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77) Idaho Company made the following purchases during the month of October.
October 6
Purchased $15,000 of merchandise, terms 2/10, n/30,
FOB destination, freight cost $100
October 14
Purchased $12,000 of merchandise, terms 2/15, n/60,
FOB shipping point, freight cost $100
October 22
Purchased $18,000 of merchandise, terms 3/10, n/20,
FOB destination, freight cost $100
October 31
Purchased $20,000 of merchandise, terms 1/15, n/45,
FOB shipping point, freight cost $100
Required:
1. Complete the chart below for each of the four purchases.
Oct. 6
Oct. 14
Oct. 22
Oct. 31
a. due date, assuming the
discount is taken
b. last day to pay if the
discount is NOT taken
c. amount of discount
$
$
$
$
d. freight cost paid by
Idaho Company
$
$
$
$
2. Assuming that the selling company accepts all discounts, what is the total cost of purchases for
the month?
78) Tiny Toy Company makes toys and sells them to retail stores on account. The company has a
December 31 year-end. In the past, Tiny Toy always sold on account but never offered sales
discounts to its customers. However, this year on November 1, the beginning of the holiday sales
season, Tiny Toy began offering stores terms of 2/90, n/120. The stores can return anything, no
questions asked, but only AFTER December 31.
Required:
A. Why would Tiny Toy offer such a liberal credit and return policy?
B. Put an X in the appropriate box to describe the effect of this credit and return policy on Tiny
Toy's financial statements for this year.
Financial statement item
Increase
Decrease
No effect
Sales
A/R
Inventory
C. Is Tiny Toy's new credit and return policy ethical?
79) For each of the purchases below made by Daily Grind, Inc., fill in the inventory amount
NET of discounts, and then indicate with an "X" whether you should include or exclude the
purchase from Daily Grind's inventory balance at DECEMBER 31.
Daily Grind purchased ON DECEMBER 31:
Amount
Include
Exclude
1. $5,000 of merchandise; terms 2/10, n/30,
FOB shipping point. The shipping cost $500.
The merchandise arrived on Jan. 2.
2. $8,000 of merchandise; terms 1/10, n/15,
FOB destination. The shipping cost $80.
The merchandise arrived on Jan 1.
80) Big Company has a policy of always taking the cash discounts offered by vendors, even if it
doesn't pay within the discount period. Big Company thinks that many of the vendors won't
notice, or if they do notice won't bother to send another bill for a small amount.
On May 5, Big Company bought $5,000 of merchandise from Little Company, terms 2/10, n/30,
FOB destination. Freight on the shipment was $40.
A. How many days does Big Company have to pay the bill and legitimately take the discount?
B. If Big Company pays within the discount period, how much should it pay Little Company?
C. Who should pay the freight on the shipment, Big Company or Little Company?
D. Is it ethical for Big Company to take the cash discount even though it does not pay within the
discount period?
81) Match the items below with the appropriate statements.
I = The expenditure should be included in the inventory account.
X = The expenditure should NOT be included in the inventory account.
______ 1. ABC, Inc. purchases merchandise and pays $400 of shipping insurance.
______ 2. ABC, Inc. returned $200 of merchandise.
______ 3. ABC, Inc. paid $2,500 to a supplier for merchandise it had purchased on credit two
months earlier.
______ 4. ABC, Inc. purchases $2,000 of merchandise on account.
______ 5. ABC, Inc. pays $60 of import tariffs associated with a purchase of merchandise from
an overseas supplier.
82) Match the descriptions below with the correct credit or shipping terms. Some terms may be
used more than once and others may not be used at all.
a. 2/10, n/30
b. 1/15, n/45
c. n/60
d. 3/10, n/60
e. FOB destination
f. FOB shipping point
______ 1. credit terms that do not provide a discount for early payment
______ 2. credit terms that allow for a 1% discount for early payment
______ 3. shipping terms that would typically mean that the buyer has to pay the freight charges
______ 4. shipping terms that would typically mean that the seller has to pay the freight charges
______ 5. credit terms that provide for a maximum of one and a half months to satisfy the debt
______ 6. credit terms that provide for a 2% discount for early payment
83) Match the items below with the appropriate statements.
A = The expenditure should be included in the inventory account.
B = The expenditure should NOT be included in the inventory account.
______ 1. UIO Co. pays $330 to insure merchandise while it is on the shelves waiting to be sold.
______ 2. RXD was billed $500 for merchandise that it had already returned to the vendor.
______ 3. YUH Company paid $12,600 to a supplier for merchandise it had purchased on credit
two months earlier.
______ 4. TGF Company purchases 500 units of merchandise at a cost of $1.40 each.
______ 5. GLO Company pays $560 of import tariffs associated with a purchase of merchandise
from an overseas supplier.
______ 6. EOP Inc. pays for freight on goods that it purchased with credit terms of FOB
shipping point.
______ 7. RFV Company pays the purchasing manager a $70,000 annual salary.
84) Match the descriptions below to the correct credit or shipping terms. Some terms may be
used more than once. Others may not be used at all.
a. 2/10, n/30
b. 1/15, n/45
c. n/30
d. 3/10, n/60
e. FOB destination
f. FOB shipping point
______ 1. would result in a $200 discount for early payment of a $10,000 purchase
______ 2. shipping terms that would typically mean that the buyer has to pay the freight charges
______ 3. credit terms that allow the buyer a maximum of two months to pay the debt
______ 4. credit terms that do not allow a discount for early payment
______ 5. would result in a $150 discount for early payment of a $5,000 purchase
______ 6. credit terms that would set May 2 as the latest payment date to take a discount on an
April 17 purchase
Learning Objective 5-2
1) The perpetual inventory method is a method of record keeping that ________.
A) maintains a constant record of the inventory balance
B) updates the inventory records only at the end of the accounting period
C) can be used only in a computerized accounting system
D) involves calculating cost of goods sold only at the end of the period
2) The periodic inventory method is a method of record keeping that ________.
A) maintains a constant record of the inventory balance
B) updates the inventory records only when a sale is made
C) can be used only in a computerized accounting system
D) involves calculating cost of goods sold only at the end of the period
3) Which of the following is an advantage of a perpetual inventory system over a periodic
system?
A) Cost of goods sold will be less.
B) Sales will be greater.
C) Inventory shrinkage is separately identified.
D) Sales returns will be less.
4) Two systems of inventory record keeping are ________.
A) periodic and perpetual
B) computerized and database
C) purchase returns and purchase discounts
D) merchandising and manufacturing
5) How does a perpetual inventory system differ from a periodic system?
A) Sales are increased only at the end of the accounting period in a perpetual system.
B) Cost of goods sold is increased only after an inventory count in a perpetual system.
C) Inventory is reduced after each sale in a perpetual system.
D) Inventory is increased after each sale in a periodic system.
6) In which way is a perpetual inventory system similar to a periodic system?
A) Sales are increased at the time of sale.
B) Cost of goods sold is increased after an inventory count.
C) Inventory is reduced after each sale.
D) Cost of goods sold is increased after each sale.
7) With a perpetual inventory system, cost of goods sold is calculated only when the firm is
ready to prepare financial statements.
8) The periodic inventory system is a record keeping system that involves calculating cost of
goods sold only at the end of the period.
9) A company that uses a perpetual inventory system must calculate cost of goods sold each time
it records a sale.
10) Compare and contrast the perpetual and periodic inventory systems.
1) FIFO means that the costs of the oldest items in inventory are ________.
A) the costs that attach to ending inventory at the end of the period
B) the costs that attach to the inventory sold during the period
C) reduced to the lower of cost or market value during the period
D) expensed when purchased
2) Which method results in the cost of goods sold equaling the exact cost of the actual goods that
have been sold?
A) FIFO
B) LIFO
C) Weighted average method
D) Specific identification
3) Which method requires the unit cost is calculated by dividing the total cost of goods available
for sale by the total number of units available for sale?
A) FIFO
B) LIFO
C) Weighted average method
D) Specific identification
4) GAAP for inventory costs ________.
A) allow two cost flow assumptions: FIFO and LIFO
B) require companies to report the same net income regardless of which inventory cost flow
assumption is used. This is called the income conformity rule
C) allow for only one inventory cost flow assumption to enhance comparability
D) allow for more than two inventory cost flow assumptions
5) Vango, Inc. sells part number 86Z to auto parts stores around the world. Information about
part number 86Z is contained in the table below. Vango uses a FIFO periodic inventory system.
Number of Units
Unit Cost
Total
Cost
Beginning inventory
2,000
$8.00
$16,000
Purchase
3,000
$8.20
$24,600
Purchase
5,000
$8.60
$43,000
Totals
10,000
$83,600
Determine the cost of goods sold and ending inventory value of part 86Z, if 4,000 units remain
unsold in inventory at the end of the accounting period.
A) Cost of goods sold is $49,200 and ending inventory is $34,400.
B) Cost of goods sold is $34,400 and ending inventory is $49,200.
C) Cost of goods sold is $50,160 and ending inventory is $33,440.
D) Cost of goods sold is $51,200 and ending inventory is $32,400.
6) Vango, Inc. sells part number 86Z to auto parts stores around the world. Information about
part number 86Z is contained in the table below. Vango uses a FIFO perpetual inventory
system.
Number of Units
Unit
Cost/Price
Total Cost
Beginning inventory
2,000
$8.00
$16,000
Purchase
3,000
$8.20
$24,600
Sale
(6,000)
$15.00
Purchase
5,000
$8.60
$43,000
Determine the cost of goods sold and ending inventory value of part 86Z, if 4,000 units remain
unsold in inventory at the end of the accounting period.
A) Cost of goods sold is $49,200 and ending inventory is $34,400.
B) Cost of goods sold is $34,400 and ending inventory is $49,200.
C) Cost of goods sold is $50,160 and ending inventory is $33,440.
D) Cost of goods sold is $51,200 and ending inventory is $32,400.
7) Vango, Inc. sells part number 86Z to auto parts stores around the world. Information about
part number 86Z is contained in the table below. Vango uses a LIFO periodic inventory system.
Number of Units
Unit Cost
Total
Cost
Beginning inventory
2,000
$8.00
$16,000
Purchase
3,000
$8.20
$24,600
Purchase
5,000
$8.60
$43,000
Totals
10,000
$83,600
Determine the cost of goods sold and ending inventory value of part 86Z, if 4,000 units remain
unsold in inventory at the end of the accounting period.
A) Cost of goods sold is $49,200 and ending inventory is $34,400.
B) Cost of goods sold is $34,400 and ending inventory is $49,200.
C) Cost of goods sold is $50,160 and ending inventory is $33,440.
D) Cost of goods sold is $51,200 and ending inventory is $32,400.
8) Vango, Inc. sells part number 86Z to auto parts stores around the world. Information about
part number 86Z is contained in the table below. Vango uses a weighted average cost periodic
inventory system.
Number of Units
Unit Cost
Total Cost
Beginning inventory
2,000
$8.00
$16,000
Purchase
3,000
$8.20
$24,600
Purchase
5,000
$8.60
$43,000
Totals
10,000
$83,600
Determine the cost of goods sold and ending inventory value of part 86Z, if 4,000 units remain
unsold in inventory at the end of the accounting period.
A) Cost of goods sold is $49,200 and ending inventory is $34,400.
B) Cost of goods sold is $34,400 and ending inventory is $49,200.
C) Cost of goods sold is $50,160 and ending inventory is $33,440.
D) Cost of goods sold is $51,200 and ending inventory is $32,400.
9) Fargo Engines Incorporated sells part number 45G to toy manufacturers around the world.
Information about part number 45G is contained in the table below. Fargo uses a LIFO periodic
inventory system.
Number of Units
Unit Cost
Total Cost
Beginning inventory
2,000
$8.00
$16,000
Purchase
3,000
$8.20
$24,600
Purchase
5,000
$8.60
$43,000
Totals
10,000
$83,600
Determine the cost of goods sold and ending inventory cost of part 45G, if 2,000 units remain
unsold in inventory at the end of the accounting period.
A) Cost of goods sold is $67,600 and ending inventory is $16,000.
B) Cost of goods sold is $66,600 and ending inventory is $17,000.
C) Cost of goods sold is $66,200 and ending inventory is $17,400.
D) Cost of goods sold is $8,000 and ending inventory is $2,000.
10) Fargo Engines Incorporated sells part number 45G to toy manufacturers around the world.
Information about part number 45G is contained in the table below. Fargo uses a weighted-
average periodic inventory system.
Number of Units
Unit Cost
Total Cost
Beginning inventory
2,000
$8.00
$16,000
Purchase
3,000
$8.20
$24,600
Purchase
5,000
$8.60
$43,000
Totals
10,000
$83,600
Determine the cost of goods sold and ending inventory cost of part 45G if 2,000 units remain
unsold in inventory at the end of the accounting period.
A) Cost of goods sold is $66,133 and ending inventory is $17,467.
B) Cost of goods sold is $66,267 and ending inventory is $25,733.
C) Cost of goods sold is $65,803 and ending inventory is $26,197.
D) Cost of goods sold is $66,880 and ending inventory is $16,720.
11) One difference between U.S. GAAP and IFRS is ________.
A) U.S. GAAP allows LIFO and IFRS does not
B) IFRS allows LIFO and U.S. GAAP does not
C) U.S. GAAP allows FIFO and IFRS does not
D) IFRS allows FIFO and U.S. GAAP does not
12) Grand Forks Enterprises sells toy airplanes to retailers such as K-Mart and Wal-Mart.
Information about inventory is contained in the table below. The company uses a FIFO perpetual
inventory system.
Number of Units
Unit Cost
Total Cost
Beginning inventory
2,000
$2.00
$4,000
Sale
(1,200)
Purchase
4,000
$2.25
$9,000
Sale
(2,500)
Purchase
5,000
$2.40
$12,000
Sale
(6,000)
Determine the cost of goods sold.
A) $20,800
B) $21,200
C) $21,880
D) $19,400
13) Grand Forks Enterprises sells toy airplanes to retailers such as K-Mart and Wal-Mart.
Information about inventory is contained in the table below. The company uses a LIFO perpetual
inventory system and sells inventory for $5.00 per unit.
Date
Number of Units
Unit Cost
Total Cost
January 01
Beginning inventory
2,000
$2.00
$4,000
January 10
Sale
1,200
January 15
Purchase
4,000
$2.25
$9,000
January 20
Sale
2,500
January 25
Purchase
5,000
$2.40
$12,000
January 30
Sale
6,000
Determine the cost of goods sold for the January 10th sale.
A) $6,000
B) $3,600
C) $2,400
D) $2,600
14) Grand Forks Enterprises sells toy airplanes to retailers such as K-Mart and Wal-Mart.
Information about inventory is contained in the table below. The company uses a LIFO perpetual
inventory system and sells inventory for $5.00 per unit.
Date
Number
of Units
Unit Cost
Total
Cost
January 01
Beginning inventory
2,000
$2.00
$4,000
January 10
Sale
1,200
January 15
Purchase
4,000
$2.25
$9,000
January 20
Sale
2,500
January 25
Purchase
5,000
$2.40
$12,000
January 30
Sale
6,000
Determine the cost of goods sold for the January 20th sale.
A) $5,425
B) $5,850
C) $5,625
D) $5,725
15) Grand Forks Enterprises sells toy airplanes to retailers such as K-Mart and Wal-Mart.
Information about inventory is contained in the table below. The company uses a LIFO perpetual
inventory system and sells inventory for $5.00 per unit.
Date
Number of
Units
Unit Cost
Total Cost
January 01
Beginning inventory
2,000
$2.00
$4,000
January 10
Sale
1,200
January 15
Purchase
4,000
$2.25
$9,000
January 20
Sale
2,500
January 25
Purchase
5,000
$2.40
$12,000
January 30
Sale
6,000
Determine the ending inventory for the period.
A) $2,925
B) $2,600
C) $2,725
D) $3,120
16) Philipsburg Corporation sells mugs to fine retailers across the world. Data from its periodic
inventory system is presented in the table below. Inventory is sold for $170 per unit. Operating
expenses, excluding cost of goods sold, totaled $40,000.
Date
Number of
Units
Unit
Cost
Total Cost
January 1
Beginning
inventory
300
$100
$30,000
January 13
Purchase
400
$110
$44,000
January 22
Purchase
500
$120
$60,000
Which cost flow method would result in the HIGHEST taxable income for the period?
A) FIFO
B) LIFO
C) Weighted average method
D) Each of the methods would have equal net income for the period.
17) Philipsburg Corporation sells mugs to fine retailers across the world. Data from its periodic
inventory system is presented in the table below. Inventory is sold for $170 per unit. Operating
expenses excluding cost of goods sold totaled $40,000.
Date
Number of Units
Unit Cost
Total Cost
January 1
Beginning inventory
300
$100
$30,000
January 13
Purchase
400
$110
$44,000
January 22
Purchase
500
$120
$60,000
Which cost flow method would result in the LOWEST taxable income for the period?
A) FIFO
B) LIFO
C) Weighted average method
D) Only the LIFO cost flow method can be used for tax returns.
18) Inventory information for Great Falls Merchandising, Inc. is provided below. Sales for the
period were 2,800 units for $8 each. The company uses a FIFO periodic inventory system.
Date
Number of
Units
Unit Cost
Total Cost
January 1
Beginning
inventory
1,000
$3.00
$3,000
January
Purchase
600
$3.50
$2,100
February
Purchase
800
$4.00
$3,200
March
Purchase
1,200
$4.25
$5,100
Totals
3,600
$13,400
Determine the ending inventory at March 31.
A) $3,400
B) $3,800
C) $9,200
D) $10,000
19) Tarheel Company purchases inventory from McGardy Wholesalers. The per unit cost of the
items purchased during the current accounting period was $5.50, $5.70, $5.90 and $6.23. Which
statement below regarding Tarheel’s choice of inventory cost flow methods is TRUE?
A) Net income will be the same regardless of the cost flow assumption adopted. The choice of an
accounting method can’t affect net income.
B) Net income will be greater than taxable income regardless of the inventory method chosen by
Tarheel Company.
C) If Tarheel Company uses the LIFO method for financial reporting, then it must also use the
LIFO method for tax reporting.
D) If Tarheel Company selects the FIFO method, it will result in a lower net income than the
LIFO method would have produced.
20) Inventory information for Great Falls Merchandising, Inc. is provided below. Sales for the
period were 2,800 units for $8 each. The company uses a LIFO periodic inventory system.
Date
Number of Units
Unit Cost
Total Cost
January 1
Beginning
inventory
1,000
$3.00
$3,000
January
Purchase
600
$3.50
$2,100
February
Purchase
800
$4.00
$3,200
March
Purchase
1,200
$4.25
$5,100
Totals
3,600
$13,400
Determine the ending inventory at March 31.
A) $3,400
B) $2,400
C) $10,200
D) $800
21) Inventory information for Missoula Merchandising, Inc. is provided below. Sales for the
period were 2,800 units for $8 each. The company uses a weighted average periodic inventory
system.
Date
Number of Units
Unit Cost
Total Cost
January 1
Beginning
inventory
1,000
$2.20
$2,200
January
Purchase
600
$3.50
$2,100
February
Purchase
800
$4.00
$3,200
March
Purchase
1,200
$4.25
$5,100
Totals
3,600
$12,600
Determine the ending inventory at March 31.
A) $2,300
B) $3,300
C) $9,800
D) $2,800
22) A company would choose to use LIFO so that it can ________.
A) report inventory that best reflects current costs on its balance sheet
B) report lower cost of goods sold and higher income
C) pay less income tax
D) pay less for its purchases of inventory
23) On June 1, beginning inventory consists of ten items that cost $100 each. On June 8, ten
more items are purchased at $120 each. On June 12, fifteen items are sold for $200 each. On
June 28, ten items are purchased at $130 each. Using perpetual FIFO, cost of goods sold for the
month ended June 30 equals ________.
A) $1,500
B) $1,600
C) $1,800
D) $3,000
24) On June 1, beginning inventory consists of ten items that cost $100 each. On June 8, ten
more items are purchased at $120 each. On June 12, fifteen items are sold for $200 each. On
June 28, ten items are purchased at $130 each. Using periodic FIFO, cost of goods sold for the
month ended June 30 equals ________.
A) $1,500
B) $1,600
C) $1,800
D) $3,000
25) On June 1, beginning inventory consists of ten items that cost $100 each. On June 8, ten
more items are purchased at $120 each. On June 12, fifteen items are sold for $200 each. On
June 28, ten items are purchased at $130 each. Using periodic LIFO, cost of goods sold for the
month ended June 30 equals ________.
A) $1,600
B) $1,800
C) $1,900
D) $1,950
26) On June 1, beginning inventory consists of ten items that cost $100 each. On June 8, ten
more items are purchased at $120 each. On June 12, fifteen items are sold for $200 each. On
June 28, ten items are purchased at $130 each. Using perpetual LIFO, cost of goods sold for the
month ended June 30 equals ________.
A) $1,700
B) $1,800
C) $1,900
D) $1,950
27) Mighty Ducks, Inc.’s inventory activity in October 2011 was as follows:
Inventory, October 1
11 units @ $8 each
Purchase, October 12
22 units @ $11 each
Sale, October 25
23 units @ $24 each
Which of the following shows the correct effect on the accounting equation of the October 25
sale on account using the perpetual FIFO method of accounting for inventory?
A)
Assets
Liabilities
Shareholders’ equity
(220) Inventory
552 Accounts payable
552 Sales
(220) Cost of goods
sold
B)
Assets
Liabilities
Shareholders’ equity
552 Accounts
receivable
(250) Inventory
No effect
552 Sales
(250) Cost of goods
sold
C)
Assets
Liabilities
Shareholders’ equity
552 Accounts
receivable
(220) Inventory
No effect
552 Sales
(220) Cost of goods
sold
D)
Assets
Liabilities
Shareholders’ equity
(230) Inventory
552 Accounts payable
552 Sales
(230) Cost of goods
sold
