventory refers
to its dollar amount measured using selling prices of inventory items.
58. To avoid the time-consuming process of taking an inventory each year, most companies
use the gross profit method to estimate ending inventory.
59. Using the retail inventory method, if the cost to retail ratio is 70% and ending inventory at
retail is $145,000, then estimated ending inventory at cost is $207,143.
60. Damaged and obsolete goods that can be sold:
A. Are never counted as inventory.
B. Are included in inventory at their full cost.
C. Are included in inventory at their net realizable value.
D. Should be disposed of immediately.
E. Are assigned a value of zero.
61. Merchandise inventory includes:
A. All goods owned by a company and held for sale.
B. All goods in transit.
C. All goods on consignment.
D. Only damaged goods.
E. Only non-damaged goods.
62. Goods in transit are included in a purchaser’s inventory:
A. At any time during transit.
B. When the purchaser is responsible for paying freight charges.
C. When the supplier is responsible for freight charges.
D. If the goods are shipped FOB destination.
E. After the half-way point between the buyer and seller.
63. Consignment goods are:
A. Goods shipped by the owner to the consignee who sells the goods for the owner.
B. Reported in the consignee’s books as inventory.
C. Goods shipped to the consignor who sells the goods for the owner.
D. Not reported in the consignor’s inventory since they do not have possession of the
inventory.
E. Always paid for by the consignee when they take possession.
64. Regardless of the inventory costing system used, cost of goods available for sale must be
allocated at the end of the period between
A. beginning inventory and net purchases during the period.
B. ending inventory and beginning inventory.
C. net purchases during the period and ending inventory.
D. ending inventory and cost of goods sold.
E. beginning inventory and cost of goods sold.
65. On December 31 of the current year, Plunkett Company reported an ending inventory
balance of $215,000. The following additional information is also available:
Plunkett sold and shipped goods costing $38,000 to Savannah Enterprises on
December 28 with shipping terms of FOB shipping point. The goods were not
included in the ending inventory amount of $215,000.
Plunkett purchased goods costing $44,000 on December 29. The goods were shipped
FOB destination and were received by Plunkett on January 2 of the following year.
The shipment was a rush order that was supposed to arrive by December 31. These
goods were included in the ending inventory balance of $215,000.
Plunkett’s ending inventory balance of $215,000 included $15,000 of goods being held
on consignment from Carole Company. (Plunkett Company is the consignee.)
Plunkett’s ending inventory balance of $215,000 did not include goods costing
$95,000 that were shipped to Plunkett on December 27 with shipping terms of FOB
destination and were still in transit at year-end.
Based on the above information, the amount that Plunkett should report in ending inventory
on December 31 is:
A. $194,000
B. $209,000
C. $200,000
D. $171,000
E. $156,000
66. 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. $412,000
B. $340,000
C. $318,000
D. $362,000
E. $390,000
67. Buffalo 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 did not include goods costing $48,000 that
were purchased by Buffalo on December 28 and shipped FOB destination on that date.
Buffalo did not receive the goods until January 2 of the following year.
The ending inventory balance of $412,000 included damaged goods at their original
cost of $38,000. The net realizable value of the damaged goods was $10,000.
Based on this information, the correct balance for ending inventory on December 31 is:
A. $374,000
B. $384,000
C. $460,000
D. $422,000
E. $438,000
68. Costs included in the Merchandise Inventory account can include all of the following
except:
A. Invoice price minus any discount.
B. Transportation-in.
C. Storage.
D. Insurance.
E. Damaged inventory that cannot be sold.
69. Internal controls that should be applied when a business takes a physical count of
inventory should include all of the following except:
A. Prenumbered inventory tickets.
B. A manager confirms that all inventories are ticketed only once.
C. Counters confirm the validity of inventory existence, amounts, and quality.
D. Second counts by a different counter.
E. Counters of inventory should be those who are responsible for the inventory.
70. Physical counts of inventory:
A. Are not necessary under the perpetual system.
B. Are necessary to adjust the Inventory account to the actual inventory available.
C. Must be taken at least once a month.
D. Requires the use of hand-held portable computers.
E. Are not necessary under the cost-to benefit constraint.
71. During a period of steadily rising costs, the inventory valuation method that yields the
highest reported net income is:
A. Specific identification method.
B. Average cost method.
C. Weighted-average method.
D. FIFO method.
E. LIFO method.
72. The inventory valuation method that tends to smooth out erratic changes in costs is:
A. FIFO.
B. Weighted average.
C. LIFO.
D. Specific identification.
E. WIFO.
73. The inventory valuation method that has the advantages of assigning an amount to
inventory on the balance sheet that approximates its current cost, and also mimics the actual
flow of goods for most businesses is:
A. FIFO.
B. Weighted average.
C. LIFO.
D. Specific identification.
E. Lower of cost or market.
74. The inventory valuation method that results in the lowest taxable income in a period of
inflation is:
A. LIFO method.
B. FIFO method.
C. Weighted-average cost method.
D. Specific identification method.
E. Gross profit method.
75. The consistency concept:
A. Prescribes a company use the same accounting method of inventory valuation, an
exception being when a change from one method to another will improve its financial
reporting.
B. Requires a company to use one method of inventory valuation exclusively.
C. Requires that all companies in the same industry use the same accounting methods of
inventory valuation.
D. Is also called the full disclosure principle.
E. Is also called the matching principle.
76. The full disclosure principle:
A. Prescribes that the notes to the financial statements report the change from one inventory
valuation method to another.
B. Requires that companies use the same accounting method for inventory valuation period
after period.
C. Is not subject to the consideration of materiality.
D. Is only applied to retailers and manufacturers.
E. Is also called the consistency principle.
77. Which of the following prescribes the use of the less optimistic amount when more than
one estimate of an amount to be received or paid exists and the estimates are about equally
likely?
A. Full disclosure principle.
B. Consistency concept.
C. FIFO inventory valuation method.
D. Conservatism constraint.
E. Matching principle.
78. Which of the following inventory costing methods will always result in the same values
for ending inventory and cost of goods sold regardless of whether a perpetual or periodic
inventory system is used?
A. FIFO and LIFO
B. LIFO and weighted-average cost
C. Specific identification and FIFO
D. FIFO and weighted-average cost
E. LIFO and specific identification
79. If a period-end inventory amount is reported in error, it can cause a misstatement in all of
the following except:
A. Cost of goods sold.
B. Gross profit.
C. Net sales.
D. Current assets.
E. Net income.
80. Since an error in the period-end inventory causes an offsetting error in the next period:
A. Managers can ignore the error.
B. It is said to be self-correcting.
C. It affects only income statement accounts.
D. If affects only balance sheet accounts.
E. Is immaterial for managerial decision making.
81. The understatement of the ending inventory balance causes:
A. Cost of goods sold to be overstated and net income to be understated.
B. Cost of goods sold to be overstated and net income to be overstated.
C. Cost of goods sold to be understated and net income to be understated.
D. Cost of goods sold to be understated and net income to be overstated.
E. Cost of goods sold to be overstated and net income to be correct.
82. The understatement of the beginning inventory balance causes:
A. Cost of goods sold to be understated and net income to be understated.
B. Cost of goods sold to be understated and net income to be overstated.
C. Cost of goods sold to be overstated and net income to be overstated.
D. Cost of goods sold to be overstated and net income to be understated.
E. Cost of goods sold to be overstated and net income to be correct.
83. Lucia Company reported cost of goods sold for Year 1 and Year 2 as follows:
Year 1 Year 2
Beginning inventory $ 120,000 $ 130,000
Cost of goods purchased 250,000 275,000
Cost of goods available for sale 370,000 405,000
Ending inventory 130,000 135,000
Cost of goods sold $ 240,000 $ 270,000
Lucia Company made two errors: 1) ending inventory at the end of Year 1 was understated by
$15,000 and 2) ending inventory at the end of Year 2 was overstated by $6,000. Given this
information, the correct cost of goods sold figure for Year 2 would be:
A. $291,000
B. $276,000
C. $264,000
D. $285,000
E. $249,000
84. Hull Company reported the following income statement information for 2015:
2015
Sales $410,000
Cost of goods sold:
Beginning inventory $132,000
Cost of goods purchases
273,000
Cost of goods available for sale 405,000
Ending inventory
144,000
Cost of goods sold
261,000
Gross profit
$149,000
The beginning inventory balance for Year 1 is correct. However, the ending inventory figure
for Year 1 was overstated by $20,000. Given this information, the correct gross profit figure
for 2015 would be:
A. $149,000.
B. $169,000.
C. $129,000 .
D. $142,000.
E. $112,000.
85. An understatement of ending inventory will cause
A. An overstatement of assets and equity on the balance sheet.
B. An understatement of assets and equity on the balance sheet.
C. An overstatement of assets and an understatement of equity on the balance sheet.
D. An understatement of assets and an overstatement of equity on the balance sheet.
E. No effect on the balance sheet.
86. The inventory turnover ratio:
A. Is used to analyze profitability.
B. Is used to measure solvency.
C. Reveals how many times a company sells its merchandise inventory during a period.
D. Reveals how many days a company can sell inventory if no new merchandise is purchased.
E. Calculation depends on the company’s inventory valuation method.
87. Days’ sales in inventory:
A. Is also called days’ stock on hand.
B. Focuses on average inventory rather than ending inventory.
C. Is used to measure solvency.
D. Is calculated by dividing cost of goods sold by ending inventory.
E. Is a substitute for the acid-test ratio.
88. The inventory turnover ratio is calculated as:
A. Cost of goods sold divided by average merchandise inventory.
B. Sales divided by cost of goods sold.
C. Ending inventory divided by cost of goods sold.
D. Cost of goods sold divided by ending inventory.
E. Cost of goods sold divided by ending inventory times 365.
89. Days’ sales in inventory is calculated as:
A. Ending inventory divided by cost of goods sold.
B. Cost of goods sold divided by ending inventory.
C. Ending inventory divided by cost of goods sold times 365.
D. Cost of goods sold divided by ending inventory times 365.
E. Ending inventory times cost of goods sold.
90. Giorgio had cost of goods sold of $9,421 million, ending inventory of $2,089 million, and
average inventory of $1,965 million. Its inventory turnover equals:
A. 0.21.
B. 4.51
C. 4.79.
D. 76.1 days.
E. 80.9 days.
91. Perfection Company had cost of goods sold of $853,000, ending inventory of $70,500,
and average inventory of $71,600. Its inventory turnover equals:
A. 11.9.
B. 1.0
C. 6.0.
D. 30.6.
E. 12.0.
92. Beckenworth had cost of goods sold of $9,421 million, ending inventory of $2,089
million, and average inventory of $1,965 million. Its days’ sales in inventory equals:
A. 0.21.
B. 4.51.
C. 4.79.
D. 76.1 days.
E. 80.9.days.
93. Ulrich had cost of goods sold of $6.7 million, ending inventory of $2.2 million, and
average inventory of $1.9 million. Its days’ sales in inventory equals:
A. 120.
B. 104.
C. 60.
D. 35.
E. 180
94. Acceptable methods of assigning specific costs to inventory and cost of goods sold
include all of the following except:
A. LIFO method.
B. FIFO method.
C. Specific identification method.
D. Weighted average method.
E. Retail method.
95. Decisions management must make in accounting for inventory cost include all of the
following except:
A. Costing method.
B. Perpetual or periodic inventory system
C. Customer demand for inventory.
D. Use of market values or other estimates.
E. Items included in inventory and their costs.
96. The inventory valuation method that identifies each item in ending inventory with a
specific purchase and invoice is the:
A. Weighted average inventory method.
B. First-in, first-out method.
C. Last-in, first-out method.
D. Specific identification method
E. Retail inventory method.
97. A company had the following purchases during the current year:
January: 10 units at $120
February: 20 units at $130
May: 15 units at $140
September: 12 units at $150
November: 10 units at $160
On December 31, there were 26 units remaining in ending inventory. These 26 units consisted
of 2 from January, 4 from February, 6 from May, 4 from September, and 10 from November.
Using the specific identification method, what is the cost of the ending inventory?
A. $3,500.
B. $3,800.
C. $3,960.
D. $3,280.
E. $3,640.
98. A company had the following purchases during the current year:
January: 10 units at $120
February: 20 units at $125
May: 15 units at $130
September: 12 units at $135
November: 10 units at $140
On December 31, there were 26 units remaining in ending inventory. Using the FIFO
inventory valuation method, what is the cost of the ending inventory?
A. $3,280.
B. $3,200.
C. $3,445.
D. $3,540.
E. $3,640.
99. A company had the following purchases during the current year:
January: 10 units at $120
February: 20 units at $125
May: 15 units at $130
September: 12 units at $135
November: 10 units at $140
On December 31, there were 26 units remaining in ending inventory. Using the LIFO
inventory valuation method, what is the cost of the ending inventory?
A. $3,280.
B. $3,200.
C. $3,445.
D. $3,540.
E. $3,640.
100. A company had inventory on November 1 of 5 units at a cost of $20 each. On November
2, they purchased 10 units at $22 each. On November 6 they purchased 6 units at $25 each.
On November 8, 8 units were sold for $55 each. Using the LIFO perpetual inventory method,
what was the value of the inventory on November 8 after the sale?
A. $304
B. $296
C. $288
D. $280
E. $276
101. Marquis Company uses a weighted-average perpetual inventory system.
August 2 10 units were purchased at $12 per unit.
August 18 15 units were purchased at $14 per unit.
August 29 12 units were sold.
What is the amount of the cost of goods sold for this sale?
A. $148.00
B. $150.50
C. $158.40
D. $210.00
E. $330.00
102. Grays Company has inventory of 10 units at a cost of $10 each on August 1. On August
3, it purchased 20 units at $12 each. 12 units are sold on August 6. Using the FIFO perpetual
inventory method, what amount will be reported in cost of goods sold for the 12 units that
were sold?
A. $120.
B. $124.
C. $128.
D. $130.
E. $140.
103. McCarthy Company has inventory of 8 units at a cost of $200 each on October 1. On
October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the FIFO
perpetual inventory method, what amount will be reported in cost of goods sold for the 11
units that were sold?
A. $2,239.
B. $2,255.
C. $2,200.
D. $2,228.
E. $2,215.
104. McCarthy Company has inventory of 8 units at a cost of $200 each on October 1. On
October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the FIFO
perpetual inventory method, what is the value of inventory after the October 4 sale?
A. $3,485.
B. $3,445.
C. $3,500.
D. $3,472.
E. $3,461.
105. Starlight Company has inventory of 8 units at a cost of $200 each on October 1. On
October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the LIFO
perpetual inventory method, what amount will be reported in cost of goods sold for the 11
units that were sold?
A. $2,239.
B. $2,255.
C. $2,200.
D. $2,228.
E. $2,215.
106. Starlight Company has inventory of 8 units at a cost of $200 each on October 1. On
October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the LIFO
perpetual inventory method, what is the value of inventory after the October 4 sale?
A. $3,485.
B. $3,445.
C. $3,500.
D. $3,472.
E. $3,461.
107. A company’s inventory records report the following:
August 1 Beginning balance 15 units @ $12
August 5 Purchase 10 units @ $13
August 12 Purchase 20 units @ $14
On August 15, it sold 30 units. Using the FIFO perpetual inventory method, what is the value
of the inventory at August 15 after the sale?
A. $140
B. $160
C. $210
D. $380
E. $590
108. A company’s inventory records report the following in November of the current year:
Beginning November 1 5 units @ $20
Purchase November 2 10 units @ $22
Purchase November 6 6 units @ $25
On November 8, it sold 18 units for $54 each. Using the LIFO perpetual inventory method,
what was the amount recorded in the cost of goods sold account for the 18 units sold?
A. $395
B. $410
C. $450
D. $510
E. $520
109. A company’s inventory records report the following in November of the current year:
Beginning November 1 5 units @ $20 .
Purchase November 2 10 @ $22
Purchase November 6 6 @ $25
On November 8, it sold 18 units for $54 each. Using the LIFO perpetual inventory method,
what amount of gross profit was earned from the 18 units sold?
A. $577
B. $452
C. $522
D. $462
E. $562
110. A company sells garden hoses and uses the perpetual inventory system to account for its
merchandise. The beginning balance of the inventory and its transactions during September
were as follows:
September 1: Beginning balance of 18 units at $13 each
September 12: Purchased 30 units at $14 each
September 19: Sold 24 units at $30 selling price each
September 20: Purchased 24 units at $17 each
September 27: Sold 27 units at $30 selling price each
If the ending inventory is reported at $276, what inventory method was used?
A. LIFO method.
B. FIFO method.
C. Weighted average method.
D. Specific identification method.
E. Retail inventory method.
111. Jammer Company uses a weighted average perpetual inventory system and reports the
following:
August 2 Purchase 10 units at $12 per unit.
August 18 Purchase 15 units at $15 per unit.
August 29 Sale 20 units.
August 31 Purchase 14 units at $16 per unit.
What is the per-unit value of ending inventory on August 31?
A. $12.00
B. $13.80
C. $15.42
D. $16.00
E. $17.74
112. Given the following information, determine the cost of the inventory at June 30 using the
LIFO perpetual inventory method.
June 1 Beginning inventory 15 units at $20 each
June 15 Sale of 6 units for $50 each
The cost of the ending inventory is:
A. $200
B. $220
C. $380
D. $275
E. $300
113. In applying the lower of cost or market method to inventory valuation, market is defined
as:
A. Historical cost.
B. Current replacement cost.
C. Current sales price.
D. FIFO.
E. LIFO.
114. Raleigh Co. has the following products in its ending inventory. Compute the lower of
cost or market total for inventory applied separately to each product.
Product Quantity Cost per unit Market per unit
Jelly 150 $2.00 2.15
Jam 370 $2.65 2.50
Marmalade 260 $3.10 3.05
A. $2,040.50.
B. $2,086.50.
C. $2,018.00.
D. $2,109.00.
E. $2,053.50.
115. Generally accepted accounting principles require that the inventory of a company be
reported at:
A. Market value.
B. Historical cost.
C. Lower of cost or market.
D. Replacement cost.
E. Retail value.
116. The conservatism constraint prescribes that:
A. When multiple estimates of amounts to be received or paid in the future are equally likely,
then the least optimistic amount should be used.
B. A company use the same accounting methods period after period.
C. Revenues and expenses are reported in the period in which they are earned or incurred.
D. All items of a material nature are included in financial statements.
E. All inventory items are reported at full cost.
117. A company’s normal selling price for its product is $20 per unit. However, due to market
competition, the selling price has fallen to $15 per unit. This company’s current inventory
consists of 200 units purchased at $16 per unit. Replacement cost has fallen to $13 per unit.
Calculate the value of this company’s inventory at the lower of cost or market.
A. $2,550.
B. $2,600.
C. $2,700.
D. $3,000.
E. $3,200.
118. A company normally sells its product for $20 per unit. However, the selling price has
fallen to $15 per unit. This company’s current inventory consists of 200 units purchased at
$16 per unit. Replacement cost has now fallen to $13 per unit. What is the amount of the
lower cost of market adjustment the company must make as a result of this decline in value?
A. $1,000.
B. $1,400.
C. $400.
D. $600.
E. $800.
119. A company’s current inventory consists of 5,000 units purchased at $6 per unit.
Replacement cost has now fallen to $5 per unit. What is the entry the company must record to
adjust inventory to market?
A. Debit Merchandise Inventory $25,000; credit Cost of Goods Sold $25,000.
B. Debit Cost of Goods Sold $30,000; credit Merchandise Inventory $30,000.
C. Debit Cost of Goods Sold $5,000; credit Merchandise Inventory $5,000.
D. Debit Loss on Inventory $5,000; credit Cost of Goods Sold $5,000.
E. Debit Merchandise Inventory $30,000; credit Cost of Goods Sold $25,000.
120. A company has the following per unit original costs and replacement costs for its
inventory. LCM is applied to individual items.
Part A: 50 units with a cost of $5, and replacement cost of $4.50
Part B: 75 units with a cost of $6, and replacement cost of $6.50
Part C: 160 units with a cost of $3, and replacement cost of $2.50
Under the lower of cost or market method, the total value of this company’s ending inventory
is:
A. $1,180.00.
B. $1,075.00.
C. $1,112.50.
D. $1,217.50.
E. $1,137.50.
121. A company has beginning inventory of 10 units at a cost of $10 each on February 1. On
February 3, it purchases 20 units at $12 each. 12 units are sold on February 5. Using the FIFO
periodic inventory method, what is the cost of the 12 units that are sold?
A. $120
B. $124
C. $128
D. $130
E. $140
122. A company has beginning inventory of 15 units at a cost of $12 each on October 1. On
October 5, it purchases 10 units at $13 per unit. On October 12 it purchases 20 units at $14
per unit. On October 15, it sells 30 units. Using the FIFO periodic inventory method, what is
the value of the inventory at October 15 after the sale?
A. $140
B. $160
C. $210
D. $380
E. $590
123. A company had beginning inventory of 10 units at a cost of $20 each on March 1. On
March 2, it purchased 10 units at $22 each. On March 6 it purchased 6 units at $25 each. On
March 8, it sold 22 units for $54 each. Using the FIFO perpetual inventory method, what was
the cost of the 22 units sold?
A. $470
B. $490
C. $450
D. $570
E. $520
124. A company uses the periodic inventory system and had the following activity during the
current monthly period.
November 1: Beginning inventory of 100 units @ $20
November 5: Purchased 100 units @ $22
November 8: Purchased 50 units @ $23
November 16: Sold 200 units @ $45
November 19: Purchased 50 units @ $25
Using the weighted-average inventory method, the company’s ending inventory would be:
A. $2,000
B. $2,200
C. $2,250
D. $2,400
E. $4,400
125. Health Defense sells first aid kits and uses the periodic inventory system to account for
its merchandise. The beginning balance of the inventory and its transactions during January
were as follows:
January 1: Beginning balance of 18 units at $13 each
January 12: Purchased 30 units at $14 each
January 19: Sold 24 units at a selling price of $30 each
January 20: Purchased 24 units at $17 each
January 27: Sold 27 units at a selling price of $30 each
If the ending inventory is reported at $357, what inventory method was used?
A. LIFO.
B. FIFO.
C. Weighted average.
D. Specific identification.
E. Retail inventory method.
126. A company’s warehouse contents were destroyed by a flood on September 12. The
following information was the only information that was salvaged:
1. Inventory, beginning: $28,000
2. Purchases for the period: $17,000
3. Sales for the period: $55,000
4. Sales returns for the period: $700
The company’s average gross profit ratio is 35%. What is the estimated cost of the lost
inventory?
A. $ 9,705.
B. $25,995.
C. $29,250.
D. $44,000.
E. $45,000.
127. A company reports the following information regarding its inventory.
Beginning inventory: cost is $80,000; retail is $130,000
Net purchases: cost is $65,000; retail is $120,000
Sales at retail: $145,000
The year-end inventory shows $135,000 worth of merchandise available at retail prices. What
is the cost of the ending inventory calculated using the retail inventory method?
A. $ 135,000.
B. $ 73,125.
C. $ 78,300.
D. $ 72,900.
E. $105,000.
128. On March 31 a company needed to estimate its ending inventory to prepare its first
quarter financial statements. The following information is available:
Beginning inventory, January 1: $4,000
Net sales: $80,000
Net purchases: $78,000
The company’s gross margin ratio is 25%. Using the gross profit method, the cost of goods
sold would be:
A. $60,000.
B. $20,000.
C. $58,500.
D. $63,000.
E. $19,500.
129. Big Box Store has operated with a 30% average gross profit ratio for a number of years.
It had $100,000 in sales during the second quarter of this year. If it began the quarter with
$18,000 of inventory at cost and purchased $72,000 of inventory during the quarter, its
estimated ending inventory by the gross profit method is:
A. $30,000.
B. $21,000.
C. $20,000.
D. $18,000.
E. $27,000.
130. On December 31, a company needed to estimate its ending inventory to prepare its
annual financial statements. The following information is currently available:
Inventory as of January 1: $120,500
Net sales for the year: $400,000
Net purchases for the year: $270,500
This company typically achieves a gross profit ratio of 15%. Ending Inventory under the gross
profit method would be:
A. $102,425.
B. $ 10,425.
C. $ 9,000.
D. $ 51,000.
E. $ 51,425.
131. Interim financial statements:
A. Are required by the Congress.
B. Are necessary to achieve full disclosure about a business’s operations.
C. Are statements prepared for periods of less than one year.
D. Require the use of the perpetual method for inventories.
E. Cannot be prepared if the company follows the conservatism principle.
132. Jefferson Company has sales of $300,000 and cost of goods available for sale of
$270,000. If the gross profit ratio is typically 30%, the estimated cost of the ending inventory
under the gross profit method would be:
A. $60,000
B. $180,000
C. $30,000
D. $90,000
E. $120,000.
133. Oxford Packing Company reported net sales in November of the current year of
$1,000,000. At the beginning of November, the company reported beginning inventory of
$368,000. Cost of goods purchased during November amounted to $217,500. The company
reported ending inventory at the end of November of $226,750.
The company’s gross profit rate for November of the current year was:
A. 35.9%
B. 18.8%
C. 81.2%
D. 64.1%
E. 58.6%.
134. On April 24 of the current year, The Memphis Pecan Company experienced a tornado
that destroyed the company’s entire inventory. At the beginning of April, the company
reported beginning inventory of $226,750. Inventory purchased during April (until the date of
the tornado) was $197,800. Sales for the month of April through April 24 were $642,500.
Assuming the company’s typical gross profit ratio is 50%, estimate the amount of inventory
destroyed in the tornado.
A. $212,275
B. $103,300
C. $217,950
D. $321,250
E. $157,788
135. Avanti purchases inventory from overseas and incurs the following costs: the
merchandise cost is $50,000, credit terms 2/10, n/30 that apply only to the $50,000; FOB
shipping point freight charges are $1,500; insurance during transit is $500; and import duties
are $1,000. Avanti paid within the discount period and incurred additional costs of $1,200 for
advertising and $5,000 for sales commissions. Compute the cost that should be assigned to the
inventory.
A. $50,000
B. $53,000
C. $52,000
D. $51,500
E. $53,200
136. Hasham purchases inventory from overseas and incurs the following costs: the
merchandise cost is $80,000, credit terms 1/10, n/30, applicable only to the $80,000; FOB
shipping point freight charges are $2,500; insurance during transit is $300; and import duties
are $1,500. Hasham paid within the discount period. Compute the cost that should be assigned
to the inventory.
A. $83,500
B. $79,200
C. $81,700
D. $84,300
E. $81,000
137. Some companies choose to avoid assigning incidental costs of acquiring merchandise to
inventory by recording them as cost of goods sold when incurred. The principle that supports
this is called:
A. The matching principle.
B. The materiality constraint.
C. The cost principle.
D. The conservation constraint principle.
E. The lower of cost or market principle.
138. All of the following statements related to goods on consignment are true except:
A. Goods on consignment are goods provided by the owner, call the consignor.
B. A consignee sells goods for the owner.
C. The consignor continues to own the consigned goods.
D. The consignee reports the goods in its inventory until sold.
E. The consignor reports the goods in its inventory until sold.
139. When costs to purchase inventory regularly decline, which method of inventory costing
will yield the lowest gross profit and income?
A. FIFO.
B. LIFO.
C. Weighted average.
D. Specific identification.
E. Gross margin.
140. When costs to purchase inventory regularly decline, which method of inventory costing
will yield the lowest cost of goods sold?
A. FIFO.
B. LIFO.
C. Weighted average.
D. Specific identification.
E. Gross margin.
141. IFRS reporting currently does not allow which method of inventory costing?
A. Specific identification.
B. FIFO.
C. LIFO.
D. Weighted average.
E. Lower of cost or market.
142. All of the following statements regarding U.S. GAAP and IFRS are true except:
A. Both U.S. GAAP and IFRS include broad and similar guidance for the items and costs
making up merchandise inventory.
B. For both U.S. GAAP and IFRS, merchandise inventory includes all items that a company
owns and holds for sale.
C. Both U.S. GAAP and IFRS require companies to write down inventory when its value falls
below the cost presently recorded.
D. Both U.S. GAAP and IFRS allow reversals of write downs up to the original acquisition
cost.
E. With limited exceptions, neither U.S. GAAP nor IFRS allow inventory to be adjusted
upward beyond the original cost.
143. 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?
A. 29,000
B. 21,000
C. 23,000
D. 19,000
E. 26,000
144. Salmone Company reported the following purchases and sales of its only product.
Salmone uses a perpetual inventory system. Determine the cost assigned to the ending
inventory using FIFO.
Date Activities Units Acquired at Cost Units Sold at Retail
May 1 Beginning Inventory 150 units @ $10.00
5 Purchase 220 units @ $12.00
10 Sales 140 units @ $20.00
15 Purchase 100 units @ $13.00
24 Sales 150 units @ $21.00
A. $2,260
B. $3,180
C. $1,860
D. $3,580
E. $2,100
145. 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.
Date Activities Units Acquired at Cost Units Sold at Retail
May 1 Beginning Inventory 150 units @ $10.00
5 Purchase 220 units @ $12.00
10 Sales 140 units @ $20.00
15 Purchase 100 units @ $13.00
24 Sales 150 units @ $21.00
A. $2,260
B. $3,180
C. $1,860
D. $3,580
E. $2,100
146. Salmone Company reported the following purchases and sales of its only product.
Salmone uses a perpetual inventory system. Determine the cost assigned to ending inventory
using LIFO.
Date Activities Units Acquired at Cost Units Sold at Retail
May 1 Beginning Inventory 150 units @ $10.00
5 Purchase 220 units @ $12.00
10 Sales 140 units @ $20.00
15 Purchase 100 units @ $13.00
24 Sales 150 units @ $21.00
A. $2,260
B. $3,180
C. $1,860
D. $3,580
E. $2,100
147. Salmone Company reported the following purchases and sales for its only product.
Salmone uses a perpetual inventory system. Determine the cost assigned to cost of goods sold
using LIFO.
Date Activities Units Acquired at Cost Units Sold at Retail
May 1 Beginning Inventory 150 units @ $10.00
5 Purchase 220 units @ $12.00
10 Sales 140 units @ $20.00
15 Purchase 100 units @ $13.00
24 Sales 150 units @ $21.00
A. $2,260
B. $3,180
C. $1,860
D. $3,580
E. $2,100
148. On September 1 of the current year, Scots Company experienced a flood that destroyed
the company’s entire inventory. Because the company had not completed its month end
reporting for August, it must estimate the amount of inventory lost using the gross profit
method. At the beginning of August, the company reported beginning inventory of $215,450.
Inventory purchased during August was $192,530. Sales for the month of August were
$542,500. Assuming the company’s typical gross profit ratio is 40%, estimate the amount of
inventory destroyed in the flood.
A. $87,480
B. $134,520
C. $109,980
D. $82,480
E. $81,480
149. Use the following information for Shafer Company to compute inventory turnover for
2015.
2015 2014
Net sales $647,500 $582,000
Cost of goods sold 389,500 360,840
Ending inventory 76,700 79,380
A. 9.98
B. 5.08
C. 4.99
D. 8.30
E. 8.44
150. Use the following information for Davis Company to compute inventory turnover for
2015.
2015 2014
Cost of goods sold 279,500 291,800
Ending inventory 47,700 49,350
A. 5.86
B. 5.76
C. 5.67
D. 11.77
E. 5.89
151. Use the following information for Ephron Company to compute days’ sales in inventory
for 2015.
A. 52. 4
B. 82. 3
C. 50. 5
D. 76.8
E. 79.3
Answer: E
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 05-A3
Topic: Days’ Sales in Inventory
Feedback: Days’ Sales in Inventory = Ending Inventory/Cost of Goods Sold * 365
Days’ Sales in Inventory = $75,700/$348,500 * 365 = 79.3
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2015 2014
Net sales $547,500 $572,000
Cost of goods sold 348,500 370,840
Ending inventory 75,700 81,400
152. Match each of the following terms a through j with the appropriate definition.
A. Specific identification method F. Interim statements
B. Days’ sales in inventory G. Net realizable value
C. Conservatism constraint H. LIFO method
D. Inventory turnover I. Weighted average inventory method
E. Retail inventory method J. FIFO method
___1. The accounting constraint that aims to select the less optimistic estimate
when two or more estimates are about equally likely.
___2. The expected sales price of an item minus the cost of making the sale.
___3. A method for estimating an ending inventory based on the ratio of the
amount of goods for sale at cost to the amount of goods for sale at retail
price.
___4. An estimate of days needed to convert the inventory at the end of the
period into receivables or cash.
___5. An inventory pricing method that assumes the unit prices of the beginning
inventory and of each purchase are weighted by the number of units of
each in inventory; the calculation occurs at the time of each sale.
____6. Financial statements prepared for periods of less than one year.
____7. An inventory valuation method that assumes costs for the most recent
items purchased are sold first and charged to cost of goods sold.
____8. An inventory valuation method where each item in inventory is identified
with a specific purchase and invoice.
____9. An inventory valuation method that assumes that inventory items are sold
in the order acquired.
____10. The number of times a company’s average inventory is sold during a
period.
153. Match the following terms a through j with the appropriate definition.
A. Inventory turnover
B. Conservatism principle
C. Lower of cost or market
D. Gross profit method
E. Consignor
F. Consistency concept
G. Specific identification method
H. Days’ sales in inventory
I. Consignee
J. Retail inventory method
___1. An owner of goods who ships them to another party who will then sell the goods for
the owner.
___ 2. A procedure for estimating inventory where the past gross profit rate is used to
estimate the cost of goods sold, which is then subtracted from the cost of goods available for
sale to determine the estimated ending inventory.
___ 3. The accounting principle that a company use the same accounting methods period
after period so that the financial statements of succeeding periods will be comparable.
___ 4. An estimate of days needed to convert the inventory available at the end of the period
into receivables or cash.
___ 5. One who receives and holds goods owned by another for purposes of selling the
goods for the owner.
___ 6. The method of assigning costs to inventory where the purchase cost of each item in
inventory is identified and used to determine the cost of inventory.
___ 7. The number of times a company’s average inventory is sold during an accounting
period.
___ 8. The required method of reporting inventory at market when market is lower than cost.
___ 9. A method for estimating inventory based on the ratio of the amount of goods for sale
at cost to the amount of goods for sale at retail prices.
___ 10. The principle that aims to select the less optimistic estimate when two or more
estimates are about equally likely.
1. E; 2. D; 3. F; 4. H; 5. I; 6. G; 7. A; 8. C; 9. J; 10. B
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN:, Measurement
Difficulty: Easy
Learning Objective: 05-A3
Learning Objective: 05-C1
Learning Objective: 05-P1
Learning Objective: 05-P2
Learning Objective: 05-P4
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McGraw-Hill Education.
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Topic: Inventory Turnover and Days’ Sales in Inventory
Topic: Determining Inventory Items
Topic: Inventory Costing
Topic: Inventory Estimation Methods
154. Match the inventory valuation 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.
FIFO First in, first out
LIFO Last in, first out
WA Weighted average
SI Specific identification
_________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.
155. 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.)
156. What specific costs and deductions are used to determine the final cost of merchandise
inventory? Identify all costs including the incidental costs.
157. Describe the internal controls that must be applied when taking a physical count of
inventory.
158. Explain the effects of inventory valuation methods on the cost of ending inventory,
income, and income taxes.
159. How do the consistency concept and the full disclosure principle affect inventory
valuation?
160. What is the effect of an error in the ending inventory balance on the accounts reported in
the income statement?
161. Explain how the inventory turnover ratio and the days’ sales in inventory ratio are used
to evaluate inventory management.
162. Identify and describe the four inventory valuation methods.
163. Explain why the lower of cost or market rule is used to value inventory.
164. Discuss the important accounting features of a periodic inventory system including
accounts and procedures used.
165. Explain the reason a company might use the retail inventory method for valuing
inventory.
166. Explain the reason a company might use gross profit inventory method for valuing
inventory.
167. Sarbanes Oxley (SOX) demands that companies safeguard inventory and properly report
it. List methods that companies should use to safeguard inventory and accounting procedures
that should be used to properly report inventory.
168. 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?
169. 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?
170. What advantages does a perpetual inventory system have over periodic inventory
system?
172. Carolina Company uses the LIFO method for valuing its ending inventory. The following
financial statement information is available for its first year of operation:
Carolina Company
Income Statement
For the year ended December 31
Sales.................................. $60,000
Cost of goods sold........... 23,000
Gross profit...................... $37,000
Expenses ..........................
13,000
Income before taxes......... $24,000
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?
173. Evaluate each inventory error separately and determine whether it overstates or
understates cost of goods sold and net income.
Inventory error: Cost of goods sold is: Net income is:
Understatement of beginning inventory..............
Understatement of ending inventory...................
Overstatement of beginning inventory................
Overstatement of ending inventory.....................
174. The Community Store reported the following amounts on their financial statements for
Year 1, Year 2, and Year 3:
For the year ended December 31
Year 1 Year 2 Year 3
Cost of goods sold............................. $75,000 $87,000 $77,000
Net income......................................... 22,000 25,000 21,000
Total current assets............................ 155,000 165,000 110,000
Equity................................................. 287,000 295,000 304,000
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.
175. A company reported the following data:
Year 1 Year 2
Cost of goods sold $317,500 $279,100
Average inventory 72,000 93,000
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Required:
1. Calculate the company’s merchandise inventory turnover for each year.
2. Comment on the company’s efficiency in managing its inventory.
1. Year 1 $317,500/72,000 = 4.41
Year 2 $279,100/93,000 = 3.00
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.
Blooms: Apply
Blooms: Analyze
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: 2 Medium
Learning Objective: 05-A3
Topic: Inventory Turnover and Days’ Sales in Inventory
176. A company reported the following data:
Year 1 Year 2
Cost of goods sold $425,000 $486,000
Ending inventory 140,000 175,000
Required:
1. Calculate the days’ sales in inventory for each year.
2. Comment on the trend in inventory management.
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.
Blooms: Apply
Blooms: , Analyze
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: 3 Hard
Learning Objective: 05-A3
Topic: Inventory Turnover and Days’ Sales in Inventory
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177. A company made the following purchases during the year:
Jan. 10
15 units @ $360 each
Mar. 15 25 units @ $390 each
Apr. 25 10 units @ $420 each
July 30 20 units @ 450 each
Oct. 10 15units @ $480 each
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.
178. A company’s inventory records indicate the following data for the month of July:
July 1 beginning 380 u nits at $ 15 each
July 5 purchased 270 u nits at $ 17 each
July 10 sold 400 units at $50 each
July 20 purchased 300 units at $22 each
July 25 sold 400 units at $50 each
If the company uses the weighted average inventory valuation method and the perpetual
inventory system, what would be the cost of its ending inventory?
179. A company’s inventory records indicate the following data for the month of April:
April 1 beginning 350 units at $18 each
April 5 purchase 290 units at $20 each
April 9 sale 500 units at $55 each
April 14 purchase 250 units at $22 each
April 20 sale 200 units at $55 each
April 30 purchase 240 units at $25 each
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?
180. A company’s inventory records indicate the following data for the month of January:
Jan. 1 beginning 180 units at $9 each
Jan. 5 purchased 170 units at $10 each
Jan. 9 sold 300 units at $35 each
Jan. 14 purchased 200 units at $11 each
Jan. 20 sold 150 units at $35 each
Jan. 30 purchased 230 units at $12 each
If the company uses the last-in, first-out perpetual inventory system, what would be the
cost of the ending inventory?
181. A company’s inventory records indicate the following data for the month of January:
Jan. 1 beginning 180 units at $9 each
Jan. 5 purchased 170 units at $10 each
Jan. 9 sold 300 units at $35 each
Jan. 14 purchased 200 units at $11 each
Jan. 20 sold 150 units at $35 each
Jan. 30 purchased 230 units at $12 each
If the company uses the last-in, first-out perpetual inventory system, what is the amount
of cost of goods sold for January?
182. A company’s inventory records indicate the following data for the month of April:
April 1 beginning 350 units at $18 each
April 5 purchase 290 units at $20 each
April 9 sale 500 units at $55 each
April 14 purchase 250 units at $22 each
April 20 sale 200 units at $55 each
April 30 purchase 240 units at $25 each
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?
183. Calculate the ending inventory using FIFO for a company that uses a perpetual inventory
system, using the information given below.
Units
Unit
Cost
Beginning inventory 100 $10
Aug. 5 purchased 40 12
Aug. 10 sold 60 -
Aug. 15 purchased 70 13
Aug. 25 sold
50
-
Purchases Cost of Goods Sold Inventory
Date Units Unit cost Total Units Unit
cost
Total Units Unit cost Total
8/1 100 $10 $1,000
8/5 40 $12 $480 100 $10
$1,000
40
$12
480
140
$1,480
8/10 60 $10 $600 40 $10 $ 400
40
$12
480
80 $ 880
8/15 70 $13 $910 40 $10 $ 400
40 $12 480
70
$13
910
150 $1,790
8/25 40 $10 $400 30 $12 $ 360
10
$12
120
70
$13
910
100 $1,270
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 2 Medium
Learning Objective: 05-P1
Topic: Inventory Costing
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McGraw-Hill Education.
5-95
184. Calculate the ending inventory using LIFO for a company that uses a perpetual inventory
system, using the information given below.
Units
Unit
Cost
Beginning inventory 100 $10
Aug. 5 purchased 40 12
Aug. 10 sold 60 -
Aug. 15 purchased 70 13
Aug. 25 sold
50
185. Using the information given below for a company that uses a perpetual inventory system,
calculate the ending inventory using weighted average.
Units
Unit
Cost
Beginning inventory 100 $10
Jan. 5 purchased 40 12
Jan. 10 sold 60 -
Jan. 15 purchased 70 13
Jan. 25 sold
50
-
186. 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.
January 1: Purchased 100 units at $10 per unit.
February 5: Purchased 60 units at $12 per unit.
March 16: Sold 40 units for $16 per unit.
187. 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.
January 1: Purchased 100 units at $10 per unit.
February 5: Purchased 60 units at $12 per unit.
March 16: Sold 40 units for $16 per unit.
188. 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.
January 1: Purchased 100 units at $10 per unit.
February 5: Purchased 60 units at $12 per unit.
March 16: Sold 40 units for $16 per unit.
189. A company reported the following data related to its ending inventory:
Product
849
Units Available
100
Cost
$10
Market
$11
842 75 16 14
847 60 14 13
860 40 16 20
Calculate the lower-of-cost-or-market on the inventory applied separately to each product.
190. A company had the following ending inventory costs:
Product Units of Hand Unit Cost Market Value
A 10 $ 5 $ 6
B 50 8 7
C 35 10 11
Required: Calculate the lower of cost or market (LCM) value for each individual item.
1. Product Total Cost Total LCM
Market
A............ $ 50 $ 60
$50
B………. 400 350 350
C………. 350
385 350
TOTAL 800
$750
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 2 Medium
Learning Objective: 05-P2
Topic: Lower or Cost or Market
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McGraw-Hill Education.
5-101
191. 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.
Units
Unit
Cost
$3
Total
Cost
$ 90
6/01 Inventory Balance........................................ 30
6/06 Purchase....................................................... 70 4 280
6/11 Purchase....................................................... 45 5 225
6/16
Purchase.......................................................
50
6
300
Goods available...........................................
195
$895
6/12 Sale............................................................... 100
6/20
Sale...............................................................
60
Goods sold...................................................
160
6/31 Inventory Balance........................................
35
Required: Determine the cost of the ending inventory and the cost of goods sold for June
using the LIFO method.
192. A company made the following merchandise purchases and sales during the month of
May:
May 1 Purchased 380 units at $15 each
May 5 Purchased 270 units at $17 each
May 10 Sold 400 units at $50 each
May 20 Purchased 300 units at $22 each
May 25 Sold 400 units at $50 each
There was no beginning inventory. If the company uses the weighted average periodic
method, what would be the cost of the ending inventory?
193. A company made the following merchandise purchases and sales during the month of
May:
May 1 Purchased 380 units at $15 each
May 5 Purchased 270 units at $17 each
May 10 Sold 400 units at $50 each
May 20 Purchased 300 units at $22 each
May 25 Sold 400 units at $50 each
There was no beginning inventory. If the company uses the LIFO periodic inventory method,
what would be the cost of the ending inventory?
194. A company made the following merchandise purchases and sales during the month of
May:
May 1 Purchased 380 units at $15 each
May 5 Purchased 270 units at $17 each
May 10 Sold 400 units at $50 each
May 20 Purchased 300 units at $22 each
May 25 Sold 400 units at $50 each
There was no beginning inventory. If the company uses the FIFO periodic inventory method,
what would be the cost of the ending inventory?
195. 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:
Beginning inventory, January 1: $44,000
Purchases to date: $198,000
Sales to date: $310,000
Historically, the company’s gross profit ratio has been 30%. Estimate the value of the
destroyed inventory using the gross profit method.
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 05-P4
Topic: Inventory Estimation Methods
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McGraw-Hill Education.
5-106
196. Apply the retail method to the following company information to calculate the cost of the
ending inventory for the current period.
Cost
Retail
Beginning inventory…………………………………………… $20,224 $31,600
Net purchases………………………………………………….. 59,508 97,000
Sales…………………………………………………………… 89,000
197. A company uses the retail inventory method and has the following information available
concerning its most recent accounting period:
At Cost At Retail
Beginning-of-period inventory $148,600 $ 245,200
Net purchases 677,400 1,229,800
Sales 1,200,000
1. What is the cost-to-retail ratio using the retail method?
2. What is the estimated cost of the ending inventory?
198. 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 Co. 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
February 2 and were not included in the physical count.
(b) An invoice from Gamers, Inc. 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
February 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.
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
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Risk Analysis
Difficulty: 3 Hard
Learning Objective: 05-A3
Learning Objective: 05-C1
Topic: Inventory Turnover and Days’ Sales in Inventory
Topic: Determining Inventory Items
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McGraw-Hill Education.
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199. 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.
Date Activities Units Acquired at Cost Units Sold at
Retail
April 1 Beginning Inventory 175 units @ $15.00
4 Purchase 150 units @ $16.00
7 Sales 160 units @ $30.00
10 Purchase 200 units @ $17.00
16 Sales 250 units @ $30.00
25 Purchase 160 units @ $18.00
28 Sales 150 units @ $32.00
200. 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.
Date Activities Units Acquired at Cost Units Sold at
Retail
April 1 Beginning Inventory 175 units @ $15.00
4 Purchase 150 units @ $16.00
7 Sales 160 units @ $30.00
10 Purchase 200 units @ $17.00
16 Sales 250 units @ $30.00
25 Purchase 160 units @ $18.00
28 Sales 150 units @ $32.00
201. A company uses the retail inventory method and has the following information available
concerning its most recent accounting period:
At Cost At Retail
January 1 beginning inventory $167,340 $304,240
Cost of goods purchased 561,850 1,021,560
Sales 940,400
Sales returns 40,200
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.
1. $729,190/1,325,800 = .55
$1,325,800 – $900,200 = $425,600
$425,600 * .55 = $234,080
2. $425,600 – $404,800 = $20,800 inventory shrinkage at retail
$20,800 * .55 = $11,440 inventory shrinkage at cost
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 05-P4
Topic: Inventory Estimation Methods
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
5-112
Fill in the Blank Questions
202. Goods that are in transit and were shipped FOB shipping point should be included in the
inventory records of the _______________________.
203. Goods that are in transit and were shipped FOB destination should be included in the
inventory records of the _______________________.
204. 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.
205. _______________________ is the estimated sales price of damaged goods minus the
cost of making the sale.
206. Some companies use the __________________ constraint to avoid assigning incidental
costs of acquiring merchandise to inventory.
207. The cost of an inventory item includes the _____________, plus ______________ costs
necessary to put it in a place and condition for sale.
208. When purchase costs regularly rise, the ___________________ method of inventory
valuation yields the highest gross profit and net income.
209. When purchase costs regularly rise, the ___________________ method of inventory
valuation yields the lowest gross profit and net income, providing a tax advantage.
210. An advantage of the _________________ method of inventory valuation is that it tends
to smooth out the effect of erratic changes in costs.
211. An overstated beginning inventory will ______________ cost of goods sold and
_____________ net income.
212. The ________________________ratio reflects how much inventory is available in terms
of days’ sales.
213. The _____________________ is a measure of how quickly a merchandiser sells its
merchandise inventory.
214. 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.
215. The _____________________ method of assigning costs to inventory and cost of goods
sold assumes that the inventory items are sold in the order acquired.
216. The ______________________ method of assigning costs to inventory and cost of
goods sold assumes that the most recent purchases are sold first.
217. 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.
218. Regardless of what inventory method or system is used, cost of goods available for sale
must be allocated between ___________________ and ___________________.
219. When applying the lower of cost or market method of inventory valuation, market is
defined as the ______________________.
220. The _________________ method is commonly used to estimate the value of inventory
that has been destroyed, lost, or stolen.
