Exam 6: Merchandise Inventory and Cost of Sales

Rudd Company made the following merchandise purchases during the current year: There was no beginning inventory,but ending inventory consisted of 400 units.If Rudd uses the weighted-average cost method and the periodic inventory system,what would be the cost of the ending inventory?

In applying the faithful representation principle,an accountant should choose the most realistic value available,so that the inventory value is not overstated.

Because an inventory error causes an offsetting error in the next period,it is sometimes said to be self-correcting.

Incidental costs of inventory:

The gross profit ratio measures how much of each dollar of net sales is gross profit.

The merchandise turnover ratio:

When a count of merchandise inventory is taken for the purpose of reconciling goods actually on hand to the inventory control account in the general ledger it is known as taking a(n)________________.

Trekking Company's cost of inventory was $317,500.Due to phenomenal demand the net realizable value has increased to $323,000.Trekking Company should write up the value of inventory under the LCNRV rule.

On September 30,Stark Company needed to estimate its ending inventory in order to prepare its third-quarter financial statements.The following information is available: (1)Inventory,July 1: $12,500 (2)Third quarter net sales: $40,000 (3)Third quarter net purchases: $17,500 Stark's gross profit ratio is 15%.Estimated cost of goods sold would be:

The merchandise turnover ratio is calculated by dividing average merchandise inventory by cost of goods sold.

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

The principle of faithful representation provides the guidance in reporting inventory at net realizable value when net realizable value is lower than cost.

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.

The principle of faithful representation is used by some companies to justify allocating incidental inventory costs to cost of goods sold.

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

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

The days' sales in inventory ratio is calculated by dividing ending inventory by cost of goods sold and multiplying the result by 365.

The merchandise turnover ratio:

If the cost to retail ratio is 60% and ending inventory at retail is $45,000,then estimated ending inventory at cost is $27,000.

Most businesses use expected sales price minus the cost of making the sale as the definition of net realizable value.