FOR INSTRUCTOR USE ONLY
CHAPTER 6
INVENTORIES
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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True-False Statements
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Multiple Choice Questions
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sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
a This question covers a topic in an appendix to the chapter.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
6 – 2
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Brief Exercises
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SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
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Learning Objective 1
1.
TF
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Learning Objective 2
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Learning Objective 3
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Inventories
FOR INSTRUCTOR USE ONLY
6 – 3
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 4
17.
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Learning Objective 5
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Learning Objective 6
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Learning Objective a7
a22.
TF
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TF
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MC
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Ex
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TF
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Learning Objective a8
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Ex
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C
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise MA = Matching
SA = Short-Answer Essay
CHAPTER LEARNING OBJECTIVES
1. Determine how to classify inventory and inventory quantities. Merchandisers need only
one inventory classification, merchandise inventory, to describe the different items that make
up total inventory. Manufacturers, on the other hand, usually classify inventory into three
categories: finished goods, work in process, and raw materials. To determine inventory
quantities, manufacturers (1) take physical inventory of goods on hand and (2) determine the
ownership of goods in transit or on consignment.
2. Explain the accounting for inventories and apply the inventory cost flow methods. The
primary basis of accounting for inventories is cost. Cost of goods available for sale includes
(a) cost of beginning inventory and (b) the cost of goods purchased. The inventory cost flow
methods are specific identification, and three assumed cost flow methods—FIFO, LIFO, and
average-cost.
3. Explain the financial effects of the inventory cost flow assumptions. Companies may
allocate the cost of goods available for sale to cost of goods sold and ending inventory by
specific identification or by a method based on an assumed cost flow. When prices are rising,
the first-in, first-out (FIFO) method results in lower cost of goods sold and higher net income
than the other methods. The reverse is true when prices are falling. In the balance sheet,
FIFO results in an ending inventory that is closest to current value. Inventory under LIFO is
the farthest from current value. LIFO results in the lowest income taxes.
Test Bank for Financial Accounting, Ninth Edition
6 – 4
4. Explain the lower-of-cost-or-market basis of accounting for inventories. Companies use
the lower-of-cost-or-market (LCM) basis when the current replacement cost (market) is less
than cost. Under LCM, companies recognize the loss in the period in which the price decline
occurs.
5. Indicate the effects of inventory errors on the financial statements. In the income
statement of the current year: (a) An error in beginning inventory will have a reverse effect on
net income. (b) An error in ending inventory will have a similar effect on net income. In the
following period, its effect on net income for that period is reversed, and total net income for
the two years will be correct. In the balance sheet: Ending inventory errors will have the
same effect on total assets and total stockholder’s equity and no effect on liabilities.
6. Discuss the presentation and analysis of inventory. Inventory is classified in the balance
sheet as a current asset immediately below receivables. There also should be disclosure of
(1) the major inventory classifications,(2) the basis of accounting, and (3) the cost method.
The inventory turnover is cost of goods sold divided by average inventory. To convert it to
average days in inventory, divide 365 days by the inventory turnover.
a7. Apply the inventory cost flow methods to perpetual inventory records. Under FIFO and
a perpetual inventory system, companies charge to cost of goods sold the cost of the earliest
goods on hand prior to each sale. Under LIFO and a perpetual system, companies charge to
cost of goods sold the cost of the most recent purchase prior to sale. Under the moving–
average (average cost) method and a perpetual system, companies compute a new average
cost after each purchase.
a8. Describe the two methods of estimating inventories. The two methods of estimating
inventories are the gross profit method and the retail inventory method. Under the gross
profit method, companies apply a gross profit rate to net sales to determine estimated cost of
goods sold. They then subtract estimated cost of goods sold from cost of goods available for
sale to determine the estimated cost of the ending inventory. Under the retail inventory
method, companies compute a cost-to-retail ratio by dividing the cost of goods available for
sale by the retail value of the goods available for sale. They then apply this ratio to the
ending inventory at retail to determine the estimated cost of the ending inventory.
TRUE-FALSE STATEMENTS
1. Transactions that affect inventories on hand have an effect on both the balance sheet and
the income statement.
2. The more inventory a company has in stock, the greater the company’s profit.
3. Raw materials inventories are the goods that a manufacturer has completed and are
ready to be sold to customers.
Inventories
6 – 5
4. Goods that have been purchased FOB destination but are in transit, should be excluded
from a physical count of goods.
Test Bank for Financial Accounting, Ninth Edition
6 – 6
5. Goods out on consignment should be included in the inventory of the consignor.
6. The specific identification method of costing inventories tracks the actual physical flow of
the goods available for sale.
7. Management may choose any inventory costing method it desires as long as the cost flow
assumption chosen is consistent with the physical movement of goods in the company.
8. The first-in, first-out (FIFO) inventory method results in an ending inventory valued at the
most recent cost.
9. The expense recognition principle requires that the cost of goods sold be matched against
the ending merchandise inventory in order to determine income.
10. The specific identification method of inventory valuation is desirable when a company
sells a large number of low-unit cost items.
11. If a company has no beginning inventory and the unit cost of inventory items does not
change during the year, the value assigned to the ending inventory will be the same under
LIFO and average cost flow assumptions.
12. If the unit price of inventory is increasing during a period, a company using the LIFO
inventory method will show less gross profit for the period, than if it had used the FIFO
inventory method.
13. If a company has no beginning inventory and the unit price of inventory is increasing
during a period, the cost of goods available for sale during the period will be the same
under the LIFO and FIFO inventory methods.
14. A company may use more than one inventory costing method concurrently.
15. Use of the LIFO inventory valuation method enables a company to report paper or
phantom profits.
Inventories
6 – 7
16. If a company changes its inventory valuation method, the effect of the change on net
income should be disclosed in the financial statements.
17. Under the lower-of-cost-or-market basis, market is defined as current replacement cost.
18. Accountants believe that the write down from cost to market should not be made in the
period in which the price decline occurs.
19. An error that overstates the ending inventory will also cause net income for the period to
be overstated.
20. If inventories are valued using the LIFO cost flow assumption, they should not be
classified as a current asset on the balance sheet.
21. Inventory turnover is calculated as cost of goods sold divided by ending inventory.
a22. If a company uses the FIFO cost flow assumption, the cost of goods sold for the period
will be the same under a perpetual or periodic inventory system.
a23. In applying the LIFO assumption in a perpetual inventory system, the cost of the units
most recently purchased prior to sale is allocated first to the units sold.
a24. Under generally accepted accounting principles, management has the choice of physically
counting inventory on hand at the end of the year or using the gross profit method to
estimate the ending inventory.
a25. The retail inventory method requires a company to value its inventory on the balance
sheet at retail prices.
26. Finished goods are a classification of inventory for a manufacturer that are completed and
ready for sale.
Test Bank for Financial Accounting, Ninth Edition
6 – 8
27. Under the FIFO method, the costs of the earliest units purchased are the first charged to
cost of goods sold.
28. The cost of goods available for sale consists of the beginning inventory plus the cost of
goods purchased.
29. In a period of falling prices, the LIFO method results in a lower cost of goods sold than the
FIFO method.
30. The lower-of-cost-or-market basis is an example of the accounting concept of
conservatism.
31. Inventories are reported in the current assets section of the balance sheet immediately
below receivables.
a32. In a perpetual inventory system, the cost of goods sold under the FIFO method is based
on the cost of the latest goods on hand during the period.
a33. The gross profit method is based on the assumption that the rate of gross profit remains
constant from one year to the next.
Reporting
Answers to True-False Statements
Item
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Item
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Ans.
34. Inventories affect
a. only the balance sheet.
b. only the income statement.
c. both the balance sheet and the income statement.
d. neither the balance sheet nor the income statement.
Inventories
6 – 9
35. Inventory is
a. reported under the classification of Property, Plant, and Equipment on the balance
sheet.
b. often reported as a miscellaneous expense on the income statement.
c. reported as a current asset on the balance sheet.
d. generally valued at the price for which the goods can be sold.
36. Items waiting to be used in production are considered to be
a. raw materials.
b. work in progress.
c. finished goods.
d. merchandise inventory.
37. In a manufacturing business, inventory that is ready for sale is called
a. raw materials inventory.
b. work in process inventory.
c. finished goods inventory.
d. store supplies inventory.
38. The factor which determines whether or not goods should be included in a physical count
of inventory is
a. physical possession.
b. legal title.
c. management’s judgment.
d. whether or not the purchase price has been paid.
39. If goods in transit are shipped FOB destination
a. the seller has legal title to the goods until they are delivered.
b. the buyer has legal title to the goods until they are delivered.
c. the transportation company has legal title to the goods while the goods are in transit.
d. no one has legal title to the goods until they are delivered.
40. An auto manufacturer would classify vehicles in various stages of production as
a. finished goods.
b. merchandise inventory.
c. raw materials.
d. work in process.
Test Bank for Financial Accounting, Ninth Edition
6 – 10
41. Which of the following should be included in the physical inventory of a company?
a. Goods held on consignment from another company.
b. Goods in transit to another company shipped FOB shipping point.
c. Goods in transit from another company shipped FOB shipping point.
d. Goods in transit to or from another company shipped FOB shipping point.
42. Manufacturers usually classify inventory into all the following general categories except
a. work in process
b. finished goods
c. merchandise inventory
d. raw materials
43. Freight terms of FOB shipping point mean that the
a. seller must debit freight out.
b. buyer must bear the freight costs.
c. goods are placed free on board at the buyer‘s place of business.
d. seller must bear the freight costs.
44. For companies that use a perpetual inventory system, all of the following are purposes for
taking a physical inventory except
a. to check the accuracy of the records.
b. to determine the amount of wasted raw materials.
c. to determine losses due to employee theft.
d. to determine ownership of the goods.
45. Fetherston Company’s goods in transit at December 31 include:
sales made purchases made
(1) FOB destination (3) FOB destination
(2) FOB shipping point (4) FOB shipping point
Which items should be included in Fetherston’s inventory at December 31?
a. (2) and (3)
b. (1) and (4)
c. (1) and (3)
d. (2) and (4)
46. The term “FOB” denotes
a. free on board.
b. freight on board.
c. free only (to) buyer.
d. freight charge on buyer.
Inventories
6 – 11
47. Under a consignment arrangement, the
a. consignor has ownership until goods are sold to a customer.
b. consignor has ownership until goods are shipped to the consignee.
c. consignee has ownership when the goods are in the consignee’s possession.
d. consigned goods are included in the inventory of the consignee.
48. As a result of a thorough physical inventory, Horace Company determined that it had
inventory worth $320,000 at December 31, 2015. This count did not take into
consideration the following facts: Herschel Consignment currently has goods worth
$47,000 on its sales floor that belong to Horace but are being sold on consignment by
Herschel. The selling price of these goods is $75,000. Horace purchased $22,000 of
goods that were shipped on December 27, FOB destination, that will be received by
Horace on January 3. Determine the correct amount of inventory that Horace should
report.
a. $320,000.
b. $340,000.
c. $367,000.
d. $387,000.
49. Partridge Bookstore had 500 units on hand at January 1, costing $9 each. Purchases and
sales during the month of January were as follows:
Date Purchases Sales
Jan. 14 375 @ $14
17 250 @ $10
25 250 @ $11
29 260 @ $16
Partridge does not maintain perpetual inventory records. According to a physical count,
365 units were on hand at January 31.
The cost of the inventory at January 31, under the FIFO method is:
a. $3,285.
b. $3,650.
c. $3,900.
d. $4,015.
Test Bank for Financial Accounting, Ninth Edition
6 – 12
50. Partridge Bookstore had 500 units on hand at January 1, costing $9 each. Purchases and
sales during the month of January were as follows:
Date Purchases Sales
Jan. 14 375 @ $14
17 250 @ $10
25 250 @ $11
29 260 @ $16
Partridge does not maintain perpetual inventory records. According to a physical count,
365 units were on hand at January 31.
The cost of the inventory at January 31, under the LIFO method is:
a. $3,285.
b. $3,650.
c. $3,900.
d. $4,015.
51. Nick’s Place recorded the following data:
Units Unit
Date Received Sold On Hand Cost
1/1 Inventory 600 $2.50
1/8 Purchased 1,000 1,600 3.00
1/12 Sold 1,200 300
The weighted average unit cost of the inventory at January 31 is:
a. $2.50.
b. $2.75.
c. $2.81.
d. $3.400.
52. Inventoriable costs include all of the following except the
a. freight costs incurred when buying inventory.
b. costs of the purchasing and warehousing departments.
c. cost of the beginning inventory.
d. cost of goods purchased.
53. Beginning inventory plus the cost of goods purchased equals
a. cost of goods sold.
b. cost of goods available for sale.
c. net purchases.
d. total goods purchased.
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54. Cost of goods sold is computed from the following equation:
a. beginning inventory – cost of goods purchased + ending inventory.
b. sales – cost of goods purchased + beginning inventory – ending inventory.
c. sales + gross profit – ending inventory + beginning inventory.
d. beginning inventory + cost of goods purchased – ending inventory.
55. A company just starting in business purchased three merchandise inventory items at the
following prices. First purchase $64; Second purchase $76; Third purchase $68. If the
company sold two units for a total of $200 and used FIFO costing, the gross profit for the
period would be
a. $56.
b. $60.
c. $62.
d. $68.
56. The LIFO inventory method assumes that the cost of the latest units purchased are
a. the last to be allocated to cost of goods sold.
b. the first to be allocated to ending inventory.
c. the first to be allocated to cost of goods sold.
d. not allocated to cost of goods sold or ending inventory.
57. A company just starting business made the following four inventory purchases in June:
June 1 150 units $ 390
June 10 200 units 585
June 15 200 units 630
June 28 150 units 510
$2,115
A physical count of merchandise inventory on June 30 reveals that there are 250 units on
hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is
a. $683.
b. $825.
c. $1,290.
d. $1,432.
Test Bank for Financial Accounting, Ninth Edition
6 – 14
58. A company just starting business made the following four inventory purchases in June:
June 1 150 units $ 390
June 10 200 units 585
June 15 200 units 630
June 28 150 units 510
$2,115
A physical count of merchandise inventory on June 30 reveals that there are 250 units on
hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for
June is
a. $683.
b. $825.
c. $1,290.
d. $1,432.
59. A company just starting business made the following four inventory purchases in June:
June 1 150 units $ 390
June 10 200 units 585
June 15 200 units 630
June 28 150 units 510
$2,115
A physical count of merchandise inventory on June 30 reveals that there are 250 units on
hand. Using the average-cost method, the amount allocated to the ending inventory on
June 30 is
a. $683.
b. $755.
c. $825.
d. $1,360.
60. A company just starting business made the following four inventory purchases in June:
June 1 150 units $ 390
June 10 200 units 585
June 15 200 units 630
June 28 150 units 510
$2,115
A physical count of merchandise inventory on June 30 reveals that there are 250 units on
hand.
The inventory method which results in the highest gross profit for June is
a. the FIFO method.
b. the LIFO method.
c. the weighted average unit cost method.
d. not determinable.
Inventories
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61. A company purchased inventory as follows:
150 units at $5
350 units at $6
The average unit cost for inventory is
a. $5.00.
b. $5.50.
c. $5.70.
d. $6.00.
62. Which of the following items will increase inventoriable costs for the buyer of goods?
a. Purchase returns and allowances granted by the seller
b. Purchase discounts taken by the purchaser
c. Freight charges paid by the seller
d. Freight charges paid by the purchaser
63. Inventoriable costs may be thought of as a pool of costs consisting of which two
elements?
a. The cost of beginning inventory and the cost of ending inventory
b. The cost of ending inventory and the cost of goods purchased during the year
c. The cost of beginning inventory and the cost of goods purchased during the year
d. The difference between the costs of goods purchased and the cost of goods sold
during the year
64. The cost of goods available for sale is allocated between
a. beginning inventory and ending inventory.
b. beginning inventory and cost of goods on hand.
c. ending inventory and cost of goods sold.
d. beginning inventory and cost of goods purchased.
65. Indrisano’s Used Cars uses the specific identification method of costing inventory. During
March, Indrisano purchased three cars for $12,000, $14,400, and $19,200, respectively.
During March, two cars are sold for a total of $34,600. Indrisano determines that at March
31, the $14,400 car is still on hand. What is Indrisano’s gross profit for March?
a. $1,000.
b. $3,400.
c. $4,200.
d. $8,200.
Test Bank for Financial Accounting, Ninth Edition
6 – 16
66. Of the following companies, which one would not likely employ the specific identification
method for inventory costing?
a. Music store specializing in organ sales
b. Farm implement dealership
c. Antique shop
d. Hardware store
67. A problem with the specific identification method is that
a. inventories can be reported at actual costs.
b. management can manipulate income.
c. matching is not achieved.
d. the lower-of-cost-or-market basis cannot be applied.
68. The selection of an appropriate inventory cost flow assumption for an individual company
is made by
a. the external auditors.
b. the SEC.
c. the internal auditors.
d. management.
69. Which one of the following inventory methods is often impractical to use?
a. Specific identification
b. LIFO
c. FIFO
d. Average cost
70. Which of the following is not a common cost flow assumption used in costing inventory?
a. First-in, first-out
b. Middle-in, first-out
c. Last-in, first-out
d. Average cost
71. The accounting principle that requires that the cost flow assumption be consistent with the
physical movement of goods is
a. called the expense recognition principle.
b. called the consistency principle.
c. nonexistent; that is, there is no accounting requirement.
d. called the physical flow assumption.
Inventories
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72. Which of the following statements is true regarding inventory cost flow assumptions?
a. A company may use more than one costing method concurrently.
b. A company must comply with the method specified by industry standards.
c. A company must use the same method for domestic and foreign operations.
d. A company may never change its inventory costing method once it has chosen a
method.
73. Which of the following statements is correct with respect to inventories?
a. The FIFO method assumes that the costs of the earliest goods acquired are the last to
be sold.
b. It is generally good business management to sell the most recently acquired goods
first.
c. Under FIFO, the ending inventory is based on the latest units purchased.
d. FIFO seldom coincides with the actual physical flow of inventory.
74. The cost of goods available for sale is allocated to the cost of goods sold and the
a. beginning inventory.
b. ending inventory.
c. cost of goods purchased.
d. gross profit.
75. At May 1, 2015, Kibbee Company had beginning inventory consisting of 200 units with a
unit cost of $7. During May, the company purchased inventory as follows:
800 units at $7
600 units at $8
The company sold 1,000 units during the month for $12 per unit. Kibbee uses the average
cost method. The average cost per unit for May is
a. $7.000.
b. $7.375.
c. $7.500.
d. $8.000.
Test Bank for Financial Accounting, Ninth Edition
6 – 18
76. At May 1, 2015, Kibbee Company had beginning inventory consisting of 200 units with a
unit cost of $7. During May, the company purchased inventory as follows:
800 units at $7
600 units at $8
The company sold 1,000 units during the month for $12 per unit. Kibbee uses the average
cost method. The value of Kibbee’s inventory at May 31, 2015 is
a. $3,000.
b. $4,425.
c. $4,500.
d. $7,500.
77. At May 1, 2015, Kibbee Company had beginning inventory consisting of 200 units with a
unit cost of $7. During May, the company purchased inventory as follows:
800 units at $7
600 units at $8
The company sold 1,000 units during the month for $12 per unit. Kibbee uses the average
cost method. Kibbee’s gross profit for the month of May is
a. $4,625.
b. $4,571.
c. $4,000.
d. $4,500.
78. Effie Company uses a periodic inventory system. Details for the inventory account for the
month of January, 2015 are as follows:
Units Per unit price Total
Balance, 1/1/15 200 $5.00 $1,000
Purchase, 1/15/15 100 5.30 530
Purchase, 1/28/15 100 5.50 550
An end of the month (1/31/15) inventory showed that 160 units were on hand. How many
units did the company sell during January, 2015?
a. 60
b. 160
c. 200
d. 240
Inventories
6 – 19
79. Effie Company uses a periodic inventory system. Details for the inventory account for the
month of January, 2015 are as follows:
Units Per unit price Total
Balance, 1/1/15 200 $5.00 $1,000
Purchase, 1/15/15 100 5.30 530
Purchase, 1/28/15 100 5.50 550
An end of the month (1/31/15) inventory showed that 160 units were on hand. If the
company uses FIFO, what is the value of the ending inventory?
a. $800
b. $832
c. $848
d. $868
80. Effie Company uses a periodic inventory system. Details for the inventory account for the
month of January, 2015 are as follows:
Units Per unit price Total
Balance, 1/1/15 200 $5.00 $1,000
Purchase, 1/15/15 100 5.30 530
Purchase, 1/28/15 100 5.50 550
An end of the month (1/31/15) inventory showed that 160 units were on hand. If the
company uses LIFO, what is the value of the ending inventory?
a. $800
b. $832
c. $848
d. $868
81. Effie Company uses a periodic inventory system. Details for the inventory account for the
month of January, 2015 are as follows:
Units Per unit price Total
Balance, 1/1/15 200 $5.00 $1,000
Purchase, 1/15/15 100 5.30 530
Purchase, 1/28/15 100 5.50 550
An end of the month (1/31/15) inventory showed that 160 units were on hand. If the
company uses FIFO and sells the units for $10 each, what is the gross profit for the
month?
a. $1,120
b. $1,188
c. $1,532
d. $1,600
Test Bank for Financial Accounting, Ninth Edition
6 – 20
82. Eneri Company‘s inventory records show the following data:
Units Unit Cost
Inventory, January 1 10,000 $9.20
Purchases: June 18 9,000 8.00
November 8 6,000 7.00
A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for
$13 each. The company has an effective tax rate of 20%. Eneri uses the periodic
inventory method.
Under the FIFO method, the December 31 inventory is valued at
a. $28,000.
b. $32,267.
c. $32,960.
d. $36,800.
83. Eneri Company‘s inventory records show the following data:
Units Unit Cost
Inventory, January 1 10,000 $9.20
Purchases: June 18 9,000 8.00
November 8 6,000 7.00
A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for
$13 each. The company has an effective tax rate of 20%. Eneri uses the periodic
inventory method. What is the cost of goods available for sale?
a. $169,200
b. $178,000
c. $206,000
d. $325,000
84. Eneri Company‘s inventory records show the following data:
Units Unit Cost
Inventory, January 1 10,000 $9.20
Purchases: June 18 9,000 8.00
November 8 6,000 7.00
A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for
$13 each. The company has an effective tax rate of 20%. Eneri uses the periodic
inventory method. Under the LIFO method, cost of goods sold is
a. $28,000.
b. $169,200.
c. $173,040.
d. $178,000.
Inventories
6 – 21
85. Eneri Company‘s inventory records show the following data:
Units Unit Cost
Inventory, January 1 10,000 $9.20
Purchases: June 18 9,000 8.00
November 8 6,000 7.00
A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for
$13 each. The company has an effective tax rate of 20%. Eneri uses the periodic
inventory method. The weighted-average cost per unit is
a. $8.00.
b. $8.01.
c. $8.24.
d. $9.30.
86. Eneri Company‘s inventory records show the following data:
Units Unit Cost
Inventory, January 1 10,000 $9.20
Purchases: June 18 9,000 8.00
November 8 6,000 7.00
A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for
$13 each. The company has an effective tax rate of 20%. Eneri uses the periodic
inventory method. If the company uses FIFO, what is the gross profit for the period?
a. $95,000
b. $99,266
c. $99,960
d. $103,800
87. Eneri Company‘s inventory records show the following data:
Units Unit Cost
Inventory, January 1 10,000 $9.20
Purchases: June 18 9,000 8.00
November 8 6,000 7.00
A physical inventory on December 31 shows 4,000 units on hand. Eneri sells the units for
$13 each. The company has an effective tax rate of 20%. Eneri uses the periodic
inventory method. What is the difference in taxes if LIFO rather than FIFO is used?
a. $1,760 additional taxes
b. $992 additional taxes
c. $786 additional taxes
d. $992 tax savings
Test Bank for Financial Accounting, Ninth Edition
6 – 22
88. Priscilla has the following inventory information.
July 1 Beginning Inventory 20 units at $19 $ 380
7 Purchases 70 units at $20 1,400
22 Purchases 10 units at $23 230
$2,010
A physical count of merchandise inventory on July 31 reveals that there are 35 units on
hand. Using the average-cost method, the value of ending inventory is
a. $680.
b. $704.
c. $723.
d. $730.
89. Priscilla has the following inventory information.
July 1 Beginning Inventory 20 units at $19 $ 380
7 Purchases 70 units at $20 1,400
22 Purchases 10 units at $23 230
$2,010
A physical count of merchandise inventory on July 31 reveals that there are 35 units on
hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for
July is
a. $1,280.
b. $1,287
c. $1,306.
d. $1,330.
90. Priscilla has the following inventory information.
July 1 Beginning Inventory 20 units at $19 $ 380
7 Purchases 70 units at $20 1,400
22 Purchases 10 units at $23 230
$2,010
A physical count of merchandise inventory on July 31 reveals that there are 35 units on
hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for
July is
a. $1,280.
b. $1,287.
c. $1,306.
d. $1,330.
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6 – 23
91. Moroni Industries has the following inventory information.
July 1 Beginning Inventory 40 units at $120
5 Purchases 240 units at $112
14 Sale 160 units
21 Purchases 120 units at $115
30 Sale 140 units
Assuming that a periodic inventory system is used, what is the amount allocated to ending
inventory on a LIFO basis?
a. $11,500
b. $11,520
c. $33,960
d. $33,980
92. Moroni Industries has the following inventory information.
July 1 Beginning Inventory 40 units at $120
5 Purchases 240 units at $112
14 Sale 160 units
21 Purchases 120 units at $115
30 Sale 140 units
Assuming that a periodic inventory system is used, what is the amount allocated to ending
inventory on a FIFO basis?
a. $11,500
b. $11,520
c. $33,960
d. $33,980
93. Netta Shutters has the following inventory information.
Nov. 1 Inventory 30 units @ $8.00
8 Purchase 120 units @ $8.30
17 Purchase 60 units @ $8.40
25 Purchase 90 units @ $8.80
A physical count of merchandise inventory on November 30 reveals that there are 90 units
on hand. Assume a periodic inventory system is used. Cost of goods sold (rounded to the
nearest dollar) under the average-cost method is
a. $1,740.
b. $1,772.
c. $1,778.
d. $1,794.
Test Bank for Financial Accounting, Ninth Edition
6 – 24
94. Netta Shutters has the following inventory information.
Nov. 1 Inventory 30 units @ $8.00
8 Purchase 120 units @ $8.30
17 Purchase 60 units @ $8.40
25 Purchase 90 units @ $8.80
A physical count of merchandise inventory on November 30 reveals that there are 90 units
on hand. Assume a periodic inventory system is used. Ending inventory under FIFO is
a. $738.
b. $792.
c. $1,740.
d. $1,794.
95. Netta Shutters has the following inventory information.
Nov. 1 Inventory 30 units @ $8.00
8 Purchase 120 units @ $8.30
17 Purchase 60 units @ $8.40
25 Purchase 90 units @ $8.80
A physical count of merchandise inventory on November 30 reveals that there are 90 units
on hand. Assume a periodic inventory system is used. Ending inventory under LIFO is
a. $738.
b. $792.
c. $1,740.
d. $1,794.
96. Netta Shutters has the following inventory information.
Nov. 1 Inventory 30 units @ $8.00
8 Purchase 120 units @ $8.30
17 Purchase 60 units @ $8.40
25 Purchase 90 units @ $8.80
A physical count of merchandise inventory on November 30 reveals that there are 90 units
on hand. Assume a periodic inventory system is used. Assuming that the specific
identification method is used and that ending inventory consists of 20 units from each of
the three purchases and 30 units from the November 1 inventory, cost of goods sold is
a. $1,740.
b. $1,772.
c. $1,782.
d. $1,794.
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6 – 25
97. Romanoff Industries had the following inventory transactions occur during 2015:
Units Cost/unit
2/1/15 Purchase 54 $45
3/14/15 Purchase 93 $47
5/1/15 Purchase 66 $49
The company sold 150 units at $70 each and has a tax rate of 30%. Assuming that a
periodic inventory system is used, what is the company’s gross profit using LIFO?
(rounded to whole dollars)
a. $3,318
b. $3,552
c. $6,948
d. $7,182
98. Romanoff Industries had the following inventory transactions occur during 2015:
Units Cost/unit
2/1/15 Purchase 54 $45
3/14/15 Purchase 93 $47
5/1/15 Purchase 66 $49
The company sold 150 units at $70 each and has a tax rate of 30%. Assuming that a
periodic inventory system is used, what is the company’s after-tax income using LIFO?
(rounded to whole dollars)
a. $2,323
b. $2,486
c. $3,318
d. $3,552
99. Romanoff Industries had the following inventory transactions occur during 2015:
Units Cost/unit
2/1/15 Purchase 54 $45
3/14/15 Purchase 93 $47
5/1/15 Purchase 66 $49
The company sold 150 units at $70 each and has a tax rate of 30%. Assuming that a
periodic inventory system is used, what is the company’s gross profit using FIFO?
(rounded to whole dollars)
a. $3,318
b. $3,552
c. $6,948
d. $7,182
Test Bank for Financial Accounting, Ninth Edition
6 – 26
100. Romanoff Industries had the following inventory transactions occur during 2015:
Units Cost/unit
2/1/15 Purchase 54 $45
3/14/15 Purchase 93 $47
5/1/15 Purchase 66 $49
The company sold 150 units at $70 each and has a tax rate of 30%. Assuming that a
periodic inventory system is used, what is the company’s after-tax income using FIFO?
(rounded to whole dollars)
a. $2,322
b. $2,486
c. $3,318
d. $3,552
101. Companies adopt different cost flow methods for each of the following reasons except
a. balance sheet effects.
b. cost effects.
c. income statements effects.
d. tax effects.
102. In periods of rising prices, the inventory method which results in the inventory value on the
balance sheet that is closest to current cost is the
a. FIFO method.
b. LIFO method.
c. average-cost method.
d. tax method.
103. Two companies report the same cost of goods available for sale but each employs a
different inventory costing method. If the price of goods has increased during the period,
then the company using
a. LIFO will have the highest ending inventory.
b. FIFO will have the highest cost of good sold.
c. FIFO will have the highest ending inventory.
d. LIFO will have the lowest cost of goods sold.
104. If companies have identical inventoriable costs but use different inventory flow
assumptions when the price of goods have not been constant, then the
a. cost of goods sold of the companies will be identical.
b. cost of goods available for sale of the companies will be identical.
c. ending inventory of the companies will be identical.
d. net income of the companies will be identical.
Inventories
6 – 27
105. In a period of increasing prices, which inventory flow assumption will result in the lowest
amount of income tax expense?
a. FIFO
b. LIFO
c. Average Cost
d. Income tax expense for the period will be the same under all assumptions.
106. The specific identification method of costing inventories is used when the
a. physical flow of units cannot be determined.
b. company sells large quantities of relatively low cost homogeneous items.
c. company sells large quantities of relatively low cost heterogeneous items.
d. company sells a limited quantity of high-unit cost items.
107. The specific identification method of inventory costing
a. always maximizes a company’s net income.
b. always minimizes a company’s net income.
c. has no effect on a company’s net income.
d. may enable management to manipulate net income.
108. The managers of Constantine Company receive performance bonuses based on the net
income of the firm. Which inventory costing method are they likely to favor in periods of
declining prices?
a. LIFO
b. Average Cost
c. FIFO
d. Physical inventory method
109. In periods of inflation, phantom or paper profits may be reported as a result of using the
a. perpetual inventory method.
b. FIFO costing assumption.
c. LIFO costing assumption.
d. periodic inventory method.
110. Selection of an inventory costing method by management does not usually depend on
a. the fiscal year end.
b. income statement effects.
c. balance sheet effects.
d. tax effects.
Test Bank for Financial Accounting, Ninth Edition
6 – 28
111. In a period of rising prices, the costs allocated to ending inventory may be understated in
the
a. average-cost method.
b. FIFO method.
c. gross profit method.
d. LIFO method.
112. The accountant at Almira Company is figuring out the difference in income taxes the
company will pay depending on the choice of either FIFO or LIFO as an inventory costing
method. The tax rate is 30% and the FIFO method will result in income before taxes of
$8,190. The LIFO method will result in income before taxes of $7,290. What is the
difference in tax that would be paid between the two methods?
a. $270.
b. $630.
c. $900.
d. Cannot be determined from the information provided.
113. The accountant at Cedric Company has determined that income before income taxes
amounted to $7,000 using the FIFO costing assumption. If the income tax rate is 30% and
the amount of income taxes paid would be $315 greater if the LIFO assumption were
used, what would be the amount of income before taxes under the LIFO assumption?
a. $5,950
b. $7,000
c. $7,315
d. $8,050
114. The manager of Brick Company is given a bonus based on income before income taxes.
Net income, after taxes, is $11,200 for FIFO and $9,800 for LIFO. The tax rate is 30%.
The bonus rate is 20%. How much higher is the manager’s bonus if FIFO is adopted
instead of LIFO?
a. $84
b. $2,800
c. $400
d. $420
115. The consistent application of an inventory costing method is essential for
a. conservatism.
b. accuracy.
c. comparability.
d. efficiency.
Inventories
6 – 29
116. Which costing method cannot be used to determine the cost of inventory items before
lower-of-cost-or-market is applied?
a. Specific identification
b. FIFO
c. LIFO
d. All of these methods can be used.
117. Inventory is reported in the financial statements at
a. cost.
b. market.
c. the higher-of-cost-or-market.
d. the lower-of-cost-or-market.
118. The lower-of-cost-or–market basis of valuing inventories is an example of
a. comparability.
b. the cost principle.
c. conservatism.
d. consistency.
119. Under the lower-of-cost-or-market basis in valuing inventory, market is defined as
a. current replacement cost.
b. selling price.
c. historical cost plus 10%.
d. selling price less markup.
120. The lower-of-cost-or-market (LCM) basis may be used with all of the following methods
except
a. average cost.
b. FIFO.
c. LIFO.
d. The LCM basis may be used with all of these.
Test Bank for Financial Accounting, Ninth Edition
6 – 30
121. Alfalfa Company developed the following information about its inventories in applying the
lower-of-cost-or-market (LCM) basis in valuing inventories:
Product Cost Market
A $112,000 $120,000
B 80,000 76,000
C 155,000 162,000
If Alfalfa applies the LCM basis, the value of the inventory reported on the balance sheet
would be
a. $343,000.
b. $347,000.
c. $358,000.
d. $362,000.
122. Switzer, Inc. has 8 computers which have been part of the inventory for over two years.
Each computer cost $600 and originally retailed for $900. At the statement date, each
computer has a current replacement cost of $400. What value should Switzer, Inc., have for
the computers at the end of the year?
a. $2,400.
b. $3,200.
c. $4,800.
d. $7,200.
123. Switzer, Inc. has 8 computers which have been part of the inventory for over two years.
Each computer cost $600 and originally retailed for $900. At the statement date, each
computer has a current replacement cost of $400. How much loss should Switzer, Inc.,
record for the year?
a. $1,600.
b. $2,400.
c. $3,200.
d. $4,000.
124. Othello Company understated its inventory by $20,000 at December 31, 2014. It did not
correct the error in 2014 or 2015. As a result, Othello’s stockholder’s equity was:
a. understated at December 31, 2014, and overstated at December 31, 2015.
b. understated at December 31, 2014, and properly stated at December 31, 2015.
c. overstated at December 31, 2014, and overstated at December 31, 2015.
d. understated at December 31, 2014, and understated at December 31, 2015.
Inventories
6 – 31
125. Understating beginning inventory will understate
a. assets.
b. cost of goods sold.
c. net income.
d. stockholder’s equity.
126. An error in the physical count of goods on hand at the end of a period resulted in a
$15,000 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
127. If beginning inventory is understated by $13,000, 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
128. A company uses the periodic inventory method and the beginning inventory is overstated
by $7,000 because the ending inventory in the previous period was overstated by $7,000.
The amounts reflected in the current end of the period balance sheet are
Assets Stockholder’s Equity
a. Overstated Overstated
b. Correct Correct
c. Understated Understated
d. Overstated Correct
129. Overstating ending inventory will overstate all of the following except
a. assets.
b. cost of goods sold.
c. net income.
d. stockholder’s equity.
Test Bank for Financial Accounting, Ninth Edition
6 – 32
130. Disclosures about inventory should include each of the following except the
a. basis of accounting.
b. costing method.
c. quantity of inventory.
d. major inventory classifications.
131. Days in inventory is calculated by dividing
a. the inventory turnover by 365 days.
b. average inventory by 365 days.
c. 365 days by the inventory turnover.
d. 365 days by average inventory.
132. The following information is available for Everett Company at December 31, 2015:
beginning inventory $80,000; ending inventory $120,000; cost of goods sold $1,050,000;
and sales $1,800,000. Everett’s inventory turnover in 2015 is
a. 8.7 times.
b. 10.5 times.
c. 13.2 times.
d. 18 times.
133. The following information was available for Pete Company at December 31, 2015:
beginning inventory $90,000; ending inventory $70,000; cost of goods sold $984,000; and
sales $1,350,000. Pete’s inventory turnover in 2015 was
a. 10.9 times.
b. 12.3 times.
c. 14.1 times.
d. 16.9 times.
134. The following information was available for Pete Company at December 31, 2015:
beginning inventory $90,000; ending inventory $70,000; cost of goods sold $984,000; and
sales $1,350,000. Pete’s days in inventory in 2015 was
a 21.6 days.
b. 25.9 days.
c. 29.7 days.
d. 33.5 days.
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135. Delmar Company had beginning inventory of $90,000, ending inventory of $110,000, cost
of goods sold of $600,000, and sales of $960,000. Delmar’s days in inventory is:
a 38.0 days.
b. 54.3 days.
c. 60.8 days.
d. 67.5 days.
a136. During July, the following purchases and sales were made by Big Dan Company. There
was no beginning inventory. Big Dan Company uses a perpetual inventory system.
Purchases Sales
July 3 40 units @ $12 July 13 50 units
11 40 units @ $13 22 20 units
20 20 units @ $15
Under the FIFO method, the cost of goods sold for each sale is:
July 13 July 22
a. $600 $240
b. 610 260
c. 650 260
d. 750 300
a137. During July, the following purchases and sales were made by Big Dan Company. There
was no beginning inventory. Big Dan Company uses a perpetual inventory system.
Purchases Sales
July 3 40 units @ $12 July 13 50 units
11 40 units @ $13 22 20 units
20 20 units @ $15
Under the LIFO method, the cost of goods sold for each sale is:
July 13 July 22
a. $600 $240
b. 640 300
c. 650 300
d. 750 260
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a138. Pappy’s Staff has the following inventory information.
July 1 Beginning Inventory 20 units at $90
5 Purchases 120 units at $92
14 Sale 80 units
21 Purchases 60 units at $95
30 Sale 56 units
Assuming that a perpetual inventory system is used, what is the ending inventory on a
FIFO basis?
a. $5,848
b. $5,860
c. $6,068
d. $6,346
a139. Pappy’s Staff Junkets has the following inventory information.
July 1 Beginning Inventory 20 units at $90
5 Purchases 120 units at $92
14 Sale 80 units
21 Purchases 60 units at $95
30 Sale 56 units
Assuming that a perpetual inventory system is used, what is the ending inventory on a
LIFO basis?
a. $5,848
b. $5,860
c. $6,068
d. $6,346
a140. Langer Company has the following inventory information.
July 1 Beginning Inventory 10 units at $90
5 Purchases 60 units at $92
14 Sale 40 units
21 Purchases 30 units at $95
30 Sale 28 units
Assuming that a perpetual inventory system is used, what is the ending inventory (round
all calculations to nearest dollar) under the moving-average cost method?
a. $2,930
b. $2,966
c. $2,986
d. $3,054
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141. A new average cost is computed each time a purchase is made in the
a. average-cost method.
b. moving-average cost method.
c. weighted-average cost method.
d. All of these choices are correct.
a142. When valuing ending inventory under a perpetual inventory system, the
a. valuation using the LIFO assumption is the same as the valuation using the LIFO
assumption under the periodic inventory system.
b. moving average requires that a new average be computed after every sale.
c. valuation using the FIFO assumption is the same as under the periodic inventory
system.
d. earliest units purchased during the period using the LIFO assumption are allocated to
the cost of goods sold when units are sold.
a143. Sawyer Company uses the perpetual inventory system and the moving-average method
to value inventories. On August 1, there were 10,000 units valued at $30,000 in the
beginning inventory. On August 10, 20,000 units were purchased for $6 per unit. On
August 15, 24,000 units were sold for $12 per unit. The amount charged to cost of goods
sold on August 15 was
a. $30,000.
b. $108,000.
c. $120,000.
d. $144,000.
a144. Under the gross profit method, each of the following items are estimated except for the
a. cost of ending inventory.
b. cost of goods sold.
c. cost of goods purchased.
d. gross profit.
a145. Under the retail inventory method, the estimated cost of ending inventory is computed by
multiplying the cost-to-retail ratio by
a. net sales.
b. goods available for sale at retail.
c. goods purchased at retail.
d. ending inventory at retail.
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a146. Inventories are estimated
a. more frequently under a periodic inventory system than a perpetual inventory system.
b. using the wholesale inventory method.
c. more frequently under a perpetual inventory system than the periodic inventory system.
d. using the net method.
a147. Clooney Department Store estimates inventory by using the retail inventory method. The
following information was developed:
At Cost At Retail
Beginning inventory $360,000 $ 750,000
Goods purchased 900,000 1,350,000
Net sales 1,400,000
The estimated cost of the ending inventory is
a. $280,000.
b. $336,000.
c. $420,000.
d. $466,667.
a148. Turturro Department Store utilizes the retail inventory method to estimate its inventories. It
calculated its cost to retail ratio during the period at 75%. Goods available for sale at retail
amounted to $600,000 and goods were sold during the period for $420,000. The
estimated cost of the ending inventory is
a. $135,000.
b. $180,000.
c. $315,000.
d. $450,000.
a149. TB Nelson Company prepares monthly financial statements and uses the gross profit
method to estimate ending inventories. Historically, the company has had a 40% gross
profit rate. During June, net sales amounted to $180,000; the beginning inventory on June
1 was $54,000; and the cost of goods purchased during June amounted to $90,000. The
estimated cost of TB Nelson Company‘s inventory on June 30 is
a. $21,600.
b. $36,000.
c. $72,000.
d. $126,000.
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150. Goods in transit should be included in the inventory of the buyer when the
a. public carrier accepts the goods from the seller.
b. goods reach the buyer.
c. terms of sale are FOB destination.
d. terms of sale are FOB shipping point.
151. Inventory items on an assembly line in various stages of production are classified as
a. Finished goods.
b. Work in process.
c. Raw materials.
d. Merchandise inventory.
152. The cost flow method that often parallels the actual physical flow of merchandise is the
a. FIFO method.
b. LIFO method.
c. average-cost method.
d. gross profit method.
153. Goodman Company’s inventory records show the following data:
Units Unit Cost
Inventory, January 1 10,000 $9.00
Purchases: June 18 9,000 8.20
November 8 6,000 7.00
A physical inventory on December 31 shows 6,000 units on hand. Under the FIFO
method, the December 31 inventory is
a. $42,000.
b. $49,200.
c. $49,392.
d. $54,000.
154. In a period of inflation, the cost flow method that results in the lowest income taxes is the
a. FIFO method.
b. LIFO method.
c. average-cost method.
d. gross profit method.
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155. In a period of rising prices, FIFO will have
a. lower net income than LIFO.
b. lower cost of goods sold than LIFO.
c. lower income tax expense than LIFO.
d. lower net purchases than LIFO.
156. Under the LCM approach, the market value is defined as
a. FIFO cost.
b. LIFO cost.
c. current replacement cost.
d. selling price.
157. Penny Company made an inventory count on December 31, 2015. During the count, one
of the clerks made the error of counting an inventory item twice. For the balance sheet at
December 31, 2015, the effects of this error are
Assets Liabilities Stockholder’s Equity
a. overstated understated overstated
b. understated no effect understated
c. overstated no effect overstated
d. overstated overstated understated
158. The inventory turnover is computed by dividing cost of goods sold by
a. beginning inventory.
b. ending inventory.
c. average inventory.
d. 365 days.
a159. H. Hunter Company’s records indicate the following information for the year:
Merchandise inventory, 1/1 $ 550,000
Purchases 2,250,000
Net sales 3,200,000
On December 31, a physical inventory determined that ending inventory of $500,000 was
in the warehouse. H. Hunter’s gross profit on sales has remained constant at 30%.
H. Hunter suspects some of the inventory may have been taken by some new employees.
At December 31, what is the estimated cost of missing inventory?
a. $60,000
b. $100,000
c. $150,000
d. $1,340,000
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160. The requirements for accounting for and reporting of inventories under IFRS, compared to
GAAP, tend to be more
a. detailed.
b. rules-based.
c. principles-based.
d. full of disclosure requirements.
161. The major IFRS requirements related to accounting for and reporting inventories are
a. the same as GAAP.
b. the same as GAAP with a couple of exceptions.
c. completely different from GAAP.
d. not comparable to GAAP.
162. Inventory accounting under IFRS differs from GAAP in regard to
a. neither the use of LIFO nor lower-of-cost-or-market.
b. the use of LIFO but not lower-of-cost-or-market.
c. the use of lower-of–cost-or-market but not LIFO.
d. the use of LIFO and lower-of-cost-or-market.
163. Under GAAP, companies can choose which inventory system?
LIFO FIFO
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No
164. Under IFRS, companies can choose which inventory system?
LIFO FIFO
a. Yes No
b. Yes Yes
c. No Yes
d. No No
165. GAAP’s definition for inventory and provision of guidelines for inventory accounting, as
compared to IFRS are:
Definitions for Inventory Guideliness for inventory accounting
a. essentially similar more detailed
b. essentially different more detailed
c. essentially similar less detailed
d. essentially different less detailed
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166. Inventories are defined by IFRS as
a. held-for-sale in the ordinary course of business.
b. in the process of production for sale in the ordinary course of business.
c. in the form of materials or supplies to be consumed in the production process or in the
providing of services.
d. All of these answers are correct.
167. Specific Identification can be used for inventory valuation under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes
168. Specific Identification must be used for inventory valuation where the inventory items are
not interchangeable under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes
169. GAAP’s provision for ownership of goods (goods–in–transit or consigned goods), as well
as which costs to include in inventory, as compared to IFRS are:
Ownership of goods Costs to include in inventory
a. essentially similar essentially similar
b. essentially different essentially different
c. essentially similar essentially different
d. essentially different essentially similar
170. The only acceptable cost flow assumptions under IFRS are
a. FIFO and LIFO.
b. FIFO and average.
c. LIFO and average.
d. FIFO, LIFO and average.
171. LIFO can be used
a. under neither GAAP nor IFRS.
b. under IFRS but not GAAP.
c. under GAAP but not IFRS.
d. under both GAAP and IFRS.
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172. The requirement that companies use the same cost flow assumption of all goods of a
similar nature is found in
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes
173. IFRS defines market for lower-of-cost-or market as
a. net realizable value.
b. estimated selling price in the ordinary course of business.
c. replacement cost.
d. replacement cost less costs of disposal.
174. GAAP defines market for lower-of-cost-or market essentially as
a. net realizable value.
b. estimated selling price in the ordinary course of business.
c. replacement cost.
d. replacement cost less costs of disposal.
175. Inventory written down under lower-of-cost-or market may be written back up to original
cost in a subsequent period under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes
176. The option to value inventory at fair value exists under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes
177. Certain agricultural and mineral products can be reported at net realizable value under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes
Test Bank for Financial Accounting, Ninth Edition
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178. The convergence issue that will be most difficult to resolve in the area of inventory
accounting is:
a. FIFO.
b. LIFO.
c. ownership of goods.
d. costs to include in inventory.
179. The specific identification method
a. cannot be used under GAAP.
b. cannot be used under IFRS.
c. must be used under IFRS if the inventory items can be specifically identified.
d. must be used under IFRS if it would result in the lowest net income.
Answers to Multiple Choice Questions
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
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BRIEF EXERCISES
BE 180
Waegelein 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 Waegelein 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 181
In the first month of operations, Mordica 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 $9. Assuming
there are 300 units on hand, compute the cost of the ending inventory under (1) the FIFO method
and (2) the LIFO method. Mordica uses a periodic inventory system.
BE 182
Flaherty Company had beginning inventory on May 1 of $12,000. During the month, the company
made purchases of $40,000 but returned $2,000 of goods because they were defective. At the
end of the month, the inventory on hand was valued at $15,500.
Calculate cost of goods available for sale and cost of goods sold for the month.
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BE 183
Shellhammer Company‘s inventory records show the following data for the month of September:
Units Unit Cost
Inventory, September 1 100 $3.34
Purchases: September 8 450 3.50
September 18 350 3.70
A physical inventory on September 30 shows 200 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.
BE 184
Shellhammer Company’s inventory records show the following data for the month of September:
Units Unit Cost
Inventory, September 1 100 $3.34
Purchases: September 8 450 3.50
September 18 350 3.70
A physical inventory on September 30 shows 200 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 185
Shellhammer Company’s inventory records show the following data for the month of September:
Units Unit Cost
Inventory, September 1 100 $3.34
Purchases: September 8 450 3.50
September 18 350 3.70
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BE 185 (Cont.)
A physical inventory on September 30 shows 200 units on hand. Calculate the value of the
ending inventory and cost of goods sold if the company uses weighted average inventory costing
and a periodic inventory system. Round cost per unit to 2 decimal places and ending inventory
and cost of goods sold to the nearest dollar.
BE 186
The following accounts are included in the ledger of Wainwright Company:
Advertising expense
Freight-in
Inventory
Purchases
Purchase returns and allowances
Sales revenue
Sales returns and allowances
Which of the accounts would be included in calculating cost of goods sold?
BE 187
The Vogelson Company accumulates the following cost and market data at December 31.
Inventory Categories Cost Data Market Data
Camera $11,000 $9,900
Camcorders 7,800 8,500
DVDs 14,000 12,000
What is the lower-of-cost-or-market value of the inventory?
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$29,700
BE 188
Garner Supply Company reports net income of $120,000 in 2015. The ending inventory did not
include goods valued at $7,000 that Garner had consigned to Sharif’s Gift Shop.
(1) What is the correct net income for 2015?
(2) What impact will this error have on the balance sheet at 12/31/15?
BE 189
At December 31, 2015, the following information was available for Deen Company: ending
inventory $22,600; beginning inventory $21,400; cost of goods sold $171,000; and sales revenue
$430,000.
Calculate the inventory turnover and days in inventory for Deen.
Ex. 190
The following information is available for Yancey Company:
Beginning inventory 600 units at $4
First purchase 900 units at $6
Second purchase 500 units at $7.20
Assume that Yancey uses a periodic inventory system and that there are 700 units left at the end
of the month.
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Ex. 190 (Cont.)
Instructions
Compute the cost of ending inventory under the
(a) FIFO method.
(b) LIFO method.
Ex. 191
The following information is available for Yancey Company:
Beginning inventory 600 units at $4
First purchase 900 units at $6
Second purchase 500 units at $7.20
Assume that Yancey uses a periodic inventory system and that there are 700 units left at the end
of the month.
Instructions
Compute each of the following under the average-cost method:
(a) Cost of ending inventory.
(b) Cost of goods sold.
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Ex. 192
Shanrock 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 400 $6 2,400
7/25 Purchase 200 $7 1,400
10/20 Purchase 300 $8 2,400
1,000 $6,600
A physical count of inventory on December 31 revealed that there were 400 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?
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Ex. 193
Lester Company sells many products. Hackenberry is one of its popular items. Below is an
analysis of the inventory purchases and sales of Hackenberry for the month of March. Lester
Company uses the periodic inventory system.
Purchases Sales
Units Unit Cost Units Selling Price/Unit
3/1 Beginning inventory 100 $40
3/3 Purchase 60 $50
3/4 Sales 70 $80
3/10 Purchase 200 $55
3/16 Sales 80 $90
3/19 Sales 60 $90
3/25 Sales 40 $90
3/30 Purchase 40 $60
Instructions
(a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March.
(Show computations)
(b) Using the weighted average method, calculate the amount assigned to the inventory on
hand on March 31. (Show computations)
(c) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on
March 31. (Show computations)
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Ex. 194
Gray Company uses the periodic inventory system to account for inventories. Information related
to Gray Company’s inventory at October 31 is given below:
October 1 Beginning inventory 400 units @ $9.80 = $ 3,920
8 Purchase 800 units @ $10.40 = 8,320
16 Purchase 600 units @ $10.80 = 6,480
24 Purchase 200 units @ $11.80 = 2,360
Total units and cost 2,000 units $21,080
Instructions
1. Show computations to value the ending inventory using the FIFO cost assumption if 550 units
remain on hand at October 31.
2. Show computations to value the ending inventory using the weighted-average cost method if
550 units remain on hand at October 31.
3. Show computations to value the ending inventory using the LIFO cost assumption if 550 units
remain on hand at October 31.
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Ex. 195
Ford Co. uses a periodic inventory system. Its records show the following for the month of May, in
which 75 units were sold.
Units Unit Cost Total Cost
May 1 Inventory 35 $ 8 $ 280
15 Purchases 30 12 360
24 Purchases 40 13 520
Totals 105 $1,160
Instructions
Compute the ending inventory at May 31 and cost of goods sold using the FIFO and LIFO
methods. Prove the amount allocated to cost of goods sold under each method.
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Ex. 196
Washington Bottom Company reports the following for the month of June.
Units Unit Cost Total Cost
June 1 Inventory 300 $5 $1,500
12 Purchase 450 6 2,700
23 Purchase 750 8 6,000
30 Inventory 180
Instructions
(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO and (2)
LIFO.
(b) Compute the cost of the ending inventory and the cost of goods sold using the average-cost
method.
Ex. 197
Queen Company is in the electronics industry and the price it pays for inventory is decreasing.
Instructions
Indicate which inventory method will:
a. provide the highest ending inventory.
b. provide the highest cost of goods sold.
c. result in the highest net income.
d. result in the lowest income tax expense.
e. produce the most stable earnings over several years.
Inventories
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Solution 197 (4 min.)
Ex. 198
Vance Company reported the following summarized annual data at the end of 2015:
Sales revenue $1,000,000
Cost of goods sold* 600,000
Gross margin 400,000
Operating expenses 250,000
Income before income taxes $ 150,000
*Based on an ending FIFO inventory of $250,000.
The income tax rate is 40%. The controller of the company is considering a switch from FIFO to
LIFO. He has determined that on a LIFO basis, the ending inventory would have been $180,000.
Instructions
(a) Restate the summary information on a LIFO basis.
(b) What effect, if any, would the proposed change have on Vance’s income tax expense, net
income, and cash flows?
(c) If you were an owner of this business, what would your reaction be to this proposed change?
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Ex. 199
Compute the lower-of-cost-or-market valuation for Gantner Company’s total inventory based on
the following:
Inventory Categories Cost Data Market Data
A $18,000 $16,900
B 13,900 14,600
C 21,000 20,500
Ex. 200
The controller of Alt Company is applying the lower-of-cost-or-market basis of valuing its ending
inventory. The following information is available:
Cost Market
Lawnmowers:
Self-propelled $14,800 $17,000
Push type 19,000 18,000
Total 33,800 35,000
Snowblowers:
Manual 29,800 31,000
Self-start 19,000 21,000
Total 48,800 52,000
Total inventory $82,600 $87,000
Instructions
Compute the value of the ending inventory by applying the lower-of-cost-or-market basis.
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Solution 200 (15 min.)
Ex. 201
Nolen Company is preparing the annual financial statements dated December 31, 2015.
Information about inventory stocked for regular sale follows:
Quantity Unit Cost Replacement Cost
Item on Hand When Acquired (market) at year end
A 50 $20 $19
B 100 45 45
C 20 59 62
D 40 40 36
Instructions
Compute the valuation for the December 31, 2015, inventory using the lower-of-cost-or-market
basis.
Ex. 202
Foley Company applied FIFO to its inventory and got the following results for its ending inventory.
DVRs 140 units at a cost per unit of $59
DVD players 210 units at a cost per unit of $75
iPods 175 units at a cost per unit of $80
The cost of purchasing units at year-end was DVRs $71, DVD players $68, and iPods $78.
Instructions
Determine the amount of ending inventory at lower-of-cost-or-market.
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Ex. 203
Morton Watch Company reported the following income statement data for a 2-year period.
2014 2015
Sales revenue $260,000 $320,000
Cost of goods sold
Beginning inventory 32,000 44,000
Cost of goods purchased 193,000 225,000
Cost of goods available for sale 225,000 269,000
Ending inventory 44,000 57,000
Cost of goods sold 181,000 212,000
Gross profit $ 79,000 $108,000
Morton uses a periodic inventory system. The inventories at January 1, 2014, and December 31,
2015, are correct. However, the ending inventory at December 31, 2014, was overstated $5,000.
Instructions
(a) Prepare correct income statement data for the 2 years.
(b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?
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Ex. 204
Wellington Company reported net income of $60,000 in 2014 and $80,000 in 2015. However,
ending inventory was overstated by $7,000 in 2014.
Instructions
Compute the correct net income for Wellington Company for 2014 and 2015.
Ex. 205
For each of the independent events listed below, analyze the impact on the indicated items at the
end of the current year by placing the appropriate code letter in the box under each item.
Code: O = item is overstated
U = item is understated
NA = item is not affected
Events
Items
Assets
Stockholder’s
Equity
Cost of
Goods
Sold
Net
Income
1. A physical count of goods on hand at the end
of the current year resulted in some goods
being counted twice.
2. The ending inventory in the previous period
was overstated.
3. Goods purchased on account in December of
the current year and shipped FOB shipping
point were recorded as purchases, but were
not included in the count of goods on hand on
December 31 because they had not arrived
by December 31.
4. Goods purchased on account in December of
the current year and shipped FOB destination
were recorded as purchases, but were not
included in the count of goods on hand on
December 31 because they had not arrived
by December 31.
5. The internal auditors discovered that the
ending inventory in the previous period was
understated $17,000 and that the ending
inventory in the current period was overstated
$27,000.
Test Bank for Financial Accounting, Ninth Edition
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Ex. 206
Baden’s Hardware Store prepared the following analysis of cost of goods sold for the previous
three years:
2014 2015 2016
Beginning inventory 1/1 $40,000 $18,000 $25,000
Cost of goods purchased 50,000 55,000 70,000
Cost of goods available for sale 90,000 73,000 95,000
Ending inventory 12/31 18,000 25,000 40,000
Cost of goods sold $72,000 $48,000 $55,000
Net income for the years 2014, 2015, and 2016 was $70,000, $60,000, and $55,000,
respectively. Since net income was consistently declining, Mr. Baden hired a new accountant to
investigate the cause(s) for the declines.
The accountant determined the following:
1. Purchases of $25,000 were not recorded in 2014.
2. The 2014 December 31 inventory should have been $24,000.
3. The 2015 ending inventory included inventory costing $5,000 that was purchased FOB
destination and in transit at year end.
4. The 2016 ending inventory did not include goods costing $4,000 that were shipped on
December 29 to Sampson Plumbing Company, FOB shipping point. The goods were still in
transit at the end of the year.
Instructions
Determine the correct net income for each year. (Show all computations.)
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Solution (Cont.)
Ex. 207
Galena Pharmacy reported cost of goods sold as follows:
2015 2016
Beginning inventory $ 54,000 $ 64,000
Cost of goods purchased 847,000 891,000
Cost of goods available for sale 901,000 955,000
Ending inventory 64,000 55,000
Cost of goods sold $837,000 $900,000
Jim Holt, the bookkeeper, made two errors:
(1) 2015 ending inventory was overstated by $7,000.
(2) 2016 ending inventory was understated by $16,000.
Instructions
Assuming the errors had not been corrected, indicate the dollar effect that the errors had on the
items appearing on the financial statements listed below. Also indicate if the amounts are
overstated (O) or understated (U).
2015 2016
Overstated/ Overstated/
Amount Understated Amount Understated
Total assets $_________ _______ $_________ _______
Stockholder’s equity $_________ _______ $_________ _______
Cost of goods sold $_________ _______ $_________ _______
Net income $_________ _______ $_________ _______
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Ex. 208
This information is available for Eaton‘s Photo Corporation for 2014 and 2015.
2014 2015
Beginning inventory $ 200,000 $ 300,000
Ending inventory 300,000 380,000
Cost of goods sold 1,150,000 1,330,000
Sales revenue 1,600,000 1,900,000
Instructions
Calculate inventory turnover, days in inventory, and gross profit rate for Eaton’s Photo
Corporation for 2014 and 2015. Comment on any trends.
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Ex. 209
The following information is available for Heller Company:
Beginning inventory $ 60,000
Cost of goods sold 640,000
Ending inventory 100,000
Sales revenue 1,000,000
Instructions
Compute each of the following:
(a) Inventory turnover.
(b) Days in inventory.
aEx. 210
Winsor Company uses the perpetual inventory system and the LIFO method. The following
information is available for the month of May:
May 1 Beginning inventory 20 units @ $5
10 Purchase 20 units @ $8
15 Sales 15 units
18 Purchase 10 units @ $9
21 Sales 15 units
30 Purchase 10 units @ $10
Instructions
Prepare a schedule to show cost of goods sold and the value of the ending inventory for the
month of May.
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aEx. 211
Norris Company uses the perpetual inventory system and had the following purchases and sales
during March.
Purchases Sales
Units Unit Cost Units Selling Price/Unit
3/1 Beginning inventory 100 $40
3/3 Purchase 60 $50
3/4 Sales 70 $80
3/10 Purchase 200 $55
3/16 Sales 80 $90
3/19 Purchase 40 $60
3/25 Sales 120 $90
Instructions
Using the inventory and sales data above, calculate the value assigned to cost of goods sold in
March and to the ending inventory at March 31 using (a) FIFO and (b) LIFO.
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aEx. 212
Shoemaker Department Store prepares monthly financial statements but only takes a physical
count of merchandise inventory at the end of the year. The following information has been
developed for the month of July:
At Cost At Retail
Beginning inventory $ 30,000 $ 50,000
Merchandise purchases 99,000 150,000
The net sales for July amounted to $142,000.
Instructions
Use the retail inventory method to estimate the ending inventory at cost for July. Show all
computations to support your answer.
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aEx. 213
Agler Company suffered a loss of its inventory on March 28 due to a fire in its warehouse. As a
basis for filing a claim with its insurance company, Agler Company developed the following
information:
March net sales through March 28 $350,000
Beginning Inventory, March 1 100,000
Merchandise purchases through March 28 180,000
The company has experienced an average gross profit rate of 35% in the past and this rate
appears to be appropriate in the current period.
Instructions
Using the gross profit method, prepare an estimate of the cost of the inventory destroyed by fire
on March 28. Show all computations in good form.
aEx. 214
The inventory of Columbo Company was destroyed by fire on April 1. From an examination of the
accounting records, the following data for the first three months of the year are obtained:
Sales Revenue $185,000
Sales Returns and Allowances 5,000
Purchases 110,000
Freight-In 3,500
Purchase Returns and Allowances 4,000
Instructions
Determine the merchandise lost by fire, assuming a beginning inventory of $50,000 and a gross
profit rate of 40% on net sales.
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aEx. 215
Talkington Rae Company reports goods available for sale at cost, $76,800. Beginning inventory
at retail is $40,000 and goods purchased during the period at retail were $80,000. Sales for the
period amounted to $85,000.
Instructions
Determine the estimated cost of the ending inventory using the retail inventory method.
COMPLETION STATEMENTS
216. Accounting for inventories is important because inventories affect the ______________
section of the balance sheet and the ______________ section on the income statement.
217. In a manufacturing company, goods that are ready to be sold to customers are referred to
as ________________, whereas in a merchandising company they are generally referred
to as _______________.
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218. The cost of goods purchased during a period plus the beginning inventory is the amount
of goods ________________ during the period.
219. Inventoriable costs are allocated to ______________ and cost of goods ____________.
220. It is generally recognized that a major objective of accounting for inventory is the proper
determination of ______________.
221. The ______________ method tracks the actual physical flow of each unit of inventory
available for sale; however, management may be able to manipulate ______________ by
using this method.
222. If the unit cost of inventory has continuously increased, the ______________, first-out
inventory valuation method will result in a higher valued ending inventory than if the
______________, first-out method had been used.
223. The lower-of-cost-or-market basis of accounting for inventories should be applied when
the ______________ cost of the goods is lower than its cost.
224. ______________ is calculated as cost of goods sold divided by average inventory.
a225. Two widely used methods of estimating inventories are the ______________ method and
the _____________ method.
ANSWERS TO COMPLETION STATEMENTS
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MATCHING
226. Match the items below by entering the appropriate code letter in the space provided.
A. Merchandise Inventory F. First-in, first-out (FIFO) method
B. Work in process G. Last-in, first-out (LIFO) method
C. FOB shipping point H. Average-cost method
D. FOB destination I. Inventory turnover
E. Specific identification method J. Current replacement cost
____ 1. Measures the number of times the inventory sold during the period.
____ 2. Tracks the actual physical flow for each inventory item available for sale.
____ 3. Goods that are only partially completed in a manufacturing company.
____ 4. Cost of goods sold consists of the most recent inventory purchases.
____ 5. Goods ready for sale to customers by retailers and wholesalers.
____ 6. Title to the goods transfers when the public carrier accepts the goods from the seller.
____ 7. Ending inventory valuation consists of the most recent inventory purchases.
____ 8. The same unit cost is used to value ending inventory and cost of goods sold.
____ 9. Title to goods transfers when the goods are delivered to the buyer.
____ 10. The amount that would be paid at the present time to acquire an identical item.
Answers to Matching
SHORT-ANSWER ESSAY QUESTIONS
S-A E 227
FIFO and LIFO are the two most common cost flow assumptions made in costing inventories.
The amounts assigned to the same inventory items on hand may be different under each cost
flow assumption. If a company has no beginning inventory, explain the difference in ending
inventory values under the FIFO and LIFO cost bases when the price of inventory items
purchased during the period have been (1) increasing, (2) decreasing, and (3) remained constant.
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S-A E 228
In a period of rising prices, the inventory reported in Crawford Company’s balance sheet is close
to the current cost of the inventory. Breland Company’s inventory is considerably below its current
cost. Identify the inventory cost flow method being used by each company. Which company has
probably been reporting the higher gross profit?
S-A E 229
Errors occasionally occur when physically counting inventory items on hand. Identify the financial
statement effects of an overstatement of the ending inventory in the current period. If the error is
not corrected, how does it affect the financial statements for the following year?
S-A E 230
A survey of major U.S. companies revealed that 77% of those companies used either LIFO or
FIFO cost flow methods, while 19% used average cost, and only 4% used other methods.
Required:
Provide brief, yet concise responses to the following questions.
a. Why are LIFO and FIFO so popular?
b. Since computers and inventory management software are readily available, why aren’t more
companies using specific identification?
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S-A E 231
Your former college roommate is opening a new retail store and asks you “Which inventory
costing method should I use?”
What is your response? Include a comparison of the tax effect, balance sheet effect, and income
statement effect for FIFO versus LIFO.
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S-A E 232
Robert Tingle is studying for the next accounting mid-term examination. What should Robert
know about (a) departing from the cost basis of accounting for inventories and (b) the meaning of
“market” in the lower-of-cost-or-market method?
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S-A E 233 (Ethics)
Glenda Good and Danny Rock are department managers in the housewares and shoe
departments, respectively, for Litwins, a large department store. Danny has observed Glenda
taking inventory from her own department home, apparently without paying for it. He hesitates
confronting Glenda because he is due to be promoted, and needs Glanda’s recommendation. He
also does not want to notify the company management directly, because he doesn’t want an
ethics investigation on his record, believing that it will give him a “goody–goody” image. This
week, Glenda tried on several pairs of expensive running shoes in his department before finding
a pair that suited her. She did not, however, buy them. That very pair was missing this morning.
Litwins recently replaced its old periodic inventory system with a perpetual inventory system using
scanners and bar codes. In addition, the annual inventory is to be replaced by a monthly
inventory conducted by an independent firm. On hearing the news of the changes, Danny
relaxes. “The system will catch Glenda now,” he says to himself.
Required:
1. Is Danny’s attitude justified? Why or why not?
2. What, if any, action should Danny take now?
S-A E 234 (Communication)
Frank Jeffries, a new employee of Stine Company, recorded $1,000 in consigned goods received
as part of the firm’s inventory. The goods were received one day after the end of the fiscal period,
but Frank reasoned that the goods should be included in inventory sooner because Stine paid the
freight. The mistake was brought to his attention by the purchasing department who said the
goods should not have been recorded as Stine inventory at all. Frank told Sara Janik, the
purchasing supervisor, that nobody needed to worry, because the mistake would cancel itself out
the following month. In Frank’s opinion, there was no reason to get everyone excited over
nothing, especially since it was monthly, and not annual, financial statements that were affected.
Sara Janik has reported the problem to the accounting department.
Required:
You are Frank’s supervisor. Write a memo to Frank explaining why the error should have been
corrected.
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Solution 234
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CHALLENGE EXERCISE
CE 1
Stengel company sells a snowboard, WhiteOut, that is popular with snowboard enthusiasts.
Presented below is information relating to Stengel Company’s purchases of WhiteOut
snowboards during September. During the same month, 124 WhiteOut snowboards were sold at
$160 each. Stengel company uses a periodic inventory system.
Date Explanation Units Unit Cost Total Cost
Sept. 1 Inventory 25 $ 100 $ 2,500
Sept. 12 Purchases 45 106 4,770
Sept. 19 Purchases 24 110 2,640
Sept. 26 Purchases 50 112 5,600
Total 144 $15,510
Instructions
(a) Compute the ending inventory at September 30 and cost of goods sold using the FIFO and
LIFO method. Prove the amount allocated to cost of goods sold under each method.
(b) For both FIFO and LIFO, calculate the sum of inventory and cost of goods sold. What do you
notice about the answer you found for each method?
(c) What is gross profit under each method?
(d) Which method results in a larger amount reported for assets on the balance sheet? Which
results in a larger amount reported for stockholders’ equity on the balance sheet?
Solution CE 1
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Solution CE 1 (Cont.)
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CE 2
Naughty Dog Disc Golf Show uses the lower-of-cost-or market basis for its inventory. The
following data are available at December 31
Item Unit Unit Cost Market
Baskets:
Innova 15 $190 $200
Discraft 25 175 160
Disc bags:
Lightning 30 20 16
Wham-o 28 30 28
Instructions
(a) Determine the amount of the ending inventory by applying the lower– of– cost- or-market basis.
(b) When determining “lower of cost or market”, what is “market? Why is defined in this way?
Solution CE 2
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CE 3
Waters Hardware reported cost of the goods sold as follows.
2014 2015
Beginning inventory $ 30,000 $ 40,000
Cost of goods purchased 220,000 245,000
Cost of goods available for sale 250,000 285,000
Ending inventory 40,000 45,000
Cost of goods sold $210,000 $240,000
Waters made two errors: (1) 2014 ending inventory was overstated $5,000, and (2) 2015 ending
inventory was understated $8,000
Instructions
(a) Compute the correct cost of goods sold for each year.
(b) What correcting entry would Waters make for error (2)?
Solution CE 3