Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
119. Cutting Edge Technologies reported the following information in their 2010 annual
report:
1. Determine the inventory turnover ratio.
2. Determine the average days to sell inventory.
3. Explain the meaning of each number.
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
120. Quest Inc. provided the following footnote in their annual report:
Inventories are stated at the lower of cost or market. The cost of inventories has been
determined using last in first out (LIFO) method. Cost of goods sold under LIFO costing were
$22.2 billion for 2011 and ending inventory under LIFO was $1.3 billion. Inventory in 2010
under LIFO costing was $1.2 billion. The LIFO Reserve account carried a credit balance of
$0.8 billion in 2011 and $0.6 billion in 2010.
Compute the following:
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
121. Dows Company prepared income statements that reflected pretax income of $21,000 for
2010 and $30,000 for 2011. An audit has determined that there were two errors in the
inventory amounts as follows:
Determine the correct pretax income amount for each year (show computations assuming the
errors were not corrected)
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
122. For each independent situation given below, determine the effect on pretax income for
each. Enter “+” to indicate pretax income is overstated, “-” to indicate pretax income is
understated, or “NA” to indicate that pretax income is not affected.
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
123. Redford Company hired a new store manager in October 2011, who determined the
ending inventory on December 31, 2011, to be $50,000. In March, 2012 the company
discovered that the December 31, 2011 ending inventory should have been $58,000. The
December 31, 2012, inventory was correct. Ignore income taxes.
Complete the following table to show the effects of the inventory error on the four amounts
listed. Give the amount of the discrepancy and indicate whether it was overstated (O),
understated (U), or had no effect (N).
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
124. Sideline Company reported net income for 2010 of $70,000 and in 2011 of $84,000
(both after income taxes at a 30% rate). It was discovered in 2011 that the ending inventory
for 2010 was understated by $2,000 (before any income tax effect). Calculate the correct net
income (after income tax of 20%) for 2009 and 2010.
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
125. A company provided the following footnote in its most recent annual report:
During the current and prior year, the company reduced certain inventory quantities that
were valued at lower LIFO costs prevailing in prior years. The effect of these physical
reductions was to increase after tax earnings this year by $90 million, $.30 per share, and
$98 million, or $.327 per share last year.
1. Explain why the reduction in inventory quantity increased after tax earnings for this
company.
2. If the company had been using FIFO costing, would the reductions in inventory quantity
during the two years have increased after tax earnings? Explain.
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
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126. Assume Webster Company buys compact disks at a unit cost of $20 and sells them at a
unit price of $26. There was no beginning inventory.
Provide the journal entries required below by entering the account code of the appropriate
account and the amount for each debit and credit:
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
Chapter 07 – Reporting and Interpreting Cost of Goods Sold and Inventory
127. Give the journal entries for the transactions listed below under each of the two inventory
systems.
A. Purchased merchandise for cash, $1,000.
B. Sold merchandise for $600 cash that had cost $480 (cost is 80% of the sales price.
C. Accepted a sales return from a customer: sales price $30. A cash refund was given to the
customer. The goods were returned to regular inventory.
D. Returned goods to the vendor because they did not meet our specification; $50 cash refund
was received.