Chapter 6 3 All of the following statements are true regarding the LIFO reserve

Document Type
Test Prep
Book Title
Financial Accounting-- Binder Ready Version: Tools for Business Decision Making 8th Edition
Authors
Donald E. Kieso, Jerry J. Weygandt, Paul D. Kimmel
Reporting and Analyzing Inventory
6-41
170. Barnett Company had the following records:
2017 2016
Ending inventory $32,650 $30,490
Cost of goods sold 306,300 313,600
What is Barnett’s average days in inventory for 2017? (rounded)
a. 37.6 days
b. 38.8 days
c. 36.9 days
d. 36.5 days
171. The difference between ending inventory using LIFO and ending inventory using FIFO is
referred to as the
a. FIFO reserve.
b. inventory reserve.
c. LIFO reserve.
d. periodic reserve.
172. The LIFO reserve is
a. the difference between the value of the inventory under LIFO and the value under
FIFO.
b. an amount used to adjust inventory to the lower of cost or market.
c. the difference between the value of the inventory under LIFO and the value under
average cost.
d. the amount used to adjust inventory to historical cost.
173. Reporting which one of the following allows analysts to make adjustments to compare
companies using different cost flow methods?
a. FIFO reserve
b. Inventory turnover
c. LIFO reserve
d. Current replacement cost
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
6-42
174. Butler Company reported ending inventory at December 31, 2017 of $1,200,000 under
LIFO. It also reported a LIFO reserve of $210,000 at January 1, 2017, and $300,000 at
December 31, 2017. Cost of goods sold for 2017 was $4,900,000. If Butler Company had
used FIFO during 2017, its cost of goods sold for 2017 would have been
a. $5,200,000.
b. $4,990,000.
c. $4,810,000.
d. $4,600,000.
175. To adjust a company’s LIFO cost of goods sold to FIFO cost of goods sold
a. the ending LIFO reserve is added to LIFO cost of goods sold.
b. the ending LIFO reserve is subtracted from LIFO cost of goods sold.
c. an increase in the LIFO reserve is subtracted from LIFO cost of goods sold.
d. a decrease in the LIFO reserve is subtracted from LIFO cost of goods sold.
176. All of the following statements are true regarding the LIFO reserve except:
a. Companies using LIFO are required to report the LIFO reserve.
b. The equation (LIFO inventory LIFO reserve = FIFO inventory) adjusts the inventory
balance from LIFO to FIFO.
c. The financial statement differences of using LIFO normally increase the longer a
company uses LIFO.
d. Current ratios and the inventory turnover can be significantly affected if a company
has material LIFO reserves.
Reporting and Analyzing Inventory
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177. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and
Evans Services to answer the question “What is Danforth's LIFO reserve for 2016?”
(amounts in $ millions)
Boxter
Clifford
Danforth
Evans
Inventory Method for 2016 & 2017
LIFO
FIFO
LIFO
FIFO
2016 Ending inventory assuming LIFO
$324
N/A
$225
N/A
2016 Ending inventory assuming FIFO
$427
$535
$310
$663
2017 Ending inventory assuming LIFO
$436
N/A
$167
N/A
2017 Ending inventory assuming FIFO
$578
$612
$209
$542
2016 Current assets
(reported on balance sheet)
$1,677
$2,031
$1,308
$2,748
2016 Current liabilities
$987
$1,209
$545
$1,200
2017 Current assets
(reported on balance sheet)
$2,225
$2,605
$1,100
$2,390
2017 Current liabilities
$1,306
$1,410
$465
$1,000
2017 Cost of goods sold
$4,678
$5,042
$3,000
$7,000
a. $535
b. $85
c. $42
d. $58
178. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and
Evans Services to answer the question “Using the LIFO reserve adjustment, which
company would have the strongest liquidity position for 2017 as expressed by the current
ratio?”
(amounts in $ millions)
Boxter
Clifford
Danforth
Evans
Inventory Method for 2016 & 2017
LIFO
FIFO
LIFO
FIFO
2016 Ending inventory assuming LIFO
$324
N/A
$225
N/A
2016 Ending inventory assuming FIFO
$427
$535
$310
$663
2017 Ending inventory assuming LIFO
$436
N/A
$167
N/A
2017 Ending inventory assuming FIFO
$578
$612
$209
$542
2016 Current assets
(reported on balance sheet)
$1,677
$2,031
$1,308
$2,748
2016 Current liabilities
$987
$1,209
$545
$1,200
2017 Current assets
(reported on balance sheet)
$2,225
$2,605
$1,100
$2,390
2017 Current liabilities
$1,306
$1,410
$465
$1,000
2017 Cost of goods sold
$4,678
$5,042
$3,000
$7,000
a. Boxter
b. Clifford
c. Danforth
d. Evans
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
6-44
179. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and
Evans Services to answer the question “Using LIFO, what is Boxter's inventory turnover
for 2017 (to the closest decimal place)?”
Boxter
Clifford
Danforth
Evans
LIFO
FIFO
LIFO
FIFO
$324
N/A
$225
N/A
$427
$535
$310
$663
$436
N/A
$167
N/A
$578
$612
$209
$542
$1,677
$2,031
$1,308
$2,748
$987
$1,209
$545
$1,200
$2,225
$2,605
$1,100
$2,390
$1,306
$1,410
$465
$1,000
$4,678
$5,042
$3,000
$7,000
a. 12.3 times
b. 9.3 times
c. 7.5 times
d. 6.4 times
180. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and
Evans Services to answer the question “Using the LIFO adjustment, which company
shows the greatest improvement in its current ratio from 2016 to 2017?”
Boxter
Clifford
Danforth
Evans
LIFO
FIFO
LIFO
FIFO
$324
N/A
$225
N/A
$427
$535
$310
$663
$436
N/A
$167
N/A
$578
$612
$209
$542
$1,677
$2,031
$1,308
$2,748
$987
$1,209
$545
$1,200
$2,225
$2,605
$1,100
$2,390
$1,306
$1,410
$465
$1,000
$4,678
$5,042
$3,000
$7,000
a. Boxter
b. Clifford
c. Danforth
d. Evans
Reporting and Analyzing Inventory
FOR INSTRUCTOR USE ONLY
6-45
*181. In a perpetual inventory system,
a. LIFO cost of goods sold will be the same as in a periodic inventory system.
b. average costs are based entirely on unit cost simple averages.
c. a new average is computed under the average cost method after each sale.
d. FIFO cost of goods sold will be the same as in a periodic inventory system.
*182. Classic Floors has the following inventory data:
July 1 Beginning inventory 30 units at $6.00
5 Purchases 120 units at $6.60
14 Sale 80 units
21 Purchases 60 units at $7.20
30 Sale 56 units
Assuming that a perpetual inventory system is used, what is the cost of goods sold on a
LIFO basis for July?
a. $931.20
b. $472.80
c. $1,404.00
d. $696.00
*183. Classic Floors has the following inventory data:
July 1 Beginning inventory 30 units at $6.00
5 Purchases 120 units at $6.60
14 Sale 80 units
21 Purchases 60 units at $7.20
30 Sale 56 units
Assuming that a perpetual inventory system is used, what is the value of ending inventory
on a LIFO basis for July?
a. $931.20
b. $1,404.00
c. $708.00
d. $472.80
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
6-46
*184. Snug-As-A-Bug Blankets has the following inventory data:
July 1 Beginning inventory 30 units at $60
5 Purchases 180 units at $56
14 Sale 120 units
21 Purchases 90 units at $58
30 Sale 84 units
Assuming that a perpetual inventory system is used, what is the cost of goods sold on a
LIFO basis for July?
a. $11,604
b. $11,544
c. $11,592
d. $11,832
*185. Snug-As-A-Bug Blankets has the following inventory data:
July 1 Beginning inventory 30 units at $60
5 Purchases 180 units at $56
14 Sale 120 units
21 Purchases 90 units at $58
30 Sale 84 units
Assuming that a perpetual inventory system is used, what is the ending inventory on a
LIFO basis for July?
a. $5,496
b. $5,508
c. $5,544.
d. $5,796
*186. Snug-As-A-Bug Blankets has the following inventory data:
July 1 Beginning inventory 30 units at $60
5 Purchases 180 units at $56
14 Sale 120 units
21 Purchases 90 units at $58
30 Sale 84 units
Assuming that a perpetual inventory system is used, what is ending inventory (rounded)
under the average cost method for July?
a. $5,500
b. $5,568
c. $4,812
d. $5,544
Reporting and Analyzing Inventory
FOR INSTRUCTOR USE ONLY
6-47
*187. An error in the physical count of goods on hand at the end of a period resulted in a
$10,000 overstatement of the ending inventory. The effect of this error in the current
period is
Cost of Goods Sold Net Income
a. Understated Understated
b. Overstated Overstated
c. Understated Overstated
d. Overstated Understated
*188. If beginning inventory is understated by $10,000, the effect of this error in the current
period is
Cost of Goods Sold Net Income
a. Understated Understated
b. Overstated Overstated
c. Understated Overstated
d. Overstated Understated
*189. A company uses the periodic inventory method and the beginning inventory is overstated
by $4,000 because the ending inventory in the previous period was overstated by $4,000;
the ending inventory for this period is correct. The amounts reflected in the current end of
the period balance sheet are
Asset Stockholders’ Equity
a. Overstated Overstated
b. Correct Correct
c. Understated Understated
d. Overstated Correct
Problem Solving, IMA: Reporting
*190. An overstatement of the beginning inventory results in
a. no effect on the period’s net income.
b. an overstatement of net income.
c. an understatement of net income.
d. a need to adjust purchases.
*191. An overstatement of ending inventory in one period results in
a. no effect on net income of the next period.
b. an overstatement of net income of the next period.
c. an understatement of net income of the next period.
d. an overstatement of the ending inventory of the next period.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
6-48
Answers to Multiple Choice Questions
Reporting and Analyzing Inventory
6-49
BRIEF EXERCISES
Be. 192
Shellan Kamp Company identifies the following items for possible inclusion in the physical
inventory. Indicate whether each item should be included or excluded from the inventory taking.
1. Goods shipped on consignment by Shellan Kamp to another company.
2. Goods in transit from a supplier shipped FOB destination.
3. Goods shipped via common carrier to a customer with terms FOB shipping point.
4. Goods held on consignment from another company.
Be. 193
In the first month of operations, Dieker Company made three purchases of merchandise in the
following sequence: (1) 200 units at $6, (2) 300 units at $7, and (3) 400 units at $8. Assuming
there are 250 units on hand, compute the cost of the ending inventory under (1) the FIFO method
and (2) the LIFO method. Dieker uses a periodic inventory system.
Be. 194
Hess Company's inventory records show the following data for the month of September:
Units Unit Cost
Inventory, September 1 100 $3.00
Purchases: September 8 450 3.50
September 18 300 3.70
A physical inventory on September 30 shows 150 units on hand.
Calculate the value of ending inventory and cost of goods sold if the company uses FIFO
inventory costing and a periodic inventory system.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
6-50
Be. 195
Hess Company's inventory records show the following data for the month of September:
Units Unit Cost
Inventory, September 1 100 $3.00
Purchases: September 8 450 3.50
September 18 300 3.70
A physical inventory on September 30 shows 150 units on hand.
Calculate the value of ending inventory and cost of goods sold if the company uses LIFO
inventory costing and a periodic inventory system.
Be. 196
The management of Otto Corp. is considering the effects of various inventory costing methods on
its financial statements and its income tax expense. Assuming that the price the company pays
for inventory is increasing, which method will:
1. result in the lowest income tax expense?
2. provide the highest net income?
3. provide the highest ending inventory?
4. result in the most stable earnings over a number of years?
Reporting and Analyzing Inventory
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Be. 197
The Entertainment Center accumulates the following cost and market data at December 31.
Inventory Cost Market
Categories Data _ _ Data_
Camera $11,000 $10,200
Camcorders 8,000 8,500
DVDs 14,000 12,600
What is the lower-of-cost-or-market value of the inventory?
$30,800
Be. 198
At December 31, 2017, the following information (in thousands) was available for Kitselman Inc.:
ending inventory $22,600; beginning inventory $21,400; cost of goods sold $198,000; and sales
revenue $430,000. Calculate the inventory turnover and days in inventory for Kitselman.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
6-52
EXERCISES
Ex. 199
The Cain Company has just completed a physical inventory count at year end, December 31,
2017. Only the items on the shelves, in storage, and in the receiving area were counted and
costed on the FIFO basis. The inventory amounted to $80,000. During the audit, the independent
CPA discovered the following additional information:
(a) There were goods in transit on December 31, 2017, from a supplier with terms FOB
destination, costing $10,000. Because the goods had not arrived, they were excluded from
the physical inventory count.
(b) On December 27, 2017, a regular customer purchased goods for cash amounting to $1,000
and had them shipped to a bonded warehouse for temporary storage on December 28, 2017.
The goods were shipped via common carrier with terms FOB shipping point. The customer
picked the goods up from the warehouse on January 4, 2018. Cain Company had paid $500 for
the goods and, because they were in storage, Cain included them in the physical inventory count.
(c) Cain Company, on the date of the inventory, received notice from a supplier that goods
ordered earlier, at a cost of $4,000, had been delivered to the transportation company on
December 28, 2017; the terms were FOB shipping point. Because the shipment had not
arrived on December 31, 2017, it was excluded from the physical inventory.
(d) On December 31, 2017, there were goods in transit to customers, with terms FOB shipping
point, amounting to $800 (expected delivery on January 8, 2018). Because the goods had
been shipped, they were excluded from the physical inventory count.
(e) On December 31, 2017, Cain Company shipped $2,500 worth of goods to a customer, FOB
destination. The goods arrived on January 5, 2017. Because the goods were not on hand,
they were not included in the physical inventory count.
(f) Cain Company, as the consignee, had goods on consignment that cost $3,000. Because these
goods were on hand as of December 31, 2017, they were included in the physical inventory
count.
Instructions
Analyze the above information and calculate a corrected amount for the ending inventory. Explain
the basis for your treatment of each item.
Reporting and Analyzing Inventory
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Ex. 200
Dalton Company was undergoing an end of year audit of its financial records. The auditors were
in the process of reviewing Dalton’s inventory for year end, December 31, 2017. They completed
an end of year inventory. The value of the ending inventory prior to any adjustments was
$185,000, but before finishing up they had a few questions. Discussion with Dalton’s accountant
revealed the following:
(a) Dalton sold goods costing $60,000 to Summey Company FOB shipping point on December
28. The goods are not expected to reach Summey until January 12. The goods were not
included in the physical inventory because they were not in the warehouse.
(b) The physical count of the inventory did not include goods costing $95,000 that were shipped
to Dalton FOB destination on December 27 and were still in transit at year-end.
(c) Dalton received goods costing $25,000 on January 2. The goods were shipped FOB
shipping point on December 26 by Strong Company. The goods were not included in the
physical count.
(d) Dalton sold goods costing $40,000 to Hampton Company FOB destination on December 30.
The goods were received by Hampton Company on January 8. Because the goods had
been shipped, they were excluded from the physical inventory count.
(e) Dalton received goods costing $42,000 on January 2 that were shipped FOB destination on
December 29. The shipment was a rush order that was suppose to arrive December 31.
This purchase was included in the ending inventory of $185,000.
(f) Dalton Company, as the consignee, had goods on consignment that cost $3,000. Because
these goods were on hand as of December 31, they were included in the physical inventory
count.
Instructions
Analyze the above information and calculate a corrected amount for the ending inventory. Explain
the basis for your treatment of each item.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
6-54
Ex. 201
Dennis Lee, an auditor with Knapp CPAs, is performing a review of Dobson Company's inventory
account. Dobson did not have a good year, and top management is under pressure to boost
reported income. According to its records, the inventory balance at year-end was $640,000.
However, the following information was not considered when determining that amount.
1. Included in the company's count were goods with a cost of $200,000 that the company is
holding on consignment. The goods belong to Agler Corporation.
2. The physical count did not include goods purchased by Dobson with a cost of $40,000 that
were shipped FOB shipping point on December 28 and did not arrive at Dobson's warehouse
until January 3.
3. Included in the inventory account was $22,000 of office supplies that were stored in the
warehouse and were to be used by the company's supervisors and managers during the
coming year.
4. The company received an order on December 29 that was boxed and was sitting on the
loading dock awaiting pick-up on December 31. The shipper picked up the goods on January
1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods
had a selling price of $40,000 and a cost of $30,000. The goods were not included in the
count because they were sitting on the dock.
5. On December 29, Dobson shipped goods with a selling price of $90,000 and a cost of
$70,000 to Central Sales Corporation FOB shipping point. The goods arrived on January 3.
Central Sales had only ordered goods with a selling price of $10,000 and a cost of $8,000.
However, a sales manager at Dobson had authorized the shipment and said that if Central
wanted to ship the goods back next week, it could.
6. Included in the count was $50,000 of goods that were parts for a machine that the company
no longer made. Given the high-tech nature of Dobson's products, it was unlikely that these
obsolete parts had any other use. However, management would prefer to keep them on the
books at cost, "since that is what we paid for them, after all."
Reporting and Analyzing Inventory
FOR INSTRUCTOR USE ONLY
6-55
Ex. 201 (Cont.)
Instructions
Prepare a schedule to determine the correct inventory amount. Provide explanations for each
item above, saying why you did or did not make an adjustment for each item.
Ex. 202
Grother Company uses the periodic inventory method and had the following inventory information
available:
Units Unit Cost Total Cost
1/1 Beginning Inventory 100 $4 $ 400
1/20 Purchase 500 $5 2,500
7/25 Purchase 100 $7 700
10/20 Purchase 300 $8 2,400
1,000 $6,000
A physical count of inventory on December 31 revealed that there were 350 units on hand.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
6-56
Ex. 202 (Cont.)
Instructions
Answer the following independent questions and show computations supporting your answers.
1. Assume that the company uses the FIFO method. The value of the ending inventory at
December 31 is $__________.
2. Assume that the company uses the average cost method. The value of the ending inventory
on December 31 is $__________.
3. Assume that the company uses the LIFO method. The value of the ending inventory on
December 31 is $__________.
4. Determine the difference in the amount of income that the company would have reported if it
had used the FIFO method instead of the LIFO method. Would income have been greater or
less?
Reporting and Analyzing Inventory
FOR INSTRUCTOR USE ONLY
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Ex. 203
Hansen Company uses the periodic inventory method and had the following inventory information
available:
Units Unit Cost Total Cost
1/1 Beginning Inventory 100 $3 $ 300
1/20 Purchase 500 $4 2,000
7/25 Purchase 100 $5 500
10/20 Purchase 300 $6 1,800
1,000 $4,600
A physical count of inventory on December 31 revealed that there were 380 units on hand.
Instructions
Answer the following independent questions and show computations supporting your answers.
1. Assume that the company uses the FIFO method. The value of the ending inventory at
December 31 is $__________.
2. Assume that the company uses the average cost method. The value of the ending inventory
on December 31 is $__________.
3. Assume that the company uses the LIFO method. The value of the ending inventory on
December 31 is $__________.
4. Determine the difference in the amount of income that the company would have reported if it
had used the FIFO method instead of the LIFO method. Would income have been greater or
less?
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
6-58
Ex. 204
Faster Company uses the periodic inventory method and had the following inventory information
available:
Units Unit Cost Total Cost
1/1 Beginning Inventory 15 $8.00 $ 120
1/20 Purchase 60 $8.80 528
7/25 Purchase 30 $8.40 252
10/20 Purchase 45 $9.60 432
150 $1,332
A physical count of inventory on December 31 revealed that there were 55 units on hand.
Instructions
Answer the following independent questions and show computations supporting your answers.
1. Assume that the company uses the FIFO method. The value of the ending inventory at
December 31 is $__________.
2. Assume that the company uses the Average Cost method. The value of the ending inventory
on December 31 is $__________.
3. Assume that the company uses the LIFO method. The value of the ending inventory on
December 31 is $__________.
4. Assume that the company uses the FIFO method. The value of the cost of goods sold at
December 31 is $__________.
Reporting and Analyzing Inventory
FOR INSTRUCTOR USE ONLY
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Ex. 205
Compute the cost to be assigned to ending inventory for each of the methods indicated given the
following information about purchases and sales during the year.
January 1 Beginning Inventory 150 items @ $4 = $ 600
May 1 Purchases 450 items @ $6 = 2,700
Total Available 600 items $3,300
Total Sales 430 items
December 31 Ending Inventory 170
Cost assigned on an average cost basis $__________
Cost assigned on a FIFO basis $__________
Costs assigned on a LIFO basis $__________
Ex. 206
Compute the cost to be assigned to ending inventory for each of the methods indicated given the
following information about purchases and sales during the year.
January 1 Beginning Inventory 100 items @ $7 = $ 700
May 1 Purchases 400 items @ $8 = 3,200
Total Available 500 items $3,900
Total Sales 360 items
December 31 Ending Inventory 140
Cost assigned on an average cost basis $__________
Cost assigned on a FIFO basis $__________
Costs assigned on a LIFO basis $__________
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
6-60

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