Chapter 5: Inventories and Cost of Goods Sold
214. Giant-Mart purchased a large shipment of shoes from Primus, Inc. on credit near the end of its accounting period.
Primus shipped the shoes in January and Giant–Mart received the shoes in February. Assume that Giant-Mart‘s
accounting period ends on January 31, while Primus’ accounting period ends on May 31. Answer each independent
question in the set that follows.
REQUIRED: If the shoes are shipped FOB destination, when should Giant-Mart record the purchase? If the shoes
are shipped FOB shipping point, when should Giant-Mart record the purchase?
215. Giant-Mart purchased a large shipment of shoes from Primus, Inc. on credit near the end of its accounting period.
Primus shipped the shoes in January and Giant–Mart received the shoes in February. Assume that Giant-Mart‘s
accounting period ends on January 31, while Giant’s accounting period ends on May 31. Answer each independent
question in the set that follows.
REQUIRED: Under what shipping terms would Giant-Mart include the shoes as part of inventory on its January 31
balance sheet?
216. Explain the relationship between the valuation of inventory and income measurement as it relates to the balance sheet
and the income statement.
Chapter 5: Inventories and Cost of Goods Sold
217. In the following information from the 2015 annual reports of Focal Point Industries all figures have been rounded to
millions of dollars.
Balance Sheet Data
May 31, 2014
May 31, 2013
Raw materials
$ 25.8
$ 52.1
Work in process
44.8
34.7
Finished goods
1,132.7
1,303.8
Inventories at FIFO
1,203.3
1,390.6
Adjustment to LIFO
5.6
21.9
Cash Flow Data (Operating Activities)
Net income
$451.4
$399.9
Additions to net income:
Depreciation
198.2
100.2
Amortization
30.6
49.0
Changes in assets and liabilities:
Inventories
197.3
(58.0)
Accounts payable and other
(170.4)
(70.1)
REQUIRED:
(1) Describe what costs are included in each of the three types of inventories listed above for Focal Point Industries.
(2) Even though the footnote describing the inventory costing method(s) used by Focal Point Industries is not
provided above, what can you conclude about the inventory costing method(s) used by the company?
Chapter 5: Inventories and Cost of Goods Sold
Balance Sheet Data
Raw materials
May 31, 2015
$ 25.8
May 31, 2014
$ 52.1
Work in process
44.8
34.7
Finished goods
1,132.7
1,303.8
Inventories at FIFO
1,203.3
1,390.6
Adjustment to LIFO
5.6
21.9
Cash Flow Data (Operating Activities)
Net income
$451.4
$399.9
Additions to net income:
Depreciation
198.2
100.2
Amortization
30.6
49.0
Inventories
187.3
(58.0)
(170.4)
(70.1)
218. In the following information from the 2015 annual reports of Focal Point Industries all figures have been rounded to
millions of dollars.
Changes in assets and liabilities:
REQUIRED:
(1) Explain what the amount “adjustment to LIFO” represents. What effects has this “adjustment” had on Focal
Point Industries’ net earnings in 2014 and 2015?
(2) What method of determining cash flows from operating activities has Focal Point Industries used in preparing its
statement of cash flows? Explain your answer.
(3) From 2014 to 2015, what change in the inventory balance (increase or decrease) occurred in each year as a result
of operating activities? What was the effect on the company’s cash flow each year as a result of the inventory
change?
Chapter 5: Inventories and Cost of Goods Sold
219. What is LIFO inventory liquidation? Why is it important to disclose the effects of a LIFO inventory liquidation
220. Carrington Inc. manufactures digital cameras and has experienced noticeable declines in the purchase price of many
of the components it uses, including memory components. Which inventory costing method should Carrington use if it
wants to maximize net income? Explain your answer.
221. If an entity overstates its ending inventory for the current year, what are the effects on assets, cost of goods sold,
income before taxes, and retained earnings for the current year?
222. Assume that a company is experiencing increasing inventory prices and prepares its financial statements in
accordance with IFRS. Which costing method should it use to pay the least amount of taxes? Explain your answer.
223. Bower Corp.’s cost of sales has remained steady over the last two years. During this same time period, however, its
inventory has increased considerably. What does this information tell you about the company’s inventory turnover?
Explain your answer.
Chapter 5: Inventories and Cost of Goods Sold
Match the inventory-related accounts to costs that may be included in inventories for retailers and
manufacturers.
a. Merchandise Inventory
b. Raw Materials
c. Work in Process
d. Finished Goods
e. Cost of Goods Sold
224. Cost of materials which are not yet entered into the production process.
225. Cost of completed, but unsold items.
226. Costs to purchase goods ready to sell.
227. Costs of direct materials, overhead, and direct labor used in unfinished goods.
228. Costs of direct materials, overhead, and direct labor used in goods that have been sold.
Match the terms with the descriptions related to merchandise sales and purchases.
a. Transportation–in
b. Perpetual inventory system
c. Net purchases
d. FOB Destination
e. Cost of goods available for sale
f. Periodic inventory system
g. FOB Shipping point
h. Delivery expense
229. Requires updating of the inventory account at the time of each purchase and each sale.
230. Shipping costs paid to acquire merchandise.
Chapter 5: Inventories and Cost of Goods Sold
231. The seller is responsible for the cost of delivering the merchandise to the buyer
232. Relies on a count of inventory on the last day of the year to determine amount on hand
233. The buyer must pay the shipping costs.
Maxim Company sells auto parts. The company employs a periodic inventory system. Identify all the effects on the
accounting equation.
a. Increase in assets
b. Decrease in assets
c. Increase in liabilities
d. Decrease in liabilities
e. Increase on owners’ equity
f. Decrease in owners’ equity
g. Increase in assets and increase in owners’ equity
h. Decrease in assets and decrease in owners’ equity
i. Increase in liabilities and decrease in owners’ equity
j. Decrease in liabilities and increase in owners’ equity
234. Sold merchandise on credit to customers.
235. Recorded cash sales for the day.
236. Gave a customer a cash refund.
237. Granted a customer a credit on its balance due for goods that were returned.
Chapter 5: Inventories and Cost of Goods Sold
Match the costs that might be included as part of the cost of inventory to the listed accounting treatment.
a. Add to inventory cost
b. Subtract from inventory cost
c. Not an inventory cost
238. Invoice price paid for resale goods
239. Freight costs incurred by the buyer to ship goods to its place of business
240. Freight costs incurred by the seller to ship goods to its customers
241. Cost of storing the goods before they are sold to customers
242. Excise taxes paid on goods acquired
243. Sales taxes paid on goods acquired
244. Income taxes paid on profits earned from selling goods to customers
245. Cost of insurance during transit to acquire inventory items
Identify which inventory costing method (LIFO or FIFO) achieves the effect listed in the following items:
a. LIFO
b. FIFO
246. Prices are rising; profits are higher with this method
247. Prices are rising; cost of goods sold is lower with this method
Chapter 5: Inventories and Cost of Goods Sold
248. Prices are declining; income taxes are higher with this method
249. Prices are declining; gross margin is higher with this method
250. Which one of the following best explains the distinction between inventory and an operating asset?
a. ownership
b. intent
c. cost
d. purchase price
251. Which one of the following would not be found as an asset on the balance sheet of a manufacturer?
a. Raw materials
b. Work in process
c. Finished goods
d. Merchandise inventory
252. Finished goods are the equivalent of merchandise inventory for a retailer or wholesaler in that both represent the
inventory of goods held for sale.
a. True
b. False
253. When inventory is sold by a wholesaler or retailer, it is recorded in a different account on the income statement than a
manufacturer would use.
a. True
b. False
254. Which one of the following statements is false regarding the gross profit ratio?
a. The gross profit ratio is calculated by dividing net sales by gross profit.
b. The gross profit ratio is a measure of profitability.
c. The gross profit ratio can help investors decide whether or not to buy a company‘s stock.
d. The gross profit ratio should be compared with both a company’s prior years’ ratios and also competitor ratios.
Chapter 5: Inventories and Cost of Goods Sold
255. Which of the following would not be included in inventory costs?
a. Freight costs incurred by the buyer in shipping inventory to its place of business.
b. The cost of insurance taken out during the time that inventory is in transit.
c. The cost of storing inventory before it is ready to be sold.
d. Shelving to hold the inventory.
256. Assets are unexpired costs, and expenses are expired costs.
a. True
b. False
257. The value assigned to an asset such as inventory on the balance sheet determines the amount eventually recognized
as an expense on the income statement.
a. True
b. False
258. The effect of a misstatement of the year-end inventory is limited to the net income for that year.
a. True
b. False
259. If a company has a number of day’s sales in inventory equal to 60, that means that it takes about two months on
average to sell its inventory.
a. True
b. False
260. Under the indirect method, an increase in accounts payable is added to net income to determine cash flow from
operating activities.
a. True
b. False
261. If the direct method is used to prepare the Operating Activities category of the statement of cash flows, the amount
of cash paid to suppliers of inventory is shown as an addition in this section of the statement.
a. True
b. False
Chapter 5: Inventories and Cost of Goods Sold
262. The inventory costing method is applied after each sale of merchandise to update the Inventory account.
a. True
b. False
263. The lower the inventory turnover ratio, the less time inventory resides in storage.
a. True
b. False