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2013.
2013 2012
Net sales $647,500 $582,000
Cost of goods sold 388,500 360,840
Ending inventory 77,700 79,380
A. 8.33
B. 5.00
C. 4.95
D. 4.54
E. 7.33
134. Use the following information for Razor Company to compute days’ sales in inventory
for 2013.
2013 2012
Net sales $647,500 $582,000
Cost of goods sold 388,500 360,840
Ending inventory 77,700 79,380
A. 73.0
B. 80.3
C. 43.8
D. 70.0
E. 49.8
A. Specific identification method
B. Days’ sales in inventory
C. Conservatism constraint
D. Inventory turnover
E. Retail inventory method
F. Interim statements
G. Net realizable value
H. LIFO method
I. Weighted average 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 the purchase cost of each item in ending
inventory is identified and used to determine the cost assigned to inventory.
____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.
136. Match the following terms a through j with the appropriate definition.
A. Consignee
B. Conservatism principle
C. Lower of cost or market
D. Gross profit method
E. Inventory turnover
F. Consistency principle
G. Specific identification method
H. Days’ sales in inventory
I. Consignor
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.
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137. Identify the inventory valuation method that is being described for each situation below.
In all cases, assume a period of rising prices. Use the following to identify the inventory
valuation method:
FIFO First in, first out
LIFO Last in, first out
WA Weighted average
SI Specific identification
a. The method that can only be used if each inventory item can be matched with a specific
purchase and its 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 its current cost.
e. The method that will tend to smooth out erratic changes in costs.
138. 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.)
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139. What costs are assigned to merchandise inventory? Identify all costs including the
incidental costs.
140. Describe the internal controls that must be applied when taking a physical count of
inventory.
141. Explain the effects of inventory valuation methods on the cost of ending inventory,
income, and income taxes.
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142. How do the consistency concept and the full disclosure principle affect inventory
valuation?
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143. What is the effect of an error in the ending inventory balance on the income statement?
Topic: Inventory Errors
144. Explain how the inventory turnover ratio and the days’ sales in inventory ratio are used to
evaluate inventory management.
145. Identify and describe the four inventory valuation methods.
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146. Explain why the lower of cost or market rule is used to value inventory.
147. Discuss the important accounting features of a periodic inventory system including
accounts and procedures used.
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148. Explain the difference between the retail inventory method and gross profit inventory
method for valuing inventory.
149. 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.
150. The inventory manager’s compensation includes a bonus plan 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?
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151. Fast Auto Parts is an auto parts wholesaler that stocks several major brand names for
Complete Auto Parts stores across the country. Complete Auto Parts does not assume
responsibility for parts until they are sold to the customer. Identify the consignor and the
consignee. Which company should include any unsold goods as part of its inventory?
152. Advances in technology have greatly reduced the cost of a perpetual inventory system.
What advantages does a perpetual inventory system have over periodic?
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153. For Randy Hetrick of Fitness Anywhere, the major challenge was maintaining
appropriate levels of inventories while controlling costs. What is meant by this statement?
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Problems
154. Monitor Company uses the LIFO method for valuing its ending inventory. The following
financial statement information is available for its first year of operation:
Monitor Company
Income Statement
For the year ended December 31
Sales $50,000
Cost of goods sold 23,000
Gross profit $27,000
Expenses 13,000
Income before taxes $14,000
Monitor’s ending inventory using the LIFO method was $8,200. Monitor’s accountant
determined that had the company used FIFO, the ending inventory would have been $8,500.
a. Determine what the income before taxes would have been, had Monitor 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 Monitor wanted to lower the amount of income taxes to be paid, which method would it
choose?
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155. 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 ………………..
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156. The City 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.
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157. A company reported the following data:
Year 1 Year 2 Year 3
Cost of goods sold $347,600 $379,650 $443,900
Average inventory 85,000 91,050 98,350
Required:
1. Calculate the company’s merchandise inventory turnover for each year.
2. Comment on the company’s efficiency in managing its inventory.
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158. A company reported the following data:
Year 1 Year 2 Year 3
Cost of goods sold $238,000 $375,000 $495,000
Ending inventory 120,000 150,000 180,000
Required:
1. Calculate the days’ sales in inventory for each year.
2. Comment on the trend in inventory management.
159. A company made the following purchases during the year:
Jan. 10 15
Mar. 15 25
Apr. 25 10
July 30 20
Oct. 10 15
units at $360 each
units at $390 each
units at $420 each
units at $450 each
units at $480 each
On December 31, there were 28 units in ending inventory. These 28 units consisted of 1 from
the January 10 purchase, 2 from the March 15 purchase, 5 from the April 25 purchase, 15
from the July 30 purchase, and 5 from the October 10 purchase. Using specific identification,
calculate the cost of the ending inventory.
160. A company made the following merchandise purchases and sales during the month of
May:
May 1 purchased 380 un its at $ 15 each
May 5 purchased 270 un its at $ 17 each
May 10 sold 400 unit s at $50 each
May 20 purchased 300 units at $22 each
May 25 sold 400 unit s at $50 each
There was no beginning inventory. If the company uses the weighted average inventory
valuation method and the perpetual inventory system, what would be the cost of its ending
inventory?
161. A company made the following merchandise purchases and sales during the month of
July:
July 1 purchased 380 units at $15 each
July 5 purchased 270 units at $20 each
July 9 sold 500 units at $55 each
July 14 purchased 300 units at $24 each
July 20 sold 250 units at $55 each
July 30 purchased 250 units at $30 each
There was no beginning inventory. If the company uses the first-in, first-out method and
the perpetual system, what would be the cost of the ending inventory?
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162. A company made the following merchandise purchases and sales during the current
month:
July. 1 purchased 380 units at $15 each
July 5 purchased 270 units at $20 each
July 9 sold 500 units at $55 e a c h
July 14 purchased 300 units at $24 each
July 20 sold 250 units at $55 each
July 30 purchased 250 units at $30 each
There was no beginning inventory. If the company uses the last-in, first-out perpetual
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inventory system, what would be the cost of the ending inventory?