6.4-20 If a company estimates its ending inventory using the gross profit method, it does not have to take a
physical inventory at the end of the year.
6.4-21 The following data are for the Bi-Star Technologies for the year ended December 31, 20X7:
Beginning inventory
$325,000
Net purchases
$945,000
Net sales revenue
$2,100,000
Normal gross profit percentage
40%
What is the estimated ending inventory?
A) $635,000
B) $762,000
C) $167,500
D) $ 10,000
Beginning inventory
325,000
Plus purchases
945,000
Equals goods available for sale
1,270,000
Less cost of goods sold *
1,260,000
Equals ending inventory
10,000
2,100,000*.60=
6.4-22 A widely used method for estimating the value of ending inventory is the:
A) periodic method.
B) perpetual method.
C) lower-of-cost-or- net-realisable-value method.
D) gross profit method.
6.4-23 The following data are for Tina’s Candle Store for January, 20X7:
Beginning inventory
$115,000
Net sales revenue
$425,000
Net purchases
$615,000
Normal gross profit rate
30%
What is the company’s estimated cost of goods sold for the month?
A) $432,500
B) $297,500
C) $224,500
D) $184,500
GP= 30%, cost of goods sold must be 70%
Sales
425000
Times cost of goods sold %
.70
Equals cost of goods sold
297,500
6.4-24 The following data are for Tina’s Candle Store for January, 20X7:
Beginning inventory
$115,000
Net sales revenue
$425,000
Net purchases
$615,000
Normal gross profit rate
30%
What is the company’s estimated ending inventory for the month?
A) $432,500
B) $297,500
C) $224,500
D) $184,500
Plus purchases
615,000
Equals goods available for sale
730,000
Equals ending inventory
432,500
6.5-1 Overstating ending inventory in the current period will overstate the following year’s net income.
6.5-2 If ending inventory for the year is overstated, shareholders’ equity will be understated for the year.
6.5-3 An error in the valuation of beginning inventory in the current period will affect the current year’s net
income.
6.5-4 Pali Grid Inc’s controller discovered an error when comparing the count of ending inventory to the
accounting records. This error must be corrected as soon as possible or the financial statements for that
period will never be automatically corrected.
6.5-5 Beginning inventory and ending inventory have opposite effects on cost of goods sold.
6.5-6 An error in the ending inventory for the year ended December 31, 20X6:
A) automatically creates errors in cost of goods in the 20X6 and 20X7 financial statements.
B) has no effect on the 20X6 financial statements, but will create an error in the 20X7 financial
statements.
C) automatically creates errors in the ending inventory balance in the 20X6 and 20X7 financial
statements.
D) affects only the 20X6 financial statements.
6.5-7 If ending inventory is overstated, then:
A) shareholders’ equity is overstated.
B) cost of goods sold is overstated.
C) gross profit is understated.
D) net income is understated.
6.5-8 Ending inventory for the year ended December 31, 20X6, is overstated by $10,000. How will this affect
net income for 20X7?
A) Net income for 20X7 will be understated by $10,000.
B) Net income for 20X7 will be overstated by $10,000.
C) Net income for 20X7 will be understated by $20,000.
D) Net income for 20X7 will be overstated by $20,000.
6.5-9 Ending inventory for the year ended December 31, 20X6, is understated. How will this error affect net
income for 20X6 and 20X7?
A) 20X6 overstated; 20X7 understated
B) 20X6 understated; 20X7 overstated
C) 20X6 overstated; 20X7 no effect
D) 20X6 understated; 20X7 no effect
6.5-10 Beginning inventory for the year ended December 31, 20X6, is understated. How will this error affect net
income for 20X6 and 20X7?
A) 20X6 overstated; 20X7 understated
B) 20X6 understated; 20X7 overstated
C) 20X6 overstated; 20X7 no effect
D) 20X6 understated; 20X7 no effect
6.5-11 If the cost of goods sold is understated for the year, then:
A) ending inventory is understated for the year.
B) ending inventory is overstated for the year.
C) there is no effect on ending inventory for the year.
D) none of the above is true.
6.5-12 Charles Scrab Inc. has beginning inventory of $15,000, purchases of $25,000, and ending inventory of
$10,000, sales of $75,000, operating expenses of $30,000, and a tax rate of 40% for 20X4. An accounting
clerk input the ending inventory as $12,000. What is the effect on 2008 net income?
A) Net income will be $1,200 higher.
B) Net income will be $1,200 lower.
C) Net income will be $2,000 higher.
D) Net income will be $2,000 lower.
6.5-13 Charles Scrab Inc. has beginning inventory of $15,000, purchases of $25,000, and ending inventory of
$10,000, sales of $75,000, operating expenses of $30,000, and a tax rate of 40% for 20X4. An accounting
clerk input the ending inventory as $12,000. What is the effect on 2008 cost of goods sold?
A) Cost of Goods Sold will be $1,200 higher.
B) Cost of Goods Sold will be $1,200 lower.
C) Cost of Goods Sold will be $2,000 higher.
D) Cost of Goods Sold will be $2,000 lower.
6.5-14 Charles Scrab Inc has beginning inventory of $15,000, purchases of $25,000, and ending inventory of
$10,000, sales of $75,000, operating expenses of $30,000, and a tax rate of 40% for 20X6. An accounting
clerk input the ending inventory as $12,000. What is the effect on 20X7 net income?
A) Net income for 20X7 will be $1,200 higher than 20X6.
B) Net income for 20X7 will be $1,200 lower than 20X6.
C) Net income for 20X7 will be $10,200.
D) Net income for 20X7 cannot be calculated with the information given.
6.5-15 If ending inventory on December 31, 20X6, is overstated, then:
A) cost of goods sold for the year ended December 31, 20X7, will be understated.
B) cost of goods sold for the year ended December 31, 20X6, will be overstated.
C) gross profit for the year ended December 31, 20X6, will be understated.
D) gross profit for the year ended December 31, 20X7, will be understated.
6.5-16 If ending inventory for the year ended December 31, 20X6, is understated, this error will cause owners’
equity to be:
A) overstated at the end of 20X6 and understated at the end of 20X7.
B) understated at the end of 20X6 and overstated at the end of 20X7.
C) overstated at the end of 20X6 and correctly stated at the end of 20X7.
D) understated at the end of 20X6 and correctly stated at the end of 20X7.
6.5-17 Happy House Corporation reported net income of $425,000 for the current year. After the financial
statements had been prepared, it was discovered that ending inventory had been overstated by $25,000.
The correct net income was:
A) $450,000.
B) $425,000.
C) $400,000.
D) $300,000.
6.5-18 Happy House Corporation reported net sales of $425,000 for the current year. After the financial
statements had been prepared, it was discovered that ending inventory had been understated by $25,000.
If the tax rate is 40%, after the error has been corrected, net income will:
A) increase by $25,000.
B) decrease by $25,000.
C) increase by $15,000.
D) decrease by $15,000.
6.5-19 Happy House Corporation reported net sales of $425,000 for the current year. After the financial
statements had been prepared, it was discovered that ending inventory had been understated by $25,000.
If the tax rate is 40%, after the error has been corrected, net income will:
A) not be correct for two years.
B) be correct in the next year.
C) never be correct, unless there is a correcting entry.
D) be correct in the present year.