Exam 6: Inventory Costing

Goods that have been purchased FOB destination point but are in transit at year end should be included in the seller's physical inventory count.

If goods in transit are shipped FOB destination,

Which of the following statements concerning cost formulas in a periodic inventory system is correct?

Workman Art Sales uses the perpetual inventory system. On September 30, 2014, the company's year end, a physical count was taken of the inventory on hand. The cost of the inventory on hand was determined to be $325,400. However, the accountant has questions about the following items: 1. On the store shelves, the staff counted 7 paintings held by Workman on consignment from a local artist. The paintings are included on the inventory count at a cost of $4,200. 2. On September 30, a shipment of goods was sent to a customer, FOB destination. The cost of the goods shipped is $7,800, and freight, which is to be paid by Workman, will cost $200. These items are not included in the inventory count. 3. On October 2, a freight company delivered goods that cost $10,000 to Workman's warehouse. The goods had been shipped by the vendor on September 29, FOB shipping point. Freight on this shipment will amount to $500 and will be paid by the appropriate party. The goods are not included on the inventory count. 4. On September 30 a loyal customer visited Workman's retail shop and asked that certain items be set aside for him. The goods set aside have a cost of $1,300. The customer intends to let Workman know no later than October 2 whether or not he wishes to finalize the sale and have the goods shipped to his home. The freight will cost $50 and will be paid by Workman. The sales person was fairly sure the customer will take the items; and so prepared the sales invoice on September 30. The items are not included on the inventory count. 5. Residing in Workman's warehouse is merchandise costing $5,000 that was purchased in September and found to be defective. Workman's purchasing manager has arranged with the vendor to accept return of the goods and has packaged them for return shipment. The vendor processed a credit to Workman's account on September 28, and has arranged to have the goods picked up on October 1. The items are included on the inventory count. Instructions Calculate the correct inventory balance at September 30, 2014. For each of the above items, explain the basis of your treatment of the item.

If there is a recovery in the net realizable value of the inventory, the write-up can never be larger than the original writedown.

If beginning inventory is understated by $10,000, the effect of this error in the current period is Cost of Goods Sold $\quad$ Profit

Walters Department Store uses the retail inventory method to estimate its inventories. It calculated its cost to retail ratio during the period at 70%. Goods available for sale at retail amounted to $300,000 and goods were sold during the period for $160,000. The estimated cost of the ending inventory is

For each of the independent events listed below, using a perpetual inventory system, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item. Code: O = item is overstated U = item is understated NA = item is not affected

A company just starting business made the following three inventory purchases in February: On Feb 15, there were 300 units sold. The company uses a perpetual inventory system. -Using the FIFO inventory cost formula, the amount allocated to cost of goods sold for the February 15 sale is

One of the considerations in choosing a cost determination method is to report an inventory cost on the balance sheet that is close to the inventory's recent costs.

An error in the physical count of goods on hand at the end of a period resulted in a $10,000 overstatement of the ending inventory. The effect of this error in the current period is Cost of Goods Sold $\quad$ Profit

If the net realizable value of a merchandising company's inventory is higher than its cost

If prices are stable, both average and FIFO cost formulas will report the same results.

Kavenja Company sells many products. Whamo is one of its popular items. Below is an analysis of the inventory purchases of Whamo for the month of March. At the end of the month there were 120 units on hand. Kavenja Company uses the periodic inventory system. Instructions a. Using the FIFO cost formula, calculate the cost of goods sold for March. (Show calculations.) b. Using the average cost formula, calculate the inventory on hand on March 31. (Show calculations.)

O'Meara Sales sells golf bags and uses a perpetual inventory system. O'Meara's inventory records show that at March 1, there were 30 units on hand at a cost of $135 each. Transactions related to purchase and sale of golf bags in March were as follows: Instructions a. For each of the following cost formulas, calculate the ending inventory as at March 31 and the cost of goods sold for the month of March. i. FIFO ii. Average b. Calculate the gross profit and gross profit margin that will be reported under each of the two cost formulas. c. Assume that O'Meara is motivated to report the highest profit possible. Which method will they prefer? Would your answer be different if the cost of golf bags was increasing, instead of decreasing? What if the cost was fluctuating randomly? Assume the selling price of the golf bags is the same regardless of which cost formula is used.

Windsor Company reported the following summarized information at the end of 2015: The controller of the company is considering a switch from FIFO to average. He has determined that under average, the ending inventory would have been $150,000. Instructions a. Restate the above summarized information using average. b. What effect, if any, would the proposed change have on Windsor's profit and cash flows? c. If you were an owner of this business, what would your reaction be to this proposed change?

If ending inventory is understated in 2014, the 2015 ending owner's equity will be

If beginning inventory is understated then the cost of goods sold will be understated if there are no other errors.

Inventories are estimated