99. Winner Company
Winner Company’s beginning and ending inventories for the fiscal year ended September 30, Year 5, are
October 1, Year 4
September 30, Year 5
Raw materials
$15,000
$22,000
Work-in-process
40,000
35,000
Finished goods
8,000
12,000
Production data for the fiscal year ended September 30, Year 5, are
Raw materials purchased
$ 80,000
Purchase discounts
1,000
Direct labor
100,000
Manufacturing overhead
75,000
Assume Winner Company treats all raw materials as direct materials once they enter the production process. Thus, no raw materials are treated as
manufacturing overhead.
(CMA adapted, Dec 95 #29) Refer to the Winner Company example. The total value of inventory to be reported on the balance sheet as of
September 30, Year 5, for Winner Company is
100. Which of the following is not a generally accepted basis for inventory valuation?
101. Which of the following is/are correct regarding the valuation of inventory?
102. The lower-of-cost-or-market basis for inventory valuation is a conservative accounting policy because
103. The lower-of-cost-or-market basis results in reporting
104. (CMA adapted, Jun 96 #3) An item of inventory purchased in Year 5 for $25.00 has been incorrectly
written down to a current replacement cost of $17.50. The item is currently selling in Year 6 for $50.00, its
normal selling price. Which one of the following statements is correct?
105. Bargain Inc.’s beginning inventory is $20,000 and purchases for the year are $80,000. A physical inventory
shows that $15,000 of the inventory remains at year end. How much is recorded as cost of goods sold for the
year?
106. (CMA adapted, Dec 95 #27) Somali Inc. is a profitable company with the goal to maximize cash flow. A
valid reason for Somali not to adopt the last-in, first-out (LIFO) method of inventory valuation is the
107. In a period of rising prices, use of the FIFO rather than LIFO inventory cost flow assumption results in
108. Inventory by specific identification would not be practical for
109. Which inventory cost flow assumption emphasizes the income statement as opposed to the balance sheet?
110. Which inventory cost flow assumption emphasizes the balance sheet as opposed to the income statement?
111. Using either the FIFO and LIFO cost flow assumption will result in the same cost of goods sold when
112. Which of the following cost flow assumptions will report ending inventory closest to current cost?
113. LIFO inventory layers
114. In a time of rising prices, unrealized holding gains on ending inventory are
115. The U.S. GAAP requires firms using LIFO to disclose in notes to the financial statements
116. Fix-It Hardware
Fix-It Hardware began the month of November with 150 large brass switchplates on hand at a cost of $4.00
each. These switchplates sell for $7.00 each. The following schedule presents the sales and purchases of this
item during the month of November.
Purchases
Quantity Received
Unit Cost
Units Sold
100
200
$4.20
150
200
4.40
220
250
4.80
100
(CMA adapted, Dec 92 #25) Refer to the Fix-It Hardware example. If Fix-It uses FIFO inventory pricing, the value of the inventory on November
30 would be
117. Fix-It Hardware
Fix-It Hardware began the month of November with 150 large brass switchplates on hand at a cost of $4.00
each. These switchplates sell for $7.00 each. The following schedule presents the sales and purchases of this
item during the month of November.
Purchases
Quantity Received
Unit Cost
Units Sold
100
200
$4.20
150
200
4.40
220
250
4.80
100
(CMA adapted, Dec 92 #27) Refer to the Fix-It Hardware example. If Fix-It uses weighted average inventory pricing, the gross profit for November
would be
118. Fix-It Hardware
Fix-It Hardware began the month of November with 150 large brass switchplates on hand at a cost of $4.00
each. These switchplates sell for $7.00 each. The following schedule presents the sales and purchases of this
item during the month of November.
Purchases
Quantity Received
Unit Cost
Units Sold
100
200
$4.20
150
200
4.40
220
250
4.80
100
Refer to the Fix-It Hardware example. A growing firm is contemplating switching from a FIFO to a LIFO cost flow assumption for inventories and
cost of goods sold because it has recently experienced increasing manufacturing costs for its products and anticipates a prolonged period of
increasing quantities and manufacturing costs in the future. The firm wishes to know which of the following statements about the effect of the switch
to LIFO is/are correct, relative to remaining on FIFO (ignore income tax effects):
119. Fix-It Hardware
Fix-It Hardware began the month of November with 150 large brass switchplates on hand at a cost of $4.00
each. These switchplates sell for $7.00 each. The following schedule presents the sales and purchases of this
item during the month of November.
Purchases
Quantity Received
Unit Cost
Units Sold
100
200
$4.20
150
200
4.40
220
250
4.80
100
(CMA adapted, Dec 92 #28) Refer to the Fix-It Hardware example. If Fix-It uses (periodic) LIFO inventory pricing, the cost of goods sold for
November would be
120. Inventory Record
The inventory record for a particular item for Year 2 appears below.
Inventory, January 1, Year 2
20,000
$0.20
$4,000
Purchases:
March 2
4,000
.24
$ 960
April 30
3,000
.28
840
June 15
6,000
.32
1,920
September 30
2,000
.26
520
December 15
1,000
.20
200
Total purchases
16,000
$4,440
Total available for sale
36,000
$8,440
Units sold
28,000
Refer to the Inventory Record example. The cost of goods sold for year 2 under FIFO is:
121. Inventory Record
The inventory record for a particular item for Year 2 appears below.
Inventory, January 1, Year 2
20,000
$0.20
$4,000
Purchases:
March 2
4,000
.24
$ 960
April 30
3,000
.28
840
June 15
6,000
.32
1,920
September 30
2,000
.26
520
December 15
1,000
.20
200
Total purchases
16,000
$4,440
Total available for sale
36,000
$8,440
Units sold
28,000
Refer to the Inventory Record example. The cost of goods sold for year 2 under LIFO is:
122. Inventory Record
The inventory record for a particular item for Year 2 appears below.
Inventory, January 1, Year 2
20,000
$0.20
$4,000
Purchases:
March 2
4,000
.24
$ 960
April 30
3,000
.28
840
June 15
6,000
.32
1,920
September 30
2,000
.26
520
December 15
1,000
.20
200
Total purchases
16,000
$4,440
Total available for sale
36,000
$8,440
Units sold
28,000
Refer to the Inventory Record example. The cost of goods sold for year 2 under weighted-average cost-flow assumption is (rounded to the nearest
dollar):
123. A firm using FIFO had a beginning inventory of $48,000, an ending inventory of $56,000, and a pretax
income of $400,000. If it had used LIFO, its beginning inventory would have been $20,000, its ending
inventory would have been $16,000, and its pretax income would have been:
124. A firm using FIFO had a beginning inventory of $48,000, an ending inventory of $56,000, and a pretax
income of $400,000. If it had used LIFO, its beginning inventory would have been $20,000, and its ending
inventory would have been $16,000. From the information provided, one can conclude that:
125. Ethical issues may arise when management dips into LIFO layers
126. Fabulous Engine Company
Fabulous Engine Company is a wholesaler of marine engine parts. The activity of carburetor 2642J during the
month of March is presented below.
Balance or
Unit
Date
Transaction
Units
Unit Cost
Sales Price
March 1
Inventory
3,200
$64.30
$86.50
4
Purchase
3,400
64.75
87.00
14
Sales
3,600
87.25
25
Purchase
3,500
66.00
87.25
28
Sales
3,450
88.00
(CMA adapted, Jun 96 #13) Refer to the Fabulous Engine Company example. If Fabulous uses a last-in, first-out periodic inventory system, the total
cost of the inventory for carburetor 2642J at March 31 is
127. (CMA adapted, Jun 96 #15) Refer to the Fabulous Engine Company example. If Fabulous uses a weighted
average periodic inventory system, the total cost of the inventory for carburetor 2642J at March 31 is
128. Unrealized holding gain denotes the difference between the
129. Managements face the decision as to when to replenish inventories at year-end. Assuming inflation, a
company using LIFO would experience which of the following?
130. Sharp Inc. manufactures high quality sunglasses that carry the endorsements of several sports personalities.
In an effort to achieve sales targets for the fourth quarter of the year, Sharp Inc. pressured its independent
distributors to make unusually large orders of the sunglasses. Low-priced imitations of these sunglasses hit the
market soon thereafter, causing the distributors to accumulate large inventories. The distributors shipped these
sunglasses back to Sharp Inc. Sharp Inc.stored the returned sunglasses in a remote warehouse out of the view of
its auditors and did not record them as returned goods. The actions
131. Claitin Inc. uses large warehouses to store its finished goods ready for sale. After its personnel and auditors
conducted a physical inventory of goods on one side of its warehouses, Claitin Inc. transported a portion of the
inventory to another part of the warehouse, removing the inventory tags that indicated that the items had already
been counted in inventory, and thereby included the items a second time in inventory. In this way, the firm
overstated its ending inventory for the current year, understated its cost of goods sold, and overstated its
earnings. This action resulted in an overstatement of the beginning inventory for the next year. Assuming a
correct count of the ending inventory for the second year, the action has the result of overstating cost of goods
sold for the second year and understating earnings. Net income for the two years combined, however, is
correctly stated, the net result of an overstatement in the first year offset by an equal understatement in the
second year. The actions
132. On December 10 of the current year, XTREME Sports Inc. receives an advance of $50,000 from a hockey
team for 20,000 custom-made shirts with the team’s logo, which the team intends to distribute to fans entering a
hockey game during the first week in January. XTREME Sports Inc. completes the manufacturing of the shirts
on December 30, intending to ship them on December 31 before its accounting period ends. Unfortunately, a
snowstorm on December 31 prevented their shipment. XTREME Sports Inc. recorded this transaction as a sale
for December, and reduced its inventory accordingly. It set the items aside in its shipping room on December 31
with a clear sign to its own personnel conducting a physical inventory on that date and to its auditors who were
observing the count that the items were not to be counted as inventory. These actions
133. On August 1, Covington Motors pays £18,000 for insurance coverage for the next 12 months. On August
1, the firm records the following journal entry:
134. On August 1, Covington Motors pays £18,000 for insurance coverage for the next 12 months. On August
1, the firm records the following journal entry:
Prepaid Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
At the end of each of the next 12 months, the firm records the following adjusting entry:
135. Focus Company sells merchandise with a one year warranty. In 2013, sales consisted of 2,500 units. It is
estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in 2013 and
70% in 2014. In the 2013 income statement, Focus should show warranty expense of
136. During September, Genesis sold 100 radios for $50 each. Each radio cost Genesis $30 to purchase, and
carried a two-year warranty. If 5% typically need to be replaced over the warranty period and one is actually
replaced during September, for what amount in September would Genesis debit Product Warranty Expense?
137. Albion Company sells merchandise with a one year warranty. In 2013, sales consisted of 2,500 units. It
is estimated that warranty repairs will average $20 per unit sold, and 30% of the repairs will be made in 2013
and 70% in 2014. In the 2013 income statement, Albion should show warranty expense of:
138. Youngstown Company sells merchandise with a one year warranty. Sales consisted of 2,500 units in 2013
and 2,000 units in 2014. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the
repairs will be made in 2013 and 70% in 2014 for the 2013 sales. Similarly, 30% of repairs will be made in
2014 and 70% in 2015 for the 2014 sales. In the 2014 income statement, how much of the warranty expense
shown will be due to 2013 sales?
139. Under U.S. GAAP, the cost of a product warranty should be included as an expense in the
140. Lager Company sells merchandise with a one year warranty. In 2013, sales consisted of 1,600 units. It is
estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in 2013 and
70% in 2014. In the 2013 income statement, Lager should show warranty expense of
141. During May, Claremore sold 500 portable CD players for $50 each. Each CD player cost Claremore $25
to purchase and carried a one-year warranty. If 10 percent typically need to be replaced over the warranty
period, what amount should Claremore debit Product Warranty Expense for in May?
142. During June, SoundHouse sold 800 portable CD players for $50 each. Each CD player cost SoundHouse
$25 to purchase and carried a one-year warranty. If 10 percent typically need to be replaced over the warranty
period, what amount should SoundHouse debit Product Warranty Expense for in June?
143. Solve for the missing piece of information for each of the following independent situations:
Account
CASE A
CASE B
CASE C
CASE D
Raw materials
$1,000
$ 400
$300
$ 200
Cost of completed units
3,200
2,200
C
1,500
Manufacturing overhead
400
B
300
100
Ending work in process
1,200
800
400
D
Direct labor costs
2,200
1,000
100
1,000
Beginning work in process
A
750
700
400
$800
$850
$1,000
$200
144. The following data relate to the manufacturing activities of Friends Industries for the month of March:
March 1
March 31
Raw Materials Inventory
$ 42,300
$ 40,600
Factory Supplies Inventory
9,600
9,800
Work-In-Process Inventory
102,200
103,100
Finished Goods Inventory
48,700
47,300
Friends incurred the following manufacturing costs during March:
Raw materials purchased
83,500
Supplies purchased
14,300
Wages
186,800
Utilities
1,250
Insurance
550
Depreciation
3,100
Rent
4,400
(Note: Friends Industries treats all raw materials used in production, as well as all wages incurred for production, as direct in nature and such costs
are not included in manufacturing overhead.)
Compute Friends’ cost of goods sold for March.
Friends Industries
Schedule of Cost of Goods Sold
For the Month Ended March 31, Year 1
Beginning finished goods inventory
$ 48,700
Add: Cost of goods manufactured
294,500
Goods available for sale
$343,200
Less: Ending finished goods inventory
47,300
Cost of goods sold
$295,900
Raw materials:
Beginning raw materials inventory
$ 42,300
Add: purchases of raw materials
83,500
Raw materials available for use
$125,800
Less: ending raw materials inventory
40,600
Raw materials used in production
$ 85,200
Direct labor
186,800
Manufacturing overhead
Beginning supplies inventory
$ 9,600
Add: purchases of supplies
14,300
Supplies available for use
$ 23,900
Less: ending supplies inventory
9,800
Supplies used in production
$ 14,100
Utilities
1,250
Insurance
550
Depreciation
3,100
Rent
4,400
Total overhead costs
23,400
Total manufacturing costs
$295,400
Total In Process
$397,600
Less: Ending Work-in-process
103,100
Cost of goods manufactured
$294,500
145. Prepare journal entries for the following transactions related to a manufacturing operation.
a.
The firm acquires manufacturing equipment for $45,000 cash.
b.
The firm purchases raw materials costing $36,000 on account.
c.
The firm issues raw materials costing $15,000 to the production department.
d.
Payroll of $35,000 is paid: $20,000 to direct factory workers and $15,000 to sales personnel.
e.
Utilities of $1,000 are paid: $300 for manufacturing equipment, $500 for factory building, and $200 for the administrative offices.
f.
Depreciation on the building and equipment is as follows: Factory building $4,550, manufacturing equipment $500, and sales and
administration building $1,000.
g.
Units completed and transferred to finished goods total $37,000.
h.
Cost of goods sold for the period is $40,000.
a.
Equipment
45,000
Cash
45,000
Raw Materials
36,000
Accounts Payable
36,000
c.
15,000
Raw Materials
15,000
20,000
Salaries Expense—Sales
15,000
Cash
35,000
e.
800
Utilities Expense
Cash
1,000
5,050
Depreciation Expense
1,000
Accumulated Depreciation
6,050
g.
Finished Goods Inventory
37,000
Work-In-Process
37,000
h.
Cost of Goods Sold
40,000
Finished Goods Inventory
40,000
146. In the first month of operations, Rock City Manufacturing had the following transactions:
a.
Incorporated on April 1, Year 1. Issued 10,000 shares of $1 par value common stock for $30,000.
b.
Acquired factory equipment for $6,000 cash on April 2. Equipment has a 5 year life with a $600 salvage value.
c.
On April 4, purchased $10,000 of raw materials with cash.
d.
Paid $4,000 for April and May rent on administrative offices on April 5.
e.
On April 8, issued raw materials of $8,000 to production department.
f.
On April 10, purchased $5,000 additional raw materials on account.
g.
Paid $5,000 in payroll on April 14; $4,000 to factory workers, $1,000 to salesmen.
h.
Paid utilities of $1,000 on April 15; $800 for factory and $200 for administrative office.
i.
Units completed during the month and transferred to the finished goods total $7,000.
j.
Sales for the month totaled $10,000; all were credit sales.
k.
Cost of goods sold for the month is $6,500.
(Note: Rock City Manufacturing treats all raw materials used in production, as well as all wages incurred for production, as direct in nature and such
costs are not included in manufacturing overhead.)
Required:
a.
Prepare journal entries for the above transactions, including any adjusting entries.
b.
Prepare a balance sheet and income statement for April, Year 1.
a.
April 1
Cash
30,000
Common Stock
10,000
Additional Paid-in Capital
20,000
b.
April 2
Equipment
6,000
Cash
6,000
c.
April 4
Raw Materials
10,000
Cash
10,000
d.
April 5
Prepaid Rent
2,000
Rent Expense
2,000
Cash
4,000
e.
April 8
Work in Process
8,000
Raw Materials
8,000
f.
April 10
Raw Materials
5,000
Accounts Payable
5,000
g.
April 14
Work in Process
4,000
Salaries Expense
1,000
Cash
5,000
h.
April 15
Work in Process
800
Utilities Expense
200
Cash
1,000
i.
April 30
Finished Goods
7,000
Work in Process
7,000
April 30
Accounts Receivable
10,000
Sales
10,000
k.
April 30
Cost of Goods Sold
6,500
Finished Goods
6,500
April 30
Work in Process
90
Accumulated Depreciation
90
As of April 30, Year 1
147. Inventory flows for Ramos Company for the month of January are as follows:
# of units
Unit cost
Beginning inventory*
250
$1.00
Purchases:
January 3
100
1.10
January 15
150
1.15
January 17
300
1.05
Sales:
January 5
200
January 18
100
January 24
150
*Assume the same for FIFO, LIFO, and weighted average cost flow assumptions.
Required:
Compute the cost of goods sold and ending inventory for the Ramos Company using the following assumptions:
a.
FIFO cost flow assumption and a periodic inventory system
b.
LIFO cost flow assumption and a periodic inventory system
c.
Weighted average cost flow assumption and a periodic inventory system
Method
Cost of Goods Sold
Inventory
a.
FIFO
$475.00
$372.50
b.
LIFO
487.50
360.00
c.
Weighted average
476.72
370.78
148.
A.
Discuss the effect on current-year net income each of the following
inventory-related errors will have.
1.
An overstatement of beginning inventory
2.
An overstatement of ending inventory
3.
An overstatement of purchases
B.
Discuss the effect on current-year ending inventory each of the following
inventory-related errors will have. Assume that no physical inventory is
taken to determine ending inventory and that the ending inventory amount
is determined by the inventory equation.
1.
An understatement of beginning inventory
2.
An overstatement of purchases
3.
An understatement of cost of goods sold
Decrease
Increase
Decrease
Understatement
Overstatement
Overstatement