Exam 6: Inventory Costing and Valuation

If your inventory is destroyed by fire you can estimate the amount of inventory destroyed if you know: beginning inventory, purchases, net sales, and gross profit ratio.

An understatement of beginning inventory will understate cost of goods sold and overstate net income.

What are the effects of inventory methods on financial and tax reporting?

FreshFoods Co. is a small fruit and vegetable grocer. FreshFoods is concerned that sales have been down over the past three quarters. As the company accountant, you decide to perform some analysis to uncover the source of the problem. You gather the following data from the accounting records by quarter: Required: Use the information above to draw some conclusions and discuss the financial impact of your analysis to FreshFoods Co. management.

The retail inventory method of estimating inventory can be used to estimate the amount of inventory shortage if a physical count is also done.

Evaluate each inventory error and determine whether it overstates or understates each item. Inventory Errur Cost af Goods Suld Net Incume Understate beginning inventory Understate ending inventory Overstate beginning inventory Overstate ending inventory

Explain why the lower of cost and net realizable value rule is used to value inventory.

The merchandise turnover ratio is used to measure profitability.

The consistency principle

The retail inventory method of estimating inventory uses the ratio of goods available for sale at cost to goods available for sale at retail.

On March 15, Stark Company's inventory was destroyed by a tornado. The following was the only information salvaged: (1) Inventory, January 1: $31,000 (2) Purchases to Mar 15: $14,000 (3) Sales to Mar 15: $65,000 (4) Sales returns to Mar 15: $7,000 Stark's average gross profit ratio is 35%. What is the estimated value of the destroyed inventory?

An error in valuing inventory will cause an error in the amount of cost of goods sold.

When taking a physical count of inventory, the use of pre-numbered inventory tickets assists in the control process.

A company sells a single product and had the following beginning inventory, purchases, and sales during March. Number wi units Price per unit Beginning Inventory 20 8 March 6 Purchase 40 10 8 Purchase 50 9 10 Sale 45 13 12 Sale 35 13 30 Purchase 25 7 Calculate the cost of the ending inventory under each assumption below: (1) The compary uses a periodic inventory systern ard determiries cost on a FIFO basis. Endinig inventory cost_________________ (2) The compary uses a periodic irmentory system ard deterniries cost an a weighted average basis. (Round average cost per wit to 2 decimals.) Endinig invenitory cost__________________

Incidental costs of inventory

When purchase prices do not change, the choice of an inventory costing method is unimportant.

Explain the difference between the retail method and gross profit method for valuing inventory.

All material incidental costs of inventory acquisition and handling are assigned to inventory.

For the current month, Brixell Company had net sales of $13,000. Brixell typically achieves a gross profit of 15%. Cost of goods sold under the gross profit method would be

A business that has inventory items that are ordinarily interchangeable is required to use the specific identification method of assigning costs to inventory.