14. How does the perpetual inventory system differ from the periodic inventory system in the
determination of cost of goods sold?
15. Up to the date of a fire that completely destroyed Clark’s inventory, Clark had sales of $4,000,000,
purchases of $3,600,000, and freight-in of $160,000. The cost of beginning inventory was $280,000
and the company’s typical gross profit was 40 percent. Using the gross profit method, estimate Clark’s
inventory loss from the fire. (Show your work.)
16. Prior to a fire that destroyed most of its inventory, Verona Company had inventory purchases during
the period of $80,000 and sales of $250,000. Verona began the period with $190,000 in inventory.
Verona’s typical gross profit percentage is 20 percent. Inventory that cost $10,000 survived the fire.
Using the gross profit method, estimate the inventory loss from the fire. (Show your work.)
17. Jayne’s Department Store had net retail sales of $310,000 during the current year. The following
additional information was obtained from the accounting records.
At Cost
At Retail
Beginning inventory
$ 55,000
$ 95,000
Net purchases for the period
169,000
290,000
Freight-in
7,000
Estimate the company’s ending inventory at cost using the retail method. (Show your work.)
Beginning inventory
Net purchases for the period
Freight-in
Merchandise available for sale
Ratio of cost to retail price:
$231,000 ÷ $385,000 = 60%
Net sales during the period
Estimated ending inventory at retail
$ 75,000
Ratio of cost to retail
Estimated cost of ending inventory
$ 45,000
18. Marathon Shoe Store had net retail sales of $400,000 during the current year. The following additional
information was obtained from the accounting records.
At Cost
At Retail
Beginning inventory
$ 60,000
$ 126,000
Net purchases for the period
178,000
386,000
Freight-in
18,000
Estimate the company’s ending inventory at cost using the retail method. (Show your work.)
Beginning inventory
Net purchases for the period
Freight-in
Merchandise available for sale
Ratio of cost to retail price:
$256,000 ÷ $512,000 = 50%
Net sales during the period
Estimated ending inventory at retail
$ 112,000
Ratio of cost to retail
Estimated cost of ending inventory
$ 56,000
MATCHING
Match each definition with the correct term below.
a.
An inventory management system in which the Internet is used to order and track goods.
b.
A method of valuing inventory that assumes that costs of the first items acquired should be
assigned to the first items sold.
c.
A method of estimating inventory that uses the ratio of cost to retail price.
d.
Merchandise that its owner places on the premises of another company with the
understanding that payment will be made only when the merchandise is sold.
e.
An inventory management system in which goods arrive just at the time they are needed.
f.
When sales have reduced inventories below the levels set in prior years.
g.
A method of estimating inventory that assumes the gross margin for a business remains
relatively stable from year to year.
h.
The association of costs with their assumed flow in the operations of a company.
i.
A method of valuing inventory that assumes that the costs of the last items purchased
should be assigned to the first items sold.
j.
A method of valuing inventory that identifies the cost of each item in ending inventory.
1. Supply-chain management
2. Just-in-time operating environment
3. Consignment
4. Cost flow
5. Specific identification method
6. First-in, first-out
7. Last-in, last-out
8. LIFO Liquidation
9. Retail method
10. Gross profit method
PROBLEM
1. Assume that during the physical count of the inventory of a large corporation for this year, $900,000 of
merchandise was counted twice. The error was not detected, and the financial statements were
prepared. Identify the individual statements that would be affected and explain the effect the count
error would have on each. (Omit income tax consideration.)
2. Assume that during the physical count of the inventory of a large corporation last year, $750,000 of
merchandise was not counted. The error was not detected, and the financial statements for the current
fiscal year were prepared. Identify the individual statements that would be affected and explain the
effect the error would have on each of these statements.
3. Why will an understated beginning inventory produce an overstated income before income taxes for
the same period? Will the understatement have a favorable or unfavorable effect on current year
income taxes?
4. Pepin Company reports income before income taxes of $160,000 during 2013. If beginning inventory
was overstated by $14,000 and ending inventory was understated by $16,000, calculate corrected
income before income taxes for the year. (Show your work.)
5. Winer & Daughters reports income before income taxes of $10,000 during 2013. If beginning
inventory was understated by $3,000 and ending inventory was overstated by $1,200, calculate
corrected income before income taxes for the year. (Show your work.)
6. Condensed income statements for Sauk Company are shown below for two years.
2013
2012
Net sales
$150,000
$180,000
Cost of goods sold
90,000
108,000
Gross margin
$60,000
$72,000
Operating expenses
30,000
30,000
Income before income taxes
$30,000
$42,000
Compute the corrected income before income taxes for 2012 and 2013 assuming that the inventory as
of the end of 2012 was mistakenly understated by $6,000.
7. The following information is available for Sawyer Company.
Inventory held in warehouse
$32,000
Inventory on consignment (included in warehouse count)
from Rusk Company
5,000
Incoming goods shipped FOB destination
12,000
Outgoing goods shipped FOB destination
7,000
Inventory on consignment (not included in warehouse count)
at Grant Company
2,000
Incoming goods shipped FOB shipping point
3,000
Using this information, compute the cost of inventory for Sawyer company at the end of the year.
8. Emil Hinkel owns and operates a large antique shop. He uses the specific identification method to
account for transactions that affect inventory. Hinkel recently completed a physical inventory of the
merchandise in his shop as part of his year-end work. Today, his accountant called to inform him that
it would be necessary to adjust the inventory figure shown on the balance sheet, which will increase
Hinkel’s tax liability. Hinkel argued that the inventory had to be correct, because he counted it twice
and matched every item to an invoice. Cite reasons why the accountant would find it necessary to
adjust the inventory even if Hinkel’s count is accurate.
9. During April, Leary Company sold 900 units of Product Q. Its beginning inventory and purchases
during the month were as follows:
Apr.
1
Beginning inventory
200 units @ $1
5
Purchases
200 units @ $2
10
Purchases
200 units @ $3
15
Purchases
200 units @ $4
20
Purchases
200 units @ $5
25
Purchases
200 units @ $6
Compute the cost of the ending inventory under each of three methods: (a) average-cost, (b) LIFO, and
(c) FIFO. Assume the periodic inventory system is used. (Show your work.)
10. During November, Marquette Company sold 240 units of Product Y. Its beginning inventory and
purchases during the month were as follows:
Nov.
1
Beginning inventory
100 units @ $40
5
Purchases
100 units @ $48
10
Purchases
100 units @ $44
15
Purchases
100 units @ $48
20
Purchases
100 units @ $56
25
Purchases
100 units @ $52
Compute the cost of goods sold under each of three methods: (a) average-cost, (b) LIFO, and (c) FIFO.
Assume the periodic inventory system is used. (Show your work.)
100
100
4,800
100
4,400
100
4,800
100
5,600
1,000
11. During the first quarter of the year, Blake Company sold 12,000 cases of Product T for $120,000.
Facts related to its beginning inventory and purchases are as follows:
Jan.
1
Beginning inventory
5,000 cases @ $4.00
10
Purchases
3,000 cases @ $5.00
Feb.
13
Purchases
8,000 cases @ $4.50
Mar.
5
Purchases
2,000 cases @ $5.00
For the quarter ended March 31, compute the ending inventory, cost of goods sold, and gross margin
under three methods: (a) average-cost, (b) FIFO, and (c) LIFO. Assume the periodic inventory system
is used. (Show your work.)
5,600
4,800
12. Why is the LIFO cost flow assumption an acceptable valuation method for merchandise inventory
when it rarely matches the physical movement of the product?
13. For each of the following descriptive statements, indicate whether FIFO or LIFO is being described.
_____ 1. Preferable method for conforming to matching principle
_____ 2. Preferable method for tax purposes under rising prices
_____ 3. Results in more up-to-date ending inventory figure
_____ 4. Results in fictitious profits under rising prices
_____ 5. Produces higher income when prices are declining
_____ 6. Produces higher ending inventory when prices are rising
LIFO
FIFO
FIFO
FIFO
14. Use the following information to calculate ending inventory on (a) a LIFO basis, (b) a FIFO basis, and
(c) an average-cost basis. Assume a perpetual inventory system.
Round answers to nearest dollar.
Dec.
1
Beginning inventory
70 units @ $28
9
Purchases
30 units @ $32
17
Sales
25 units
22
Purchases
15 units @ $36
27
Sales
40 units
15. Braxton Company uses the retail method to estimate the cost of ending inventory. Use the following
information to estimate the cost of Braxton’s ending inventory on December 31, 2013, using the retail
method. Show your answer in good form.
Cost
Retail
January 1, 2013, inventory
$ 35,000
$ 65,000
Purchases
162,500
265,000
Purchases returns and allowances
(6,000)
(10,000)
Freight-in
8,500
Sales
247,500
Sales returns and allowances
(7,500)
Inventory, January 1, 2013
Purchases
Purchases returns and allowances
Freight-in
Net purchases for the period
Merchandise available for sale
