14) At December 31, Payless, Inc. reported inventory on the balance sheet at its cost of
$200,000. However, the market value of the inventory at that date was $190,000. Put an X in the
appropriate box to show the effect of continuing to report the inventory at cost:
Overstated
Understated
Correct
1.
Current assets
2.
Current liabilities
3.
Net income
15) At December 31, Payless, Inc. reported inventory on the balance sheet at its cost of
$200,000. However, the market value of the inventory at that date was $190,000. Put an X in the
appropriate box to show the effect of continuing to report the inventory at cost:
Overstated
Understated
Correct
1.
Inventory
2.
Accounts payable
3.
Current ratio
Overstated
Understated
Correct
1.
Inventory
2.
Accounts payable
3.
Current ratio
Overstated
Understated
Correct
1.
Current assets
2.
Current liabilities
3.
Net income
16) The accountants for Sandoval Products 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 on the company’s books
$150,000
Amount company’s managers think they can sell the inventory
$180,000
Replacement cost of inventory
$135,000
Gross profit ratio
32.00%
Inventory system
Periodic
Required: Determine the amount of inventory that will be reported on the balance sheet.
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. inventory
______ 2. cost of goods sold
______ 3. sales
______ 4. cash collected from customers
______ 5. accounts payable
______ 6. cash paid to suppliers
______ 7. management’s estimate of inventory’s market value next year
______ 8. the cost flow method adopted for inventory valuation
Learning Objective 5-6
1) Lito & Sons Woodworks has a beginning inventory of $60,000 and ending inventory of
$84,000 for the current period. The company had sales of $340,000 and cost of goods sold of
$200,000 during the period. What was the inventory turnover?
A) 4.72 times
B) 3.66 times
C) 2.78 times
D) 1.55 times
2) Gaffney & Sons Woodworks has a beginning inventory of $160,000 and ending inventory of
$180,000 for the current period. The company had sales of $500,000 and cost of goods sold of
$300,000 during the period. What was the inventory turnover?
A) 4.50 times
B) 2.94 times
C) 2.00 times
D) 1.76 times
3) Assume Taylor & Sons Cabinet Makers has an inventory turnover ratio of 4.5 for the year
ended November 30, 2011. Which statement below is the best interpretation of the ratio?
A) The company was able to sell the inventory 4.5 times faster than last year.
B) The company has 4.5 times as much inventory as it has current liabilities.
C) The company sells its average inventory balance 4.5 times per year.
D) The company sells its inventory at a greater rate than other companies in its industry.
4) Assume Taylor & Sons Cabinet Makers had a gross profit ratio of 30%, 35%, and 40% over
the most recent three years. Which statement below is the best interpretation of the data?
A) The company may be having trouble selling its inventory.
B) The company is selling more inventory than in prior years.
C) The company is increasing its selling price per unit or having its inventory costs per unit
decrease.
D) The company has been decreasing its selling price but selling more units.
5) Assume Tyler, Inc. had a gross profit ratio of 30%, 25%, and 20% over the most recent three
years. Which statement below is the best interpretation of the data?
A) The company is selling more inventory than in previous years.
B) The company is decreasing its selling price per unit or having its inventory costs per unit
increase.
C) The company’s managers are doing a good job of controlling inventory costs and selling
price.
D) The company is not selling as much inventory as in previous years.
6) Johnson Supply Company had sales of $1,000,000, Cost of goods sold was $600,000 and
operating expenses were $340,000. The beginning cash balance was $400,000 and the ending
cash balance was $220,000. Net cash flows from operating activities were $960,000. What is the
company’s gross profit ratio?
A) 20%
B) 40%
C) 60%
D) 35%
7) Which financial statement(s) do you need to calculate a company’s inventory turnover ratio?
A) only the income statement
B) only the balance sheet
C) both the income statement and the balance sheet
D) both the balance sheet and the statement of cash flows
8) Which financial statement(s) do you need to calculate a company’s gross profit ratio?
A) only the income statement
B) only the balance sheet
C) both the income statement and the balance sheet
D) both the balance sheet and the statement of cash flows
9) Thyme, Inc.’s inventory turnover ratio has been approximately 6 times per year over the past
few years. This year Thyme decided to reduce the amount of inventory it keeps on hand. What
effect will this new policy have on its inventory turnover ratio for the current year?
A) The ratio will increase.
B) The ratio will decrease.
C) The inventory turnover ratio will stay the same.
D) This is a trick question. The amount of inventory on hand has nothing to do with a company’s
inventory turnover ratio.
10) Which of the following companies will probably have the highest inventory turnover ratio?
A) Auto dealership
B) Clothing store
C) Bakery
D) All of these companies will have the same inventory turnover ratio.
11) Which of the following companies will probably have the lowest inventory turnover ratio?
A) Auto dealership
B) Clothing store
C) Bakery
D) All of these companies will have the same inventory turnover ratio.
12) Gross profit is calculated by deducting ________.
A) current assets from current liabilities
B) revenues from expenses
C) cost of goods sold from net sales
D) ending inventory from cost of goods available for sale
13) Inventory information for Cut Above, Inc. is provided below. Sales for the period were 2,000
units at $10 each. The company uses FIFO.
Number of Units
Unit
Cost
Beginning inventory
1,000
$3.00
Purchase
2,000
$4.00
Purchase
1,200
$4.25
Determine the gross profit ratio at January 31.
A) 60%
B) 65%
C) 40%
D) 57.5%
14) Which company is most likely to have a higher inventory turnover? A company with
________.
A) higher-priced goods and lower gross profit
B) lower-priced goods and lower gross profit
C) higher-priced goods and higher gross profit
D) a higher gross profit ratio
15) Which financial statement(s) is/are needed in order to calculate the average days in
inventory?
A) income statement only
B) balance sheets only
C) both the income statement and balance sheets
D) both the statement of cash flows and income statement
16) If Puffins Turnovers, Inc., has an inventory turnover ratio of 73 times, then its average days
in inventory must be ________.
A) 20 days
B) 5 days
C) 0.2 days
D) 2 days
17) The gross profit ratio is calculated by dividing gross profit by sales.
18) The asset turnover ratio is the most useful way to determine if a merchandising company is
selling its inventory effectively.
19) The gross profit ratio is the most useful way to determine if a merchandising company is
selling its inventory effectively.
20) McDonald’s gross profit ratio is higher than The Boeing Company.
21) The gross profit ratio measures the percentage of revenue left over after deducting cost of
goods sold from net sales.
22) When analyzing the operating performance of a merchandise firm, inventory turnover and
the gross profit ratio are usually calculated. What do the inventory turnover ratio and gross profit
ratio indicate?
23) Use the following data to answer the questions below:
Nov. 30, 2011
Nov. 30, 2012
Nov. 30, 2013
Sales
$3,500,000
$4,000,000
$4,400,000
COGS
$2,100,000
$2,400,000
$2,685,000
Inventory
$650,000
$700,000
$600,000
Required:
1. Calculate the values required in the chart below:
For the year ended
Nov. 30, 2012
For the year ended
Nov. 30, 2013
Gross profit
Gross profit ratio
Inventory turnover ratio
2. Interpret the meaning of each of the RATIOS you have just calculated.
Gross profit
$4,000,000 – 2,400,000 =
$4,400,000 — 2,685,000 =
Gross profit
ratio
$1,715,000 / $4,400,000 =
Inventory
turnover
$2,.400,00/(($650K + 700K)/2)
$2,685,000/(($700K+600K)/2)
24) Use the following data to answer the questions below:
Jan. 31, 2011
Jan. 31, 2012
Jan. 31, 2013
Sales
$500,000
$400,000
$380,000
COGS
$200,000
$165,000
$144,400
Inventory
$12,000
$14,000
$10,500
Required:
1. Calculate the values required in the chart below
For the year ended
Jan. 31, 2012
For the year ended
Jan. 31, 2013
Gross profit
Gross profit ratio
Inventory turnover ratio
2. Interpret the meaning of each of the RATIOS you have just calculated.
Jan. 31, 2012
Jan. 31, 2013
Gross profit
$380,000 — 144,400 =
Gross profit ratio
turnover
ratio
$165,000
($12,000 + 14,000) / 2
$144,400
($14,000 + 10,500) / 2
25) At the end of its first year of business, Payless, Inc. had Sales of $800,000 and Cost of goods
sold of $500,000 prior to a lower-of-cost-or-market write down. Payless reported its inventory at
the lower market value of $90,000 instead of the cost of $100,000. The adjusting entry to record
the write down included a decrease to Inventory and Cost of goods sold.
Required: Put an X in the appropriate box to show the effect of lower-of-cost-or-market write
down:
Increase
Decrease
Remain the same
1.
Inventory turnover
2.
Gross profit ratio
3.
Current ratio
26) Using the following information, calculate the gross profit ratio, inventory turnover ratio, and
the average days in inventory.
Sales
$1,000,000
Cost of goods sold
$700,000
Inventory at December 31, 2011
$80,000
Inventory at December 31, 2010
$60,000
Net income
$3,000
1. Gross profit ratio equals: ________
2. Inventory turnover ratio equals: ________
3. Average days in inventory equals: ________.
Increase
Decrease
Remain the same
1.
Inventory turnover
2.
Gross profit ratio
3.
Current ratio
27) 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.
Part A: Enter Tim’s Tams, Inc.’s May transactions and adjustments in the accounting equation.
1. May 1 Paid $600 cash for 3 months of insurance coverage beginning May 1.
2. May 2 Collected $8,000 from customers for sales made in April.
3. May 6 Paid $7,200 of accounts payable from April purchases.
4. May 6 Purchased 800 caps @ $6.10 each on account, FOB shipping point. Shipping cost $120
also on account.
5. May 8 Paid $300 cash for supplies.
6. May 31 During May, Tim’s Tams sold 1,000 baseball caps @ $10 each on account. Tim’s
uses a FIFO perpetual inventory system. Beginning inventory consists of 500 caps at $6 each.
7. May 31 Tim’s Tams declared and paid a $400 cash dividend to its shareholder.
8. May 31 Adjusted for insurance used during the month. Recall that on May 1, Tim’s Tams paid
$600 for 3 months of insurance coverage that began May 1.
9. May 31 Recorded one month’s straight-line depreciation on the $18,000 truck that has a 6-
year useful life and no salvage value.
10. May 31 Counted the office supplies and found that $100 of supplies have not been used.
Part B: Complete the financial statement. Part C: Complete the financial statement.
Part D: Complete the financial statement.
Part E: Complete the financial statement.
Part F: Using the Tim’s Tam financial satatements, answer the following: