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Exam 5: Inventories and Cost of Sales

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Question 1

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A company has the following per unit original costs and replacement costs for its inventory.LCM is applied to individual items. Part A: 50 units with a cost of $5,and replacement cost of $4.50 Part B: 75 units with a cost of $6,and replacement cost of $6.50 Part C: 160 units with a cost of $3,and replacement cost of $2.50 Under the lower of cost or market method,the total value of this company's ending inventory is:

A) $1,180.00.
B) $1,075.00.
C) $1,112.50.
D) $1,217.50.
E) $1,137.50.

F) A) and E)
G) A) and C)

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Question 2

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A company's inventory records indicate the following data for the month of January: $\begin{array} { | l | l | l | } \hline \text { Jan. } 1 & \text { beginning } & 180 \text { units at } \$ 9 \text { each } \\\hline \text { Jan. } 5 & \text { purchased } & 170 \text { units at } \$ 10 \text { each } \\\hline \text { Jan. } 9 & \text { sold } & 300 \text { units at } \$ 35 \text { each } \\\hline \text {Jan. } 14 & \text { purchased } & 200 \text { units at } \$ 11 \text { each } \\\hline \text { Jan. } 20 & \text { sold } & 150 \text { units at } \$ 35 \text { each } \\\hline \text { Jan. } 30 & \text { purchased } & 230 \text { units at } \$ 12 \text { each } \\\hline\end{array}$ If the company uses the last-in,first-out perpetual inventory system,what would be the cost of the ending inventory?

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Question 3

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Explain why the lower of cost or market rule is used to value inventory.

A company had the following purchases and sales during its first year of operations: $\begin{array} { | l | l | l | } \hline & \text { Purchases } & \text { Sales } \\\hline \text { January: } & 10 \text { units at } \$ 120 & 6 \text { units } \\\hline \text { February: } & 20 \text { units at } \$ 125 & 5 \text { units } \\\hline \text { May: } & 15 \text { units at } \$ 130 & 9 \text { units } \\\hline \text { September: } & 12 \text { units at } \$ 135 & 8 \text { units } \\\hline \text { November: } & 10 \text { units at } \$ 140 & 13 \text { units } \\\hline\end{array}$ On December 31,there were 26 units remaining in ending inventory.Using the Perpetual FIFO inventory valuation method,what is the cost of the ending inventory? (Assume all sales were made on the last day of the month.)

The assignment of costs to the cost of goods sold and to ending inventory using FIFO is the same for both the perpetual and periodic inventory systems.

Jefferson Company has sales of $300,000 and cost of goods available for sale of $270,000.If the gross profit ratio is typically 30%,the estimated cost of the ending inventory under the gross profit method would be:

Some companies use the ________ constraint to avoid assigning incidental costs of acquiring merchandise to inventory.

Merchandise inventory includes:

A company's cost of goods sold was $15,500 and its average merchandise inventory was $4,500.Its inventory turnover equals 3.4.

Explain how the inventory turnover ratio and the days' sales in inventory ratio are used to evaluate inventory management.

Discuss the important accounting features of a periodic inventory system including accounts and procedures used.

Under FIFO,the most recent costs are assigned to ending inventory.

Match each of the following terms with the appropriate definition. -A method for estimating an ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail price.

An understatement of ending inventory will cause an understatement of assets and equity on the balance sheet.

The inventory valuation method that results in the lowest taxable income in a period of inflation is:

Decisions management must make in accounting for inventory cost include all of the following except:

A company had beginning inventory of 10 units at a cost of $20 each on March 1.On March 2,it purchased 10 units at $22 each.On March 6 it purchased 6 units at $25 each.On March 8,it sold 22 units for $54 each.Using the FIFO perpetual inventory method,what was the cost of the 22 units sold?

The full disclosure principle:

Use the following information for Shafer Company to compute inventory turnover for year 2. $\begin{array} { | l | r | r | } \hline & \text { Year 2 } & \text { Year 1 } \\\hline \text { Net sales } & \$ 647,500 & \$ 582,000 \\\hline \text { Cost of goods sold } & 389,500 & 360,840 \\\hline \text { Ending inventory } & 76,700 & 79,380 \\\hline\end{array}$

The ________ method of assigning costs to inventory and cost of goods sold assumes that the most recent purchases are sold first.