Exam 6: Inventory Costing and Valuation

The merchandise turnover ratio is used to measure profitability.

There is no difference in the amount of inventory calculated by the periodic and perpetual inventory systems when using the FIFO cost flow assumption.

Using the perpetual system, what are the three types of inventory cost flow assumptions?

Majik Carpet was having problem selling inventory item #371 so the owner decided to place that item with a consignee to see if they could sell it. Theconsignee still had the carpet at June 30, 2017 and it was mistakenly notincluded in the ending inventory count. Indicate the amount of any over or understatement of net income for the month of June as a result of this error

Explain the effect of an error in inventory valuation on financial statements.

A business that has inventory items that are ordinarily interchangeable may use either the FIFO or moving weighted average methods to assign costs to inventory.

Trekking Company has inventory with a net realizable value of $217,000 and a cost of$241,000. According to the guidance provided by the principle of faithful representation, the inventory should be written down to $217,000.

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

On September 30, Stark Company needed to estimate its ending inventory in order to prepare its third-quarter financial statementsInventory, July 1Third quarter net salesThird quarter net purchases: $17,500Stark's gross profit ratio is 15%. Estimated cost of goods sold would be:

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

The consistency principle means that one costing method, such as FIFO or moving weighted average, has to be used exclusively.

Coronado Company sells two types of inventory, MP3 players and Blu Ray players. The MP3 players originally cost $2,250 and have a net realizable value $1,075 while the Blu Ray players had an original cost of $500 and have a net realizable value of $700.Calculate the year end adjustment to inventory when applying the lower of cost and net realizable value on an item by item basis.

The consistency principle allows companies to use different inventory valuation methods period to period as long as the changes are fully disclosed.

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

In a period of inflation, FIFO usually gives a lower taxable income and thus a tax advantage.

A company's ability to pay its short-term obligations depends on how quickly it sells its merchandise inventory.

When preparing the financial statements, management can choose the inventory cost flow assumption it will use for a particular year in order to impact the reported netincome.

Martock Company uses the periodic inventory systemSalesBeginning inventoryEnding inventoryPurchases: $10,000The cost of goods sold for the period is:

Normandy Company has collected the following inventory data prior topreparing financial statements for the month of OctoberThe October 6 purchaseThe October 12 sale.(C)The entries to close the October income statement items to Income Summary.(Assume that sales revenue and the elements of cost of goods sold are the only income statement items.)

The cost of an inventory item includes its invoice price plus any added or incidental costs necessary to put it in a place and condition for sale.