Exam 5: Accounting for Inventories

Generally accepted accounting principles allow the cost flow pattern for merchandise inventory to differ from the physical flow of merchandise within the business.

In an inflationary environment,

On February 2, 2013, a fire destroyed the entire inventory of Blue Co. The following information was found in accounting records: Purchases, $280,000; Sales $460,000; beginning inventory, $80,000; average gross margin percentage during the past five years, 30%. Based on the above information, indicate whether each of the following statements is true or false. _____ a) The cost of goods available for sale is $360,000. _____ b) The cost of goods sold as a percent of sales is 70%. _____ c) The estimated cost of goods sold is $202,000. _____ d) Estimated inventory lost in the fire is $44,000. _____ e) Estimated gross margin for the period up to the date of the fire was $138,000.

When the cost of inventory is rising, which inventory cost flow method will produce the lowest amount of cost of goods sold?

During a period of rising prices, the amount of ending inventory reported on the balance sheet will be lower using the LIFO cost flow method than with FIFO.

Marvella Company started the year with no inventory. During the year, it purchased two identical inventory items at different times. The first unit cost $600 and the second, $550. One of the items was sold during the year. Based on this information, how much product cost would be allocated to cost of goods sold and ending inventory, assuming use of a. LIFO b. FIFO c. Weighted average

Generally accepted accounting principles do not restrict or limit a company's freedom to change accounting methods from one year to the next.

A loss resulting from application of the lower-of-cost-or-market rule is included in Cost of Goods Sold if the loss is material in amount.

Assuming Chandler uses a LIFO cost flow method, the amount of cost of goods sold for the sales transaction on January 18 is (round the final result to the nearest whole dollar):

During a period of declining prices, a company would report a lower gross margin using the LIFO cost flow method than with FIFO.

Pufferbellies uses the FIFO inventory cost flow method. When its income tax is paid, what is the effect of the entry on the financial statements? Note that no tax liability had been accrued.

When prices are falling:

Vincent Company uses the perpetual inventory method. Vincent purchased 400 units of inventory that cost $5.00 each. At a later date the company purchased an additional 800 units of inventory that cost $6.00 each. Vincent sold 500 units of inventory for $9.00. If Vincent uses a FIFO cost flow method, the amount of cost of goods sold appearing on the income statement will be:

Benson Company purchased two identical inventory items. The item purchased first cost $14.00, and the item purchased second cost $15.00. Benson sold one of the items for $24.00. Which of the following statements is true?

The Rocco Company has six different categories of inventory. Quantity, cost, market value for each inventory category is shown below Required: a) Determine the value of ending inventory after applying the lower-of-cost-or-market rule to each individual category of inventory. b) Determine the value of ending inventory after applying the lower-of-cost-or-market rule to inventory in aggregate. c) Prepare the journal entry, if required, to adjust inventory for part a above. d) Prepare the journal entry, if required, to adjust inventory for part b above.

The following transactions apply to Boston Books. Assume the use of the perpetual inventory method and that all transactions were for cash. Required: a) Prepare the journal entries for the above transactions, assuming a FIFO cost flow. b) Determine the amount of ending inventory using a FIFO cost flow.

Indicate whether each of the following statements is true or false. _____ a) The FIFO cost flow method may only be used if the company actually rotates inventory so that the oldest inventory is sold first. _____ b) In a period of rising prices, LIFO gives higher cost of goods sold than FIFO. _____ c) Under the weighted average cost flow method, the cost per unit of ending inventory is equal to the cost per unit of inventory sold. _____ d) In a period of declining prices, LIFO will result in lower income tax expense than FIFO. _____ e) In a period of rising prices, FIFO gives higher ending inventory than LIFO does.

What accounting steps would a firm normally take when it discovers a material difference between a physical inventory count and the book inventory figure? Assume that the company uses a perpetual inventory system.

If prices are rising, which inventory cost flow method will produce the lowest amount of cost of goods sold?

On December 31, 2013, Owen Corporation overstates the ending inventory account by $4,000. How will this affect Retained Earnings in the December 31, 2014 balance sheet?