41. Use this information to answer the following question.
Jan.
1
Inventory
15 units @ $4.00
8
Purchase
60 units @ $4.40
17
Purchase
30 units @ $4.20
25
Purchase
45 units @ $4.80
Total sales
100 units
A periodic inventory system is used.
Cost of goods sold under FIFO is
a.
$429.
b.
$426.
c.
$452.
d.
$237.
42. Use this information to answer the following question.
Jan.
1
Inventory
15 units @ $4.00
8
Purchase
60 units @ $4.40
17
Purchase
30 units @ $4.20
25
Purchase
45 units @ $4.80
Total sales
100 units
A periodic inventory system is used.
Ending inventory under LIFO is
a.
$452.
b.
$429.
c.
$214.
d.
$237.
43. Use this information to answer the following question.
Jan.
1
Inventory
15 units @ $4.00
8
Purchase
60 units @ $4.40
17
Purchase
30 units @ $4.20
25
Purchase
45 units @ $4.80
Total sales
100 units
Assuming that the specific identification method is used and that ending inventory consists of 15 units
from each of the three purchases and five units from the January 1 inventory, cost of goods sold is
a.
$221.
b.
$418.
c.
$338.
d.
$445.
44. In a period of declining prices, which of the following inventory methods generally results in the
lowest balance sheet figure for inventory?
a.
LIFO
b.
Cannot tell without more information
c.
FIFO
d.
Average-cost
45. In a period of rising prices, which of the following inventory methods generally results in the lowest
gross margin figure?
a.
Cannot tell without more information
b.
LIFO
c.
FIFO
d.
Average-cost
46. Which inventory method generally best follows the matching principle?
a.
Average-cost
b.
LIFO
c.
Whichever method is used for tax purposes
d.
FIFO
47. Which inventory method generally results in the most realistic ending inventory figure?
a.
FIFO
b.
Whichever method produces the highest ending inventory figure
c.
LIFO
d.
Average-cost
48. In a period of rising prices, which inventory method is best to use for tax purposes?
a.
FIFO
b.
Average-cost
c.
Specific identification
d.
LIFO
49. Given equal circumstances, which inventory method probably would be the most time consuming?
a.
Specific identification
b.
FIFO
c.
Average-cost
d.
LIFO
50. In a period of rising prices, the liquidation of base-layer inventory will result in an unusually high
income tax liability under which of the following methods?
a.
Specific identification
b.
Average-cost
c.
LIFO
d.
FIFO
51. Which of the following inventory methods when used for income tax purposes must also be used for
reporting purposes?
a.
Specific identification
b.
LIFO
c.
FIFO
d.
Average-cost
52. Use this inventory information for the month of September to answer the following question.
Sept.
1
10 units @ $120
5
60 units @ $112
14
40 units
21
30 units @ $116
30
28 units
Assuming that a perpetual inventory system is used, what is ending inventory on a FIFO basis?
a.
$3,704
b.
$7,696
c.
More information is needed.
d.
$3,664
53. Use this inventory information for the month of September to answer the following question.
Sept.
1
10 units @ $120
5
60 units @ $112
14
40 units
21
30 units @ $116
30
28 units
Assuming that a perpetual inventory system is used, what is ending inventory (rounded) under the
average-cost method?
a.
$3,666
b.
$3,712
c.
$3,208
d.
$7,734
54. Use this inventory information for the month of March to answer the following questions.
Mar.
1
20 units @ $76
7
70 units @ $80
18
25 units
22
10 units @ $88
29
40 units
Assuming that a perpetual inventory system is used, what is ending inventory on a LIFO basis?
a.
More information is needed.
b.
$5,120
c.
$2,720
d.
$2,880
55. Use this inventory information for the month of March to answer the following question.
Mar.
1
20 units @ $76
7
70 units @ $80
18
25 units
22
10 units @ $88
29
40 units
Assuming that a perpetual inventory system is used, what is cost of goods sold (rounded) under the
average-cost method?
a.
$6,020
b.
$3,210
c.
$5,190
d.
$2,810
56. Which of the following companies would be most likely to use the retail method?
a.
A dealer in heavy machinery
b.
A TV repair company
c.
A women’s dress shop
d.
A farm supply company
57. In which of the following cases would the gross profit method most likely be used?
a.
In a company with good accounting records
b.
In applying the average-cost method
c.
In estimating the market value of inventory for application of the lower-of-cost-or-market
rule
d.
In estimating an inventory loss from fire
58. When applying the retail method, which of the following would not be a component of the
cost-to-retail percentage?
a.
Purchases
b.
Beginning inventory
c.
Sales
d.
Freight-in
59. Which of the following methods generally is used to determine the loss when inventory is destroyed or
stolen?
a.
Retail method
b.
FIFO
c.
LIFO
d.
Gross profit method
60. A retail company has goods available for sale of $500,000 at retail and $200,000 at cost and ending
inventory of $49,000 at retail. What is the estimated cost of goods sold?
a.
$151,000
b.
$190,200
c.
$180,400
d.
$170,600
61. A company has cost of goods available for sale of $250,000, sales of $287,000, and a gross profit
percentage of 30 percent. Using the gross profit method, what is the ending inventory?
a.
$113,000
b.
$50,000
c.
$49,100
d.
$163,900
62. A retail store has goods available for sale of $2 million at retail and $1,100,000 at cost, and ending
inventory of $160,000 at retail. What is the estimated cost of ending inventory?
a.
$128,000
b.
$160,000
c.
$110,000
d.
$88,000
63. A retail store prices its goods to achieve a gross margin of 30 percent. Up to the date of a fire that
destroyed the store’s inventory, sales were $200,000 and cost of goods available for sale was $150,000.
The estimated cost of the inventory destroyed is
a.
$10,000.
b.
$35,000.
c.
$60,000.
d.
$50,000.
64. A retail store has beginning inventory of $30,000, purchases of $220,000, sales of $200,000, and a
normal gross margin of 25 percent. What is estimated inventory based on these facts and the gross
profit method?
a.
$50,000
b.
$150,000
c.
$100,000
d.
$200,000
65. A company has goods available for sale of $250,000 at retail and $175,000 at cost. It also had sales of
$210,000 for the period. What is the estimated cost of ending inventory, using the retail method?
a.
$38,000
b.
$28,000
c.
$40,000
d.
$63,000
SHORT ANSWER
1. How is the matching rule applied when accounting for merchandise inventory?
2. Use the following figures (stated in millions of dollars) to compute the inventory
turnover and the days’ inventory on hand: (Round answers to one decimal place).
Cost of goods sold:
$6,584
Beginning inventory:
$915
Ending inventory:
$1,177
a. Inventory turnover = ___________________
b. Days’ inventory on hand = ___________________
3. What is the chief objective of supply-chain management? How is it accomplished?
4. Condensed income statements for Newlon Company are shown below for two years.
2010
2009
Net sales
$75,000
$90,000
Cost of goods sold
45,000
54,000
Gross margin
$30,000
$36,000
Operating expenses
15,000
15,000
Income before income taxes
$15,000
$21,000
Compute the corrected income before income taxes for 2009 and 2010 assuming that the inventory as
of the end of 2009 was mistakenly understated by $3,000.
5. Assuming that ending inventory for 2009 was understated, indicate whether each of the following will
be understated (U), overstated (O), or not affected (N).
_____ 1. Beginning inventory for 2010
_____ 2. Cost of goods sold for 2009
_____ 3. Stockholders’ equity at the end of 2010
_____ 4. Income before income taxes for 2010
_____ 5. Stockholders’ equity at the end of 2009
_____ 6. Cost of goods sold for 2010
_____ 7. Income before income taxes for 2009
6. Assuming that ending inventory for 2009 was overstated, indicate whether each of the following will
be understated (U), overstated (O), or not affected (N).
_____ 1. Beginning inventory for 2010
_____ 2. Cost of goods sold for 2009
_____ 3. Stockholders’ equity at the end of 2010
_____ 4. Income before income taxes for 2010
_____ 5. Stockholders’ equity at the end of 2009
_____ 6. Cost of goods sold for 2010
_____ 7. Income before income taxes for 2009
7. Marina Sailboats reports income before income taxes of $80,000 during 2010. If beginning inventory
was overstated by $7,000 and ending inventory was understated by $8,000, calculate corrected income
before income taxes for the year. (Show your work.)
8. Winer & Daughters reports income before income taxes of $10,000 during 2010. 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.)
9. 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?
10. 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.)
11. 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.
12. Why are cost flow assumptions made when accounting for merchandise inventory?
13. 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.
1. Some items purchased and owned were still in transit when Hinkel took his physical count.
2. Hinkel had some merchandise on consignment or stored at another location.
3. Some items Hinkel counted had already been sold but not yet picked up by the buyer.
4. Hinkel forgot to add freight costs to the total cost of his inventory.
14. Why is the LIFO cost flow assumption an acceptable valuation method for merchandise inventory
when it rarely matches the physical movement of the product?
ANS:
15. Given the following information about purchases and sales during the year, compute the cost to be
assigned to ending inventory under each of three methods: (a) average-cost, (b) FIFO, and (c) LIFO.
Assume the periodic inventory system is used. (Show your work.)
Jan.
1
Beginning inventory
150 items @ $3 =
$ 450
May
1
Purchases
450 items @ $6 =
2,700
Totals
600 items
$3,150
Total sales
300 items
Dec.
31
Ending inventory
300 items
16. Given the following information about purchases and sales during the year, compute the cost to be
assigned to ending inventory under each of three methods: (a) average-cost, (b) FIFO, and (c) LIFO.
Assume the periodic inventory system is used. (Show your work.)
Jan.
1
Beginning inventory
100 items @ $4 =
$ 400
July
1
Purchases
300 items @ $8 =
2,400
Totals
400 items
$2,800
Total sales
240 items
Dec.
31
Ending inventory
160 items
17. Use the following information to calculate cost of goods sold under each of three methods: (a) FIFO,
(b) LIFO, and (c) average-cost. Assume the periodic inventory system is used. (Show your work.)
Apr.
1
Beginning inventory
90 units @ $40
8
Sales
70 units
17
Purchases
150 units @ $42
24
Sales
110 units
30
Purchases
60 units @ $44
18. Why are the amounts determined for ending inventory and cost of goods sold the same under both the
periodic and perpetual inventory systems when FIFO is used but not when LIFO is used?
19. How does the perpetual inventory system differ from the periodic inventory system in the
determination of cost of goods sold?
20. 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
21. Under rising prices, why will the FIFO method produce a higher ending inventory than LIFO?
22. What is a LIFO liquidation, and what is its effect on income before income taxes?
23. Up to the date of a fire that completely destroyed Singer’s inventory, Singer had sales of $2,000,000,
purchases of $1,800,000, and freight-in of $80,000. The cost of beginning inventory was $140,000 and
the company’s typical gross profit was 40 percent. Using the gross profit method, estimate Singer’s
inventory loss from the fire. (Show your work.)
24. 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.)
25. 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
26. Freyman’s Shoe Store had net retail sales of $200,000 during the current year. The following additional
information was obtained from the accounting records.
At Cost
At Retail
Beginning inventory
$ 30,000
$ 63,000
Net purchases for the period
89,000
193,000
Freight-in
9,000
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:
$128,000 ÷ $256,000 = 50%
Net sales during the period
Estimated ending inventory at retail
$ 56,000
Estimated cost of ending inventory
$ 28,000
27. 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.)
28. During October, Tedesco Company sold 240 units of Product R. Its beginning inventory and purchases
during the month were as follows:
Oct.
1
Beginning inventory
100 units @ $20
5
Purchases
100 units @ $24
10
Purchases
100 units @ $22
15
Purchases
100 units @ $24
20
Purchases
100 units @ $28
25
Purchases
100 units @ $26
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.)
29. During the first quarter of 20xx, 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, 20xx, 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.)
30. 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 @ $14
9
Purchases
30 units @ $16
17
Sales
25 units
22
Purchases
15 units @ $18
27
Sales
40 units
31. 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, 2010, using the retail
method. Show your answer in good form.
Cost
Retail
January 1, 2010, 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, 2010
Purchases
Purchases returns and allowances
Freight-in
Net purchases for the period
Merchandise available for sale
Ratio of cost to retail price:
$200,000 ÷ $320,000 = 62.5%
Net sales during the period
($247,500 – $7,500)
Estimated inventory, December 31,
2010, at retail
Ratio of cost to retail
Estimated cost of inventory,
December 31, 2010