61) Match the statements below with the appropriate cost flow method. Some methods may be
used more than once and others may not be used at all.
F = FIFO
L = LIFO
W = Weighted average method
S = Specific identification method
______ 1. the cost flow method that reduces taxable income, relative to the other methods, in a
period of rising inventory costs
______ 2. is based on a calculation that divides the cost of goods available for sale by the
number of units available for sale
______ 3. would be the best method if inventory costs are rising and the objective is to maximize
net income
______ 4. tends to be used only in low-volume businesses
______ 5. matches the oldest costs with sales on the income statement
______ 6. results in the highest current asset balance, relative to the other methods, in a period of
rising prices
62) Match the statements below with the appropriate cost flow method. Some methods may be
used more than once, and others may not be used at all.
F = FIFO
L = LIFO
W = Weighted average method
S = Specific identification method
______ 1. matches the costs of the most recently purchased items with sales on the income
statement
______ 2. results in the lowest net income in a period of rising inventory purchase costs
______ 3. is difficult to apply when the inventory items are identical
______ 4. results in the highest net income in a period of rising inventory purchase costs
______ 5. results in the highest ending inventory value in a period of falling prices
Learning Objective 5-4
1) Philipsburg Corporation sells hats to upscale retailers around the world. Information about
inventory is contained in the table below. The company uses a LIFO perpetual inventory system.
Date
Number of Units
Unit Cost
Total Cost
January 1
Beginning
inventory
500
$9.00
$4,500
January 13
Purchase
1,000
$10.00
$10,000
January 22
Purchase
1,400
$11.00
$15,400
Determine the gross profit for the period assuming that the only sale was 1,200 units for $35
each on January 15.
A) $30,200
B) $32,400
C) $36,540
D) $42,000
2) Head on Straight, Inc. sells hats to fine retailers across the world. It uses a FIFO perpetual
inventory system. Inventory data is presented in the table below.
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
Determine the operating income for the period, assuming that 1,000 units were sold for $170
each. Operating expenses excluding cost of goods sold totaled $40,000.
A) $110,000
B) $16,000
C) $65,000
D) $20,000
3) Up Against the Wall, Inc. sells wallpaper to fine retailers across the world. It uses a LIFO
perpetual inventory system. Inventory data is presented in the table below.
Date
Number of Units
Amount per unit
January 1
Beginning
inventory
300
$100
January 13
Purchase
600
$110
January 22
Sale
500
$200
Determine the gross profit for the period.
A) $55,000
B) $45,000
C) $100,000
D) $48,000
4) Philipsburg Corporation sells mugs to fine retailers around the world. It uses a FIFO perpetual
inventory system. Inventory data is presented in the table below.
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
Determine gross profit for the period, assuming that 1,000 units were sold for $170 each.
Operating expenses excluding cost of goods sold totaled $40,000.
A) $80,000
B) $60,000
C) $40,000
D) $170,000
5) Philipsburg Corporation sells mugs to fine retailers around the world. It uses a FIFO perpetual
inventory system. Inventory data is presented in the table below.
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
Determine operating income for the period, assuming that 1,000 units were sold for $170 each.
Operating expenses excluding cost of goods sold totaled $40,000.
A) $40,000
B) $34,000
C) $22,000
D) $20,000
6) Putting on the Ritz, Inc. sells hats to upscale retailers around the world. Information about
inventory is contained in the table below. The company uses a LIFO perpetual inventory system.
Date
Number of
Units
Unit
Cost
Total Cost
January 1
Beginning
inventory
500
$9.00
$4,500
January 13
Purchase
1,000
$10.00
$10,000
January 22
Purchase
1,400
$11.00
$15,400
Determine the gross profit for the period assuming that the only sale was 1,200 units for $35
each on January 15.
A) $30,200
B) $32,400
C) $36,540
D) $42,000
7) Inventory information for Great Falls Merchandising, Inc. is provided below. Sales for the
period were 2,800 units at $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 gross profit for the quarter ended March 31.
A) $15,400
B) $12,600
C) $12,400
D) $22,400
8) Inventory data for Missoula Merchandising, Inc. are provided below. Sales for the period were
2,800 units. Each sold for $8. The company maintains 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
Purchases
600
$3.50
$2,100
February
Purchases
800
$4.00
$3,200
March
Purchases
1,200
$4.25
$5,100
Totals
3,600
$12,600
Determine the gross profit for the quarter ended March 31.
A) $12,635
B) $12,600
C) $13,000
D) $22,400
9) Over the Top, Inc. sells hats to upscale retailers around the world. Information about inventory
is contained in the table below. The company uses a FIFO perpetual inventory system.
Date
Number of
Units
Unit
Cost/Price
January 1
Beginning inventory
500
$9.00
January 13
Purchase
1,000
$10.00
January 22
Sale
1,200
$35.00
Determine the gross profit.
A) $42,000
B) $34,750
C) $30,500
D) $30,2500
10) Spring Hill, Inc. sells merchandise to customers worldwide in a highly competitive industry.
During June, Spring Hill completed the following transactions:
∙ June 1: Purchased 200 units of merchandise for $11 each, FOB shipping point.
∙ June 1: Paid $205 of freight costs for the merchandise.
∙ June 3: Paid $1,200 to the local radio station for an advertising campaign related to the
merchandise.
∙ June 9: Sold 180 units of the merchandise to customers for $26 each.
Required:
1. Determine the cost of the inventory on the books of Spring Hill, Inc., on June 2.
2. When will the costs that are included in inventory become expenses?
3. Which financial statement will report the costs that do NOT attach to inventory?
11) Umatilla Tile Company compiled the following inventory information for the current year.
Sales for the year were 3,500 units at $25 each. Total operating expenses for the year, excluding
cost of goods sold, were $35,000. The company maintains a periodic inventory system.
Date
Number of Units
Unit
Cost
Total Cost
January 1
Beginning inventory
1,000
$10.08
$10,080
March 10
Purchase
1,200
$11.00
$13,200
July 22
Purchase
1,500
$12.00
$18,000
November 9
Purchase
1,800
$13.00
$23,400
Totals
5,500
$64,680
Required:
1. Determine the ending inventory cost assuming the company uses the weighted average
inventory method.
2. Determine the net income that will be reported on the income statement assuming the
company uses the weighted average inventory method.
12) Inventory data for Henderson Enterprises are below. Twenty units were sold during the
period.
Date
Number of Units
Unit Cost
Total
Cost
January
Beginning inventory
10
$10.00
$100
February
Purchase
12
$11.00
$132
March
Purchase
15
$12.00
$180
Total
37
$412
Required: Fill in the missing amounts for (A), (B), and (C) in the income statement below. Use
the inventory method that will give the highest possible net income.
Henderson Enterprises
Income Statement
For the Quarter Ended March 31, 2011
Sales $9,000
Cost of goods sold (A)_________
Gross profit (B)_________
Expenses
Utilities $ 700
Salaries 2500
Depreciation 500
Total expenses 3,700
Net income (C)_________
13) Inventory data for Patterson Enterprises are below. Two hundred units were sold during the
quarter.
Date
Number of Units
Unit Cost
Total Cost
January
Beginning
inventory
100
$100.00
$10,000
February
Purchases
120
$105.00
$12,600
March
Purchases
150
$112.00
$16,800
Required: Fill in the missing amounts for (A), (B), and (C) in the income statement below. Use
the inventory method that will give the lowest possible federal income taxes.
Patterson Enterprises
Income Statement
For the Quarter Ended March 31, 2011
Sales $80,000
Cost of goods sold (A)_________
Gross profit (B)_________
Operating expenses
Utilities $12,000
Salaries 25,000
Depreciation 10,000
Total expenses 47,000
Net income (C)_________
14) Ana, the accountant, is reviewing the work of a subordinate. Ana’s boss tells her to find as
many errors as she can or, if there are no errors, certify that the work is done correctly. All
information given relates to the month of January, 2011.
EMX Electronics
Income Statement
January 31, 2011
Revenues
Sales $60,000
Unearned revenues 15,000
Accounts receivable 20,000
Total revenues $95,000
Cost of goods sold 40,000
Gross profit 55,000
Expenses
Utilities $2,000
Salaries 13,000
Dividends 5,000
Depreciation 1,000
Total expenses $48,000
Return on equity $3,000
Additional Information:
a. The beginning inventory was 200 units, at cost of $200 each. Purchases on January 3 were 100
units at a cost of $202 each and purchases on January 30 were 100 units at a cost of $205 each.
b. The company sold 150 units during the month for $400 each.
c. The company uses the weighted average cost flow method and a periodic inventory system.
Required: Prepare a corrected income statement for the month.
15) FILLO, Inc.’s inventory activity in May 2011 was as follows:
Inventory, May 1
100 units @ $8 each
Purchase, May 7
300 units @ $6 each
Sale, May 18
250 units @ $15 each
Part A: Record the effect of the above inventory activity on the accounting equation assuming
perpetual weighted average cost is used.
Shareholders’ equity
Transactions in May, 2011:
Assets
Liabilities
CC
Retained earnings
5/1
Beginning inventory: FILLO,
Inc. still owes for the 100
units @ $8.
800 Inventory
800 Accounts
Payable
5/7
Purchased 300 units @ $6
each on account
5/18
Sold 250 units for $15 each
to customers on account.
Record the 1) sale and 2) cost
of the sale.
Part B: Record the effect of the above inventory activity on the accounting equation assuming
perpetual first-in, first-out (FIFO) is used.
Shareholders’ equity
Transactions in May, 2011:
Assets
Liabilities
CC
Retained earnings
5/1
Beginning inventory: FILLO,
Inc. still owes for the 100
units @ $8.
800 Inventory
800 Accounts
Payable
5/7
Purchased 300 nits @ $6
each on account.
5/18
Sold 250 units for $15 each
to customers on account.
Record the 1) sale and 2) cost
of the sale.
Part C: Using the information from Parts A and B above, for each item, write in the amount
(even if $0) as of or for the Month Ended May 31, 2011. Write in the one financial statement
where the line item is found.
Amount
Financial Statement
WA
FIFO
1.
Inventory
2.
Cost of goods sold
3.
Gross profit
4.
Sales
5.
Accounts receivable
6.
Accounts payable
16) Divide the class into teams of three or four people. Each team member should work the
following problem separately outside of class. Then give the students time in class to compare
answers with their teammates and put together a final, correct copy of the problem. Each team
should turn in only one copy of the problem for grading. All team members will receive the same
grade.
Phillo, Inc. had the following sales and purchases during its first month of business.
Part A: Record the effect of the following transactions on the accounting equation, assuming a
LIFO PERPETUAL inventory system. Fill in both the correct dollar amounts and account
titles. Use a plus for increases and a minus for decreases.
Shareholders’ equity
Transactions in May, 2011:
Assets
Liabilities
CC
Retained earnings
5/3
Purchased 30 units at $11
each on account
5/10
Sold 25 units for $15 each to a
customer on accounts.
5/15
Purchased 20 units at $10
each on account.
5/18
Collected its accounts
receivable.
5/23
Paid half of its accounts
payable.
5/29
Sold 15 units for $15 each to a
customer on account.
Part B: Record the effect of the following transactions on the accounting equation assuming a
FIFO PERPETUAL inventory system. Fill in both the correct dollar amounts and account titles.
Use a plus for increases and a minus for decreases.
Shareholders’ equity
Transactions in May, 2011:
Assets
Liabilities
CC
Retained earnings
5/3
Purchased 30 units at $11
each on account
5/10
Sold 25 units for $15 each
to a customer on accounts.
5/15
Purchased 20 units at $10
each on account.
5/18
Collected its accounts
receivable.
5/23
Paid half of its accounts
payable.
5/29
Sold 15 units for $15 each
to a customer on account.
Part C: Put an X in the appropriate box to select the method that gives the result shown by
choosing either LIFO, FIFO, or Same (if both methods result in the same amount).
Which method results in the:
WA
FIFO
Same
1
higher net income?
2
lower taxes?
3
higher current assets?
4
higher Cash paid to suppliers on the Statement
of Cash Flows?
5
higher Accounts payable on the Balance Sheet?
5/3
40 x $11 = $330
+330
inventory
+330 A/P
5/10
25 x $15 = $375
25 x $11 = $275
+375 A/R
-275 inventory
+375 sales
-275 COGS
5/15
20 x $10 = $200
+200
inventory
+200 A/P
5/18
+375 cash
-375 A/R
5/23
half of $530 = $265
– 265 cash
-265 A/P
-150 inventory
-150 COGS
5/3
30 x $11 = $330
+330
inventory
+330 A/P
5/10
25 x $15 = $375
25 x $11 = $275
+375 A/R
-275 inventory
+375 sales
-275 COGS
5/15
20 x $10 = $200
+200
inventory
+200 A/P
-375 A/R
5/23
half of $530 = $265
-265 cash
-265 A/P
5/29
15 x $15 = $225
(5 x $11) + (10 x $10)
+225 A/R
-155 inventory
+225 sales
-155 COGS
17) Indicate the financial statement where each item listed below would be found.
BS = the balance sheet
IS = the income statement
CF = the statement of cash flows
F = the notes to the financial statements
N = The item is NOT part of GAAP-based accounting disclosure.
______ 1. cash collected from customers
______ 2. cash paid to suppliers
______ 3. the fair market value of inventory, which includes the desired profit margin
______ 4. the cost flow method adopted for inventory valuation
______ 5. inventory
______ 6. cost of goods sold
______ 7. sales
Learning Objective 5-5
1) The accountants for QEE Systems use the lower of cost or market (LCM) method to value
inventory on the balance sheet in accordance with GAAP. The accountants have gathered the
following information:
Inventory recorded in the company’s accounting records
$150,000
Inventory selling (market) value per managers
$180,000
Replacement value
$135,000
Gross profit percentage
30%
At what amount will inventory will be reported on the balance sheet?
A) $150,000
B) $180,000
C) $135,000
D) $126,000
2) The accountants for Q-Logic Integrated Systems use the lower of cost or market (LCM)
method to value inventory on the balance sheet in accordance with GAAP rules. The accountants
have gathered the following information:
Inventory recorded in the company’s accounting records
$400,000
Inventory selling (market) value per managers
$900,000
Replacement value
$410,000
Gross profit percentage
30%
At what amount will inventory will be reported on the balance sheet?
A) $400,000
B) $900,000
C) $410,000
D) $630,000
3) Which statement below is TRUE regarding the lower of cost or market rule?
A) Inventory should be reported on the balance sheet at the lower of the replacement value or
historical cost.
B) Inventory should be revalued at the end of each period to its market value.
C) Inventory should be reported on the balance sheet at whatever amount management honestly
believes it is worth.
D) The LCM rule is based on the cost principle.
4) Niteco Company ended its fiscal year with inventory recorded at its cost of $10,000. Niteco
believes it will be able to sell the inventory for approximately $12,000. Due to changes in the
market, Niteco would be able to replace this inventory for $9,000. How much should Niteco
show for inventory on its year-end balance sheet?
A) $10,000
B) $12,000
C) $9,000
D) $2,000
5) Inventory is reported at its replacement cost when the ________.
A) inventory’s historical cost is higher
B) gross profit is lower
C) market value is higher
D) prices are rising
6) After a lower-of-cost-or-market write down, Inventory will ________.
A) increase by the difference between the historical cost and the replacement cost
B) decrease by the difference between the historical cost and the replacement cost
C) the same
D) decrease by the replacement cost
7) In times of rising prices, ________ will be more apt to result in a lower-of-cost-or-market
write down.
A) the LIFO method
B) the FIFO method
C) the Weighted average cost method
D) Each method is as likely to result in a lower-of-cost-or-market write down as the others are.
8) The main objective of the lower-of-cost-or–market rule is to ________.
A) not overstate revenues
B) report a conservative inventory balance
C) not overstate cost of goods sold
D) report a conservative gross profit
9) Inventory must be reported at its market value at the end of the period.
10) In times of rising prices, a lower-of-cost-or-market write down is more likely if LIFO is
used.
11) In times of rising prices, a lower-of-cost-or-market write down is more likely if FIFO is used.
12) Explain the lower of cost or market (LCM) rule.
13) The accountants for Ruiz Imports use the lower of cost or market (LCM) method to value
inventory on the balance sheet in accordance with GAAP. The accountants have gathered the
following information:
Inventory cost recorded on the company’s books
$50,000
The company’s managers think they can sell the
inventory for this amount.
$80,000
Replacement cost of inventory
$45,000
Gross profit percentage
37.5%
Inventory system
Periodic
Required:
1. Determine the amount of inventory that will be reported on the balance sheet.
2. What principle of accounting supports the lower of cost or market rule for inventory?