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Exam 7: Reporting and Interpreting Cost of Goods Sold and Inventory

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Question 41

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Iris Company has provided the following information regarding two of its items of inventory at year-end: There are 100 units of Item A having a cost of $20 per unit and a replacement cost of $18 per unit. There are 50 units of Item B having a cost of $50 per unit and a replacement cost of $55 per unit. How much is the ending inventory using lower of cost or market on an item-by-item basis? A)$4,300 B)$4,500 C)$4,750 D)$4,550

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Question 42

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Redford Company hired a new store manager in October 2011,who determined the ending inventory on December 31,2011,to be $50,000.In March,2012 the company discovered that the December 31,2011 ending inventory should have been $58,000.The December 31,2012,inventory was correct.Ignore income taxes. Complete the following table to show the effects of the inventory error on the four amounts listed.Give the amount of the discrepancy and indicate whether it was overstated (O),understated (U),or had no effect (N). $\begin{array}{l}\begin{array} { l } \text { Year } \quad \text { Ending Inventory } &\text { Cost of Goods Sold }&\text { Net Income } \\2011 \\2012\end{array}\\\end{array}$

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Question 43

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Wilmington Company reported pretax income of $25,000 during 2010 and $30,000 during 2011.Later it was discovered that the ending inventory for 2010 was understated by $2,000 (and not corrected in 2011) .What is the correct pretax income for each year? $\begin{array} { l c c } & \underline { 2010 } & \underline { 2011 } \\\text { A. } & \$ 23,000 & \$ 32,000 \\\text { B. } & \$ 27,000 & \$ 32,000 \\\text { C. } & \$ 27,000 & \$ 28,000 \\\text { D. } & \$ 23,000 & \$ 28,000\end{array}$

Tinker's 2011 cost of goods sold was $750,000 and 2010 cost of goods sold was $770,000.The inventory at the end of 2011 was $188,000 and $208,000 at the end of 2010.What was Tinker's inventory turnover during 2011?

Which of the following statements is incorrect?

The FIFO inventory method allocates the most recent inventory purchase costs to ending inventory.

An overstatement of the 2011 ending inventory results in an understatement of net income during 2012.

The journal entry to write-down inventory under the lower-of-cost-or-market (LCM)rule results in a decrease in both ending inventory and cost of goods sold.

Atomic Company incorrectly recorded a December 2009 credit purchase of inventory during January 2010.Assuming that the December 31,2009 ending inventory was correctly determined,what is the effect of this error on the financial statements for the year ended December 31,2010?

Tinker's 2011 cost of goods sold was $750,000 and 2010 cost of goods sold was $770,000.The inventory at the end of 2011 was $188,000 and $208,000 at the end of 2010.What is Tinker's average number of days to sell their inventory during 2011?

In a period of rising costs,the LIFO Reserve account would be deducted from the ending inventory under LIFO costing to convert it to ending inventory under FIFO costing.

An overstatement of the 2011 ending inventory results in an overstatement of stockholders' equity as of the end of 2012.

Inventory turnover under LIFO is greater than inventory turnover under FIFO when prices are increasing.

During periods of decreasing prices,use of the FIFO inventory method results in lower gross profit than would use of the LIFO method.

Carp Corporation has provided the following information for its most recent month of operation: Sales $16,000; ending inventory $4,000,purchases $8,000 and gross profit $10,000.How much was Carp's beginning inventory?

Which of the following statements is correct when inventory prices are decreasing?

The inventory records of Martin Corporation reflected the following information for the month of August: $\begin{array} { l l c c } \text { Date } & { \text { Transaction } } & \text { Number of Units } & \text { Unit Cost } \\8 / 1 & \text { Beginning inventory } & 400 & \$ 5 \\8 / 3 & \text { Purchase No. 1 } & 400 & \$ 5 \\8 / 5 & \text { Sale No. 1 } & 600 & \\8 / 7 & \text { Sale No. 2 } & 100 & \\8 / 11 & \text { Purchase No. 2 } & 1,000 & \$ 7 \\8 / 17 & \text { Sale No. 3 } & 700 & \\8 / 19 & \text { Purchase No. 3 } & 1,000 &\$ 7 \\8 / 21 & \text { Sale No. 4 } & 600 & \\8 / 28 & \text { Sale No. } 5 & 600 & \\8 / 29 & \text { Purchase No. 4 } & 1,200& \$9 \\8 / 30 & \text { Ending inventory } & & \end{array}$ A.Determine the amount of the ending inventory and cost of goods sold under each of the following methods assuming the periodic inventory system. $\begin{array} { lcccl } \text { Method} & \text { Ending } & \text { Cost of Goods Sold } \\ & \text { Inventory} & \\\text { a. Weighted-average} & \$ & \$ \\\text {b. FIFO } & \$& \$ \\\text {c. LIFO } & \$ & \$\end{array}$ B.Why would cash flow considerations relate to the choice of an inventory method?

$\begin{array}{l}\begin{array} { l } \text { }&\text { }\\&\text { FIFO }\\\text { Sales revenue }(4,000 \text { units) } & \$ 80,000 \\\text { Cost of goods sold: } & \\\text { Beginning inventory }(1,000 &\\\text { units } @\$ 10 \text { per unit) } & 10,000 \\\text { Purchases ( } 5,000 \text { units } @ \$ 12 & \\\text { per unit) } & 60,000\\\text { Goods available for sale } & \\\text { Ending inventory ( } 2,000 \text { units) } & \\\quad \text { Cost of goods sold } & \\\text { Gross margin } & \\\text { Expenses } &20,000 \\\text { Net income (pretax) }\end{array}\begin{array} { l } \text { }&\text {Weighted }\\\text { LIFO }&\text {Average }\\\$ 80,000 & \$ 80,000 \\&&\\\\10,000 & 10,000 \\\\60,000 & 60,000 \\\\\\\\\\20,000 & 20,000\\\\\end{array}\end{array}$ B.Explain the results of the weighted-average inventory costing method compared to the FIFO and LIFO costing methods.

The single-step income statement for Clinton Company for 2010 reported the following under two different assumptions $\begin{array}{lr} & \text { Case A FIFO } & \text { Case B LIFO } \\\text { Sales revenue } & \underline{(\$ 1,000,000)}&\underline{(\$ 1,000,000)}\\\text { Expenses: } & & \\\text { Cost of goods sold } & 600,000& 700,000 \\\text { Salary and wage expense } & 100,000&100,000 \\\text { Depreciation } & 20,000&20,000 \\\text { Other expenses } &80,000&80,000 \\\text { Total expenses } & 800,000 &900,000\\\text { Pretax income } & \$ 200,000 & \$ 100,000\\\\\text { Ending inventory for } 2010& \$ 120,000 & \$ ?\end{array}$ Answer the following questions (assume a 40% income tax rate): A.Were merchandise inventory costs rising,or falling? Explain your answer. B.What was the amount of the LIFO ending inventory? C.Calculate net income (after tax)for both LIFO and FIFO. D.Under FIFO,would retained earnings on the balance sheet be higher or lower than under LIFO?

Which of the following statements is correct when inventory prices are increasing?