Exam 17: Merchandise Inventory

On July 1, 2019, a fire destroyed the entire inventory of Stewart Clothes, a retail store. The accounting records that were saved showed that the firm's gross profit rate was 40 percent of net sales. During the period of January 1 to July 1, 2019, the store had net sales of $345,000 and net purchases of $325,000. On December 31, 2018, the inventory was $50,000. 1. What is the estimated cost of goods sold for the period? 2. What is the estimated ending (destroyed)inventory? 3. What is the estimated gross profit for the period?

Average costing is advantageous to use when a company's inventory is composed of many similar items that are not subject to significant price and style changes.

Explain what taking a physical inventory is and why it is done.

In a period of falling prices, the LIFO method of inventory valuation results in a lower reported net income than the FIFO method.

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

Under the gross profit method, the cost of the ending inventory is determined by applying the gross profit ratio to net sales and then subtracting the cost of goods sold from the cost of goods available for sale.

The Lower of Cost or Net Realizable rule is based on which accounting principle?

The fundamental assumption of the gross profit method of estimating inventory is that the rate of gross profit on sales is fairly consistent from period to period.

A merchant who deals in one-of-a-kind items with large unit costs may account for inventory by the--------- method.

The LIFO method of inventory valuation assigns the cost of the most recent purchases to the cost of goods sold.

The modifying convention of conservatism requires that inventory be presented on the balance sheet at

Point-of-sale cash registers and scanners assist in tracking inventory units purchased and sold under a periodic inventory system.

A firm that sells a single product had a beginning inventory of 9,000 units with a total cost of $45,000. Early in the year, 15,000 units were purchased at $6 each. Using LIFO, what is the value of the ending inventory of 4,000 units?

On June 29, Hurricane Moriah destroyed the warehouse where The Adams Bicycle Sales Company stored their inventory. The inventory was, for the most part, destroyed by the force of the storm. The usual gross profit rate for the company was 45%. The beginning inventory of $120,000 was recorded on the prior year's financial reports. The net sales to date are known to be $474,500, and net purchases (including freight-in charges and purchases returns)were $325,000. Using the gross profit method of inventory valuation, determine the value of the inventory that was destroyed.

To calculate the cost-to-retail ratio, the beginning inventory at cost is divided by the merchandise available for sale at retail.

Under a periodic inventory system, cost of goods sold is calculated based on the cost of available-for-sale units less the cost of ending inventory as identified through a physical inventory.

Under the gross profit method, the cost of the ending inventory is determined by applying the gross profit ratio to net sales and then subtracting the gross profit calculated from the cost of goods available for sale.

The use of the FIFO method of inventory valuation results in a matching of current inventory costs against current sales revenue.

When the-------- method is used, the cost of the ending inventory is computed by using the cost of the most recent purchases.

Inventory can only be valued at the lower of cost or net realizable value if the inventory cost was determined using the FIFO methods.