ACG 2021 Ch. 6 – Flashcards
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When is a physical inventory usually taken?
a. When the company has its least amount of inventory
b. In the middle of the fiscal year
c. At the end of the company's fiscal year
d. When goods are not being sold or received
e. When a company has its greatest amount of inventory
answer
c. At the end of the company's fiscal year
A physical inventory count is usually taken at the end of the company's fiscal year as a step in the preparation of the company's financial statements. For example, every company must report its end-of-period inventory on its balance sheet
question
When terms are FOB destination
a. ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller
b. ownership of the goods transfer to the seller when the buyer pays for them
c. ownership of the goods transfer to the seller at the end of the year
d. ownership of the goods remains with the seller until the goods are sold by the buyer
e. ownership of the goods remains with the seller until the goods reach the buyer
answer
e. ownership of the goods remains with the seller until the goods reach the buyer
In FOB destination, ownership transfers when the buyer receives the purchased goods from the public carrier rather than when the public carrier accepts them from the seller
question
Which of the following is an inventory account?
a. Accounts receivable
b. Finished goods
c. All of these are inventory accounts
d. Equipment
e. Contributed capital
answer
b. Finished goods
Equipment is not an inventory account. Equipment consists of items used in the production of income that are not held for sale. Inventory can include raw materials, work in process, and finished goods. Raw materials is an inventory account that contains the cost of materials that have not yet been started into the production process. Work in process is an inventory account that contains the cost of goods started, but not completed. Finished goods is an inventory account that contains the cost of goods completed that are ready to sell
question
Cecil gives goods on consignment to Jerry who agrees to try to sell them for a 25% commission. At the end of the accounting period, the goods have not been sold. Which of the following parties includes in its inventory the consigned goods?
a. None of these
b. Jerry
c. Cecil
d. Both Cecil and Jerry
e. Neither Cecil nor Jerry
answer
c. Cecil
Ownership remains with Cecil, so Cecil reports the goods as assets. Jerry is not the owner of the goods even though he has physical possession
question
At December 31, Sunrise Company's inventory records indicated a balance of $654,000. Upon further investigation it was determined that this amount included the following:
(1) $68,000 of inventory sold and shipped by Sunrise on December 28 under the terms FOB destination, and this inventory was received by the buyer on January 6.
(2) $98,000 of inventory purchased by Sunrise under the terms FOB destination, and this $98,000 of inventory did not arrive until January 2.
(3) $4,000 of inventory held by Sunrise on consignment from another company.
What is Sunrise's correct ending inventory balance at December 31?
a. $650,000
b. $556,000
c. $728,000
d. $586,000
e. $552,000
answer
e. $552,000
The inventory balance of $654,000 should not include the $98,000 since ownership passes at destination on January 2. It should include the $68,000 because ownership does not pass at the shipping point on December 28. It should not include the $4,000 on consignment because these goods are not owned by Sunrise.
The corrected inventory balance = $654,000 - $98,000 - $4,000 = $552,000
question
At December 31, Moore Company's inventory records indicated a balance of $420,000. Upon further investigation it was determined that this amount included the following:
(1) $54,000 in inventory purchases made by Moore shipped from the seller December 29 terms FOB shipping point, but not due to be received until January 2.
(2) $25,000 in inventory purchases made by Moore shipped from the seller December 29 terms FOB destination, but not due to be received until January 2.
(3) $6,000 in goods sold by Moore with terms FOB destination on December 29. The goods are not expected to reach their destination until January 5.
(4) $7,000 in goods sold by Moore with terms FOB shipping point on December 29. The goods are not expected to reach their destination until January 4.
(5) $15,000 of goods received on consignment from Dollywood Company.
What is Moore's correct ending inventory balance at December 31?
a. $392,000
b. $334,000
c. $351,000
d. $365,000
e. $373,000
answer
e. $373,000
Do not include the following in inventory:
-FOB destination purchases not yet received (i.e., $25,000)
-FOB shipping point goods sold and shipped (i.e., $7,000)
-Goods held on consignment (i.e., $15,000).
Ending inventory = $420,000 - 25,000 - 7,000 - 15,000 = $373,000
question
Cost of goods purchased is $620,000, beginning inventory is $60,000, and cost of goods sold is $550,000. How much is ending inventory?
a. $10,000
b. $130,000
c. $0
d. $60,000
e. $90,000
answer
b. $130,000
Beginning inventory + Purchases - Ending inventory = Cost of goods sold
60,000 + 620,000 - Ending inventory = 550,000
Ending inventory = 60,000 + 620,000 - 550,000 = 130,000
question
Which of the following statements is true?
a. All of these answer choices are correct
b. LIFO inventory valuation requires the physical flow of goods to be representative of the cost flow
c. None of these answer choices is correct
d. Specific identification method inventory valuation requires the physical flow of goods to be representative of the cost flow
answer
d. Specific identification method inventory valuation requires the physical flow of goods to be representative of the cost flow
The specific identification method has this constraint. There is no requirement for the physical flow of goods under the LIFO or FIFO inventory valuation concepts to match cost flow
question
Inventory is accounted for at cost. After a company has determined the quantity of units of inventory, it applies unit costs to the quantities to determine the total cost of inventory and the cost of goods sold. Which of the following statements is not a method for computing the cost of inventory?
a. First-in, first-out
b. Average-cost
c. Last-in, first-out
d. Allowance estimation
e. Specific identification
answer
d. Allowance estimation
A company's management decides which method of computing the cost of inventory. Choices of method include (1) specific identification, (2) first-in, first-out, (3) last-in, first-out, and (4) average cost methods
question
Parrish Company has the following inventory units and costs:
Units Unit Cost
Inventory, Jan. 1 9,000 $11
Purchase, June 19 12,000 12
Purchase, Nov. 8 6,000 13
If 11,000 units are on hand at December 31, what is the cost of the ending inventory under FIFO using a periodic inventory system?
a. $138,000
b. $113,000
c. $132,000
d. $143,000
e. $99,000
answer
a. $138,000
[FIFO periodic ending inventory]
Ending inventory under FIFO uses the most recent costs of inventory to compute ending inventory.
Ending inventory = (6,000 x $13) + (5,000 x $12) = $138,000
question
Lance Company has the following inventory units and costs:
Units Unit Cost
Inventory, Jan. 1 8,000 $11
Purchase, June 19 13,000 12
Purchase, Nov. 8 5,000 13
If 9,000 units are on hand at December 31, what is the cost of the ending inventory under LIFO using a periodic inventory system?
a. $113,000
b. $100,000
c. $99,000
d. $91,000
e. $108,000
answer
b. $100,000
[LIFO periodic ending inventory]
Ending inventory under LIFO uses the oldest (i.e., earliest) costs of inventory to compute ending inventory.
Ending inventory = (8,000 x $11) + (1,000 x $12) = $100,000
question
Freehan Company's accounting records has the following information about its inventory:
Units Unit Cost
Inventory, Jan. 1 6,000 $ 8
Purchase, April 2 18,000 10
Purchase, Aug. 28 16,000 12
If the company has 8,000 units on hand at December 31, how much is the cost of ending inventory under the average-cost method in a periodic inventory system?
a. $84,000
b. $75,250
c. $80,000
d. $56,000
e. $78,000
answer
a. $84,000
[Average periodic ending inventory]
Ending inventory cost equals the average cost per unit times the number of units of inventory in ending inventory. The average cost per unit equals the total cost of all inventory amounts divided by the number of inventory units.
Average cost per unit = [(6,000 x $8) + (18,000 x $10) + (16,000 x $12)] ÷ (6,000 + 18,000 + 16,000) = $420,000 ÷ 40,000 units = $10.5 per unit.
Ending inventory = $10.5 x 8,000 units = $84,000
question
In periods of inflation, what will LIFO produce?
a. Higher retained earnings than FIFO
b. All of these
c. Lower cost of goods sold than FIFO
d. Lower total assets than FIFO
e. Higher net income than FIFO
answer
d. Lower total assets than FIFO
LIFO (i.e., last-in, first-out) uses the cost of the most recently purchased inventory to determine cost of goods sold. Rising prices (i.e., inflation) suggests the most recently purchased inventory is the most expensive inventory. As a result, LIFO and inflation produces the highest cost of goods sold (i.e., high expenses). High cost of goods sold produces low gross profit (i.e., gross margin), low net income, low retained earnings, and low total stockholders' equity. High cost of goods sold (i.e., selling the more expensive inventory) also produces low ending inventory (i.e., keeping the inexpensive inventory) and low total assets
question
In a period of falling prices, which of the following methods will give the largest net income?
a. LIFO
b. Specific identification
c. All of these produce the same net income
d. FIFO
e. Average-cost
answer
a. LIFO
The largest net income occurs with the smallest cost of goods sold. In periods with falling prices (i.e., deflation), low cost of goods sold occurs when the last units of inventory purchased are the ones assumed sold. LIFO will provide the highest net income during a period of falling prices. FIFO will not provide the highest net income during a period of falling prices. Specific identification costing will vary depending on which units are sold. Average costing will produce a net income between LIFO and FIFO
question
In a period of rising prices which inventory method will result in the greatest amount of income tax expense?
a. LIFO
b. Average cost
c. Specific identification
d. All of these produce the same income tax expense
e. FIFO
answer
e. FIFO
The highest or greatest income tax expense occurs with the highest income and the lowest expenses (i.e., lowest cost of goods sold). During periods with rising process, the lowest cost of goods sold occurs with FIFO (i.e., FIFO assumes the oldest units of inventory were sold)
question
Irwin Industries had the following inventory transactions occur during the current year:
Units Cost/unit
Feb. 1 Purchase 40 $42
Mar. 14 Purchase 60 $43
May 1 Purchase 55 $44
The company sold 100 units at $75 each and has a tax rate of 20%. Assuming that a periodic inventory system is used and operating expenses are $1,000, what is the company's gross profit using LIFO? (rounded to whole dollars)
a. $3,655
b. $4,355
c. $3,885
d. $3,145
e. $3,235
answer
d. $3,145
Using periodic LIFO, cost of goods sold includes the last inventory purchased (i.e., the newest inventory).
Sales revenue = 100 x $75 = $7,500
Cost of goods sold = (55 x $44) + [(100 - 55) x $43] = $2,420 + 1,935 = $4,355
Gross profit = Sales revenue - cost of goods sold = $7,500 - 4,355 = $3,145
question
Howe Industries had the following inventory transactions occur during the current year:
Units Cost/unit
Feb. 1 Purchase 40 $42
Mar. 14 Purchase 60 $43
May 1 Purchase 55 $44
The company sold 100 units at $75 each and has a tax rate of 20%. Assuming that a periodic inventory system is used and operating expenses are $1,000, what is the company's after tax net income using LIFO? (rounded to whole dollars)
a. $2,516
b. $2,145
c. $3,145
d. $1,716
e. $3,885
answer
d. $1,716
Using periodic LIFO, cost of goods sold includes the last inventory purchased (i.e., the newest inventory).
Sales revenue = 100 x $75 = $7,500
Cost of goods sold = (55 x $44) + [(100 - 55) x $43] = $2,420 + 1,935 = $4,355
Gross profit = Sales revenue - cost of goods sold = $7,500 - 4,355 = $3,145
Net income before taxes = 7,500 - 4,355 - 1,000 = 2,145
Net income = 2,145 x (100% - 20%) = 1,716
question
What accounting concept is employed when using the lower-of-cost-or-market valuation?
a. Economic entity concept
b. Revenue recognition
c. Conservatism
d. Cost constraint
e. Going concern assumption
answer
c. Conservatism
Conservatism dictates the lower-of-cost-or-market inventory valuation. Inventory that has not yet sold has not reached revenue recognition. In simple terms, conservatism means that accounting rules are designed to report assets, income, etc. on a conservative basis—that financial reports should not overstate a company assets, profits, etc. The lower-of-cost-or-market principle avoids overstating ending inventory on a company's balance sheet
question
Ray's Sounds has accumulated the following cost and market data on March 31:
Cost Data Market Data
iPods $22,000 $19,600
Cell phones $17,000 $18,500
DVDs $26,500 $28,600
Using the lower-of-cost-or-market, how much is the value of the ending inventory?
a. $65,500
b. $63,100
c. $56,500
d. $66,700
e. $65,200
answer
b. $63,100
Cost is compared to market for each inventory category as follows: iPods $19,600 + cell phones $17,000 + DVDs $26,500 = $63,100
question
Which of these transactions would cause the inventory turnover ratio to increase the most?
a. Increasing the amount of inventory on hand and decreasing sales
b. Decreasing the amount of inventory on hand and increasing sales
c. None of these
d. Keeping the amount of inventory on hand constant but increasing sales
e. Keeping the amount of inventory on hand constant but decreasing sales
answer
b. Decreasing the amount of inventory on hand and increasing sales
Inventory turnover ratio = Cost of goods sold divided by average inventory.
Increasing sales will increase cost of goods sold which increases the numerator of the inventory turnover ratio. A corresponding decrease in inventory decreases the denominator of the inventory turnover ratio. Thus, both an increase of sales (and cost of goods sold) and a decrease in inventory will cause the inventory turnover to increase
question
Carlos Company had beginning inventory of $80,000, ending inventory of $110,000, cost of goods sold of $285,000, and sales revenue of $475,000. What is Carlos' days in inventory?
a. 115.9 days
b. 84.5 days
c. 73 days
d. 121.7 days
e. 102.5 days
answer
d. 121.7 days
Days in inventory equals 365 days ÷ inventory turnover (cost of goods sold ÷ average inventory) = 365 ÷ ($285,000 ÷ [($80,000 + $110,000) ÷ 2]) = 121.7 days
question
The following information came from the income statement of the Wilkens Company: sales revenue $1,800,000; beginning inventory $160,000; ending inventory $240,000; and gross profit $600,000. What is Wilkens' inventory turnover ratio?
a. 3.0 times
b. 3.75 times
c. 6.0 times
d. 7.0 times
e. 2.5 times
answer
c. 6.0 times
Cost of goods sold is the difference between sales revenue and gross profit:
$1,800,000 - $600,000 = $1,200,000.
Inventory turnover ratio = Cost of goods sold divided by average inventory:
$1,200,000/[($160,000 + $240,000)/2] = 6.0
question
The following information came from the income statement of the Watson Company: sales revenue $2,400,000; beginning inventory $150,000; ending inventory $250,000; and gross profit $1,000,000. Inventory turnover is 7 times per year. What is Watson's days in inventory?
a. 91.25 days
b. 121.7 days
c. 52.1 days
d. 97.3 days
e. 60.8 days
answer
c. 52.1 days
Dividing 365 days of the year by the inventory turnover of 7 results in an average of 52.1 days in inventory
question
Net sales are $2,400,000, cost of goods sold is $1,260,000, and average inventory is $40,000. How many days' sales are in inventory?
a. 12.2
b. 32
c. 11.6
d. 7.5
e. 11.4
answer
c. 11.6
Days' sales in inventory is calculated as 365 days divided by inventory turnover.
Inventory turnover = $1,260,000/$40,000 = 31.5 times
Days' sales in inventory = 365/31.5 = 11.6 days
question
What is the LIFO reserve?
a. The difference between inventory reported using LIFO and inventory using FIFO
b. An amount used to adjust inventory reported using LIFO inventory to its historical cost
c. The difference between income reported using LIFO and inventory using average cost.
d. The cost of ending inventory using LIFO
e. An difference between inventory reported at cost and inventory at lower-of-cost-or-market
answer
a. The difference between inventory reported using LIFO and inventory using FIFO
The LIFO reserve is the difference between inventory reported using LIFO and inventory using FIFO
question
A company uses LIFO. At the beginning of the current year its inventory was $225,000, and at the end of the current year its inventory is $300,000. At the start of the year its LIFO reserve was $20,000 and at the end of the year its LIFO reserve is $25,000. The company operates in an inflationary environment. If the company used FIFO instead of LIFO, its ending inventory would be
a. $250,000
b. $200,000
c. $325,000
d. $300,000
e. $275,000
answer
c. $325,000
The LIFO reserve is the difference between inventory using LIFO and inventory using FIFO. If the company operates in an inflationary environment (i.e., rising prices), then the LIFO reserve is a positive number, add the LIFO reserve to LIFO inventory to determine the company's FIFO inventory.
FIFO ending inventory = LIFO ending inventory + LIFO reserve = $300,000 + 25,000 = $325,000
question
Big Time Widgets has the following inventory data:
December 1 Beginning inventory of 15 units at $6.00 per unit
December 7 Purchased 50 units at $6.60 per unit
December 12 Sold 45 units
December 20 Purchased 30 units at $7.50 per unit
December 29 Sold 15 units
Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for December? What if a periodic inventory system had been used instead of perpetual?
a. $423 using perpetual, and $409.50 using periodic
b. $409.50 using perpetual, and $423 using periodic
c. $423 using perpetual, and $423 using periodic
d. $408 using perpetual, and $414 using periodic
e. $387 using perpetual, and $387 using periodic
answer
b. $409.50 using perpetual, and $423 using periodic
When using perpetual LIFO, cost of goods sold includes the last inventory acquired that was on hand at the date of sale; it does not include inventory acquired after the sale occurred.
On Dec. 12, the company sold 45 units from the Dec. 7 layer of inventory.
On Dec. 29, the company sold 15 units from the Dec. 20 layer of inventory.
Cost of goods sold = (45 x $6.60) + (15 x $7.50) = 297 + 112.50 = $409.50
When using periodic LIFO, cost of goods sold includes the last inventory acquired regardless of whether it was on hand at the date of sale; it can include inventory acquired after the sale occurred.
On Dec. 12, the company sold 45 units.
On Dec. 29, the company sold 15 units.
Cost of goods sold is based on the last 60 units of inventory acquired = (30 x $7.50) + (30 x $6.60) = 225 + 198 = $423
question
Big Time Widgets has the following inventory data:
December 1 Beginning inventory of 15 units at $6.00 per unit
December 7 Purchased 60 units at $6.60 per unit
December 12 Sold 35 units
December 20 Purchases 30 units at $7.20 per unit
December 29 Sold 25 units
Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis for December? What if a periodic inventory system had been used instead of perpetual?
a. $292.50 using perpetual, and $313.75 using periodic
b. $309.50 using perpetual, and $323 using periodic
c. $291 using perpetual, and $288 using periodic
d. $313.75 using perpetual, and $291 using periodic
e. $288 using perpetual, and $423 using periodic
answer
c. $291 using perpetual, and $288 using periodic
When using perpetual LIFO, cost of goods sold includes the last inventory acquired that was on hand at the date of sale; it does not include inventory acquired after the sale occurred.
For each sale date, determine the inventory sold using LIFO for each sale of inventory; the inventory not sold during the period belongs in ending inventory.
On December 12, sold 35 of the units acquired on Dec. 7
On December 29, sold 25 of the units acquired on Dec. 20
Ending inventory includes the 40 units, including 15 units of beginning inventory, 25 units of inventory acquired on Dec. 7, and 5 units of inventory acquired on Dec. 29.
Ending inventory = (15 x $6.00) + (25 x $6.60) + (5 x $7.20) = 90 + 165 + 36 = $291
When using periodic LIFO, cost of goods sold includes the last inventory acquired regardless of whether it was on hand at the date of sale; it can include inventory acquired after the sale occurred. For each sale date, determine the inventory sold using LIFO for each sale of inventory; the inventory not sold during the period belongs in ending inventory.
On Dec. 12, the company sold 35 units.
On Dec. 29, the company sold 25 units.
Cost of goods sold is based on the last 60 units of inventory acquired; ending inventory includes the oldest 40 units of inventory = (15 x $6.00) + (30 x $6.60) = 90 + 198 = $288
question
If the ending inventory is overstated, what occurs?
a. Assets are overstated and the cost of goods sold is overstated
b. Assets are overstated and the liabilities are understated
c. Assets are overstated and the net income is understated
d. Stockholders' equity will not be affected
e. Assets are overstated and stockholders' equity is overstated
answer
e. Assets are overstated and stockholders' equity is overstated
If the ending inventory is overstated, assets, net income, and stockholders' equity will be overstated, while the cost of goods sold will be understated
question
Fran Company's ending inventory is understated by $4,000. What are the effects of this error on the current year's cost of goods sold and net income, respectively?
a. Overstated and understated
b. Overstated and overstated
c. None of these
d. Understated and overstated
e. Understated and understated
answer
a. Overstated and understated
If ending inventory is understated by $4,000, the amount subtracted from goods available for sale is understated. This causes cost of goods sold to be overstated, which in turn causes net income to be understated
