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chapter 8
Inventory
goals discussion goals achievement fill in the blanks multiple choice problems check list and key terms
Select the appropriate response.
1. Inventory accounts should be classified in which section of a balance sheet?
a. Current
assets
b. Investments
c. Property, plant, and equipment
d. Intangible assets
2. Ritz Company agreed to purchase certain inventory items from Hostess Corporation. Hostess shipped the goods F.O.B. destination. On December 31, Ritz's accounting year-end, Ritz was aware that the goods had been shipped and would be received any day.
a. Ritz
should include the goods in its inventory calculated on December 31.
b. Ritz should include the goods in its inventory calculated on December 31, but
should not record the obligation to pay for them.
c. Ritz should not include the goods in its inventory calculated on December 31,
but should include the related payable on its balance sheet at December 31.
d. Ritz should not include the goods in its inventory calculated on December 31,
and should not include the related payable on its balance sheet at December 31.
3. Hefty Company wants to know the effect of different inventory methods on financial statements. Given below is information about beginning inventory and purchases for the current year.
| January 2 | Beginning Inventory | 500 units at $3.00 |
| April 7 | Purchased | 1,100 units at $3.20 |
| June 30 | Purchased | 400 units at $4.00 |
| December 7 | Purchased | 1,600 units at $4.40 |
Sales during the year were 2,700 units at $5.00. If Hefty used the first-in, first-out method, ending inventory would be:
a.
$2,780
b. $3,960
c. $9,700
d. $10,880
4. Hefty Company wants to know the effect of different inventory methods on financial statements. Given below is information about beginning inventory and purchases for the current year.
| January 2 | Beginning Inventory | 500 units at $3.00 |
| April 7 | Purchased | 1,100 units at $3.20 |
| June 30 | Purchased | 400 units at $4.00 |
| December 7 | Purchased | 1,600 units at $4.40 |
Sales during the year were 2,700 units at $5.00. If Hefty used the periodic LIFO method, cost of goods sold would be:
a.
$2,780
b. $3,960
c. $9,700
d. $10,880
5. Hefty Company wants to know the effect of different inventory methods on financial statements. Given below is information about beginning inventory and purchases for the current year.
| January 2 | Beginning Inventory | 500 units at $3.00 |
| April 7 | Purchased | 1,100 units at $3.20 |
| June 30 | Purchased | 400 units at $4.00 |
| December 7 | Purchased | 1,600 units at $4.40 |
Sales during the year were 2,700 units at $5.00. If Hefty used the weighted-average method, gross profit would be:
a. $3,255
b. $3,415
c. $10,245
d. $13,500
6. Which of the following inventory methods will always produce the same results under both a periodic and perpetual system?
a. FIFO
b. LIFO
c. Average
d. All of these
7. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is:
a. FIFO
b. LIFO
c. Retail
d. Weighted-average
8. Bernstein Corporation recently experienced a fire which destroyed all of its inventory. The following data have been reconstructed from partial accounting information, and pertain to the year up to the date of the fire.
| Beginning inventory | $20,000 |
| Net purchases | $45,000 |
| Sales | $80,000 |
| Gross profit rate | 40% |
Using the gross profit method, estimate the dollar amount of inventory which was destroyed in the fire.
a. $17,000
b. $33,000
c. $48,000
d. $65,000
9. Gerber Department Store utilizes the retail inventory method. Gerber's beginning inventory cost $140,000 and retailed for $280,000. Purchases for the period amounted to $390,000 and were priced to sell at twice that amount. Sales for the period, all at normal retail, were $600,000. How much is the cost of Gerber's estimated ending inventory?
a.
$115,000
b. $150,000
c. $230,000
d. $300,000
10. Wonder Corporation failed to record the purchase of merchandise on account. The merchandise and related accounts payable should have been recorded but were not. What is the effect of these errors on assets, liabilities, retained earnings, and net income, respectively?
a.
Understated, understated, no effect, no effect
b. Understated, understated,
understated, understated
c. Understated, overstated, overstated, understated
d. Overstated, overstated, understated, overstated
1. a. Inventory is appropriately classified as a current asset because it will be used or sold and converted to cash within the operating cycle.
2. d. Ritz should not include the goods in its inventory until the goods are received, as evident from the freight terms which specified F.O.B. destination. The obligation would not be recorded until the inventory was received.
3. b. $3,960. Ending inventory consisted of 900 units ((500 + 1,100 + 400 + 1,600) - 2,700). The value for these items is based on the last purchase at $4.40 each (900 X $4.40).
4. d. $10,880. Cost of goods sold consisted of the last 2,700 units purchased ((1,600 X $4.40) + (400 X $4.00) + (700 X $3.20)).
5. a. $3,255. Sales minus cost of goods sold equals gross profit. Sales are $13,500 (2,700 X $5.00). Cost of goods sold is $10,245, calculated as weighted-average cost per unit (((500 units X $3) + (1,100 units X $3.20) + (400 units X $4.00) + (1,600 units X $4.40))/(500 + 1,100 + 400 + 1,600)) times the 2,700 units sold.
6. a. FIFO valuations do not depend on the choice of a periodic or perpetual system. As sales occur, the cost is always presumed to be from the oldest goods in stock. This occurs whether the computation is made only once at the end of the period or throughout the period. The other methods would yield different results under a periodic versus a perpetual system, as the units presumed to be sold are sensitive to the timing of the sale.
7. a. With FIFO, the oldest costs are almost always charged to cost of goods sold. WIth LIFO, the oldest costs are likely to remain in inventory. Average and retail methods tend to blend costs, so that the oldest costs impact both cost of goods sold and ending inventory.
8. a. $17,000. Cost of goods sold up to the date of the fire was $48,000 ($80,000 sales minus cost of goods sold equals the gross profit of $32,000 ($80,000 X 40%)). Beginning inventory ($20,000) plus net purchases ($45,000) is goods available for sale ($65,000). Goods available for sale minus cost of goods sold is the estimated ending inventory lost to fire.
9. c. $230,000. Cost of goods available for sale is $530,000 ($140,000 + $390,000). The retail value of the goods is $1,060,000 ($280,000 + $780,000), resulting in a cost to retail percentage of 50%. Ending inventory at retail is $460,000 ($1,060,000 - $600,000); therefore, the estimated cost of ending inventory is $230,000 ($460,000 X 50%).
10. a. Assets are understated because the
inventory was not recorded. Liabilities are understated because the accounts
payable was not recorded. The error has no impact on income; both purchases and
ending inventory are understated, resulting in cost of goods sold being
correctly stated:
Beginning inventory
Correct
Plus: purchases
Understated
Goods available for sale Understated
Less: ending inventory
Understated
Cost of goods sold
Correct
Because cost of goods sold is correct, income is correct. Likewise, since income
is correct, retained earnings is correct.