Financial Accounting Tools for Business Decision Making, 7th Edition By Kimmel -Test Bank A+

Description

REPORTING AND ANALYZING INVENTORY

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY

Item	LO	BT	Item	LO	BT	Item	LO	BT	Item	LO	BT	Item	LO		BT
True-False Statements
1.	1	K	10.	1	K	19.	3	K	28.	3	K	37.	5		K
2.	1	K	11.	2	K	20.	3	C	29.	3	K	38.	5		C
3.	1	K	12.	2	K	21.	3	C	30.	3	K	39.	6		K
4.	1	K	13.	2	K	22.	3	C	31.	3	K	40.	6		K
5.	1	K	14.	2	K	23.	3	K	32.	3	K	*41.	7		K
6.	1	K	15.	2	K	24.	3	K	33.	4	K	*42.	7		K
7.	1	K	16.	2	K	25.	3	K	34.	4	K	*43.	8		K
8.	1	K	17.	3	K	26.	3	K	35.	4	K	*44.	8		K
9.	1	K	18.	3	K	27.	3	K	36.	4	K
Multiple Choice Questions
45.	1	K	75.	2	AP	105.	2	AP	135.	3	C	165.		5	AP
46.	1	K	76.	2	AP	106.	2	K	136.	3	K	166.		5	C
47.	1	K	77.	2	AP	107.	2	C	137.	3	C	167.		5	AP
48.	1	K	78.	2	AP	108.	3	AP	138.	3	AP	168.		5	AP
49.	1	K	79.	2	AP	109.	3	AP	139.	3	AP	169.		5	AP
50.	1	K	80.	2	AP	110.	3	AP	140.	3	AP	170.		5	AP
51.	1	K	81.	2	AP	111.	3	AP	141.	3	K	171.		6	K
52.	1	K	82.	2	AP	112.	3	AP	142.	3	C	172.		6	K
53.	1	K	83.	2	AP	113.	3	AP	143.	3	C	173.		6	K
54.	1	K	84.	2	K	114.	3	AP	144.	3	C	174.		6	AP
55.	1	K	85.	2	K	115.	3	AP	145.	4	K	175.		6	C
56.	1	K	86.	2	K	116.	2	AP	146.	4	K	176.		6	C
57.	1	K	87.	2	C	117.	3	AP	147.	4	K	177.		6	AN
58.	1	K	88.	2	AP	118.	2	AP	148.	4	K	178.		6	AN
59.	1	K	89.	2	AP	119.	3	AP	149.	4	AP	179.		6	AN
60.	1	AP	90.	2	AP	120.	2	AP	150.	4	AN	180.		6	C
61.	1	AP	91.	2	AP	121.	2	AP	151.	4	AN	181.		7	K
62.	1	K	92.	2	K	122.	2	AP	152.	5	C	182.		7	AP
63.	1	C	93.	2	K	123.	2	AP	153.	5	AN	183.		7	AP
64.	2	K	94.	2	K	124.	3	AP	154.	5	AN	184.		7	AP
65.	2	K	95.	2	K	125.	3	C	155.	5	AN	185.		7	AP
66.	2	AP	96.	2	K	126.	3	C	156.	5	AN	186.		7	AP
67.	2	AP	97.	2	K	127.	3	C	157.	5	C	187.		8	AN
68.	2	AP	98.	2	K	128.	3	C	158.	5	K	*188.		8	AN
69.	2	C	99.	2	K	129.	3	C	159.	5	K	*189.		8	AN
70.	2	AP	100.	2	K	130.	3	C	160.	5	K	*190.		8	C
71.	2	AP	101.	2	AP	131.	3	C	161.	5	C	*191.		8	C
72.	2	AP	102.	2	AP	132.	3	C	162.	5	AP
73.	2	AP	103.	2	AP	133.	3	K	163.	5	AP
74.	2	AP	104.	2	AP	134.	3	K	164.	5	AP
Brief Exercises
192.	1	K	194.	2	AP	196.	2	C	198.	5	AP
193.	2	AP	195.	2	AP	197.	4	AP
Exercises
199.	1	AN	204.	2	AP	209.	2	AP	214.	6	AP	*219.	8		AN
200.	1	AN	205.	2	AP	210.	2	AP	215.	6	AP	*220.	8		AN
201.	1	AN	206.	2	AP	211.	4	AP	*216.	7	AP	*221.	8		AN
202.	2	AP	207.	2	AP	212.	5	AN	*217.	7	AP	*222.	8		AN
203.	2	AP	208.	2	AP	213.	6	AN	*218.	7	AP	*223.	8		AN
Completion Statements
224.	1	K	227.	2	K	230.	2	K	233.	5	K
225.	1	K	228.	3	K	231.	2	K	234.	6	K
226.	1	K	229.	3	K	232.	4	K
Matching
235.	1-6	K
Short Answer Essay
236.	1	K	238.	3	C	240.	3	C	242.	4	C	244.	1		E
237.	2	K	239.	3	K	241.	3	C	243.	6	C	245.	1		AN

*This topic is dealt with in an Appendix to the chapter.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Learning Objective 1
Item	Type	Item	Type	Item	Type	Item	Type	Item	Type	Item	Type
1.	TF	8.	TF	49.	MC	56.	MC	63.	MC	226.	CS
2.	TF	9.	TF	50.	MC	57.	MC	192.	BE	235.	Ma
3.	TF	10.	TF	51.	MC	58.	MC	199.	Ex	236.	SA
4.	TF	45.	MC	52.	MC	59.	MC	200.	Ex	244.	SA
5.	TF	46.	MC	53.	MC	60.	MC	201.	Ex	245.	CS
6.	TF	47.	MC	54.	MC	61.	MC	224.	CS
7.	TF	48.	MC	55.	MC	62.	MC	225.	CS
Learning Objective 2
11.	TF	72.	MC	86.	MC	100.	MC	194.	BE	231.	CS
12.	TF	73.	MC	87.	MC	101.	MC	195.	BE	235.	Ma
13.	TF	74.	MC	88.	MC	102.	MC	196.	BE	237.	SA
14.	TF	75.	MC	89.	MC	103.	MC	202.	Ex
15.	TF	76.	MC	90.	MC	104.	MC	203.	Ex
16.	TF	77.	MC	91.	MC	105.	MC	204.	Ex
64.	MC	78.	MC	92.	MC	106.	MC	205.	Ex
65.	MC	79.	MC	93.	MC	116.	MC	206.	Ex
66.	MC	80.	MC	94.	MC	118.	MC	207.	Ex
67.	MC	81.	MC	95.	MC	120.	MC	208.	Ex
68.	MC	82.	MC	96.	MC	121.	MC	209.	Ex
69.	MC	83.	MC	97.	MC	122.	MC	210.	Ex
70.	MC	84.	MC	98.	MC	123.	MC	227.	CS
71.	MC	85.	MC	99.	MC	193.	BE	230.	CS

Learning Objective 3
Item	Type	Item	Type	Item	Type	Item	Type	Item	Type	Item	Type
17.	TF	26.	TF	110.	MC	125.	MC	134.	MC	143.	MC
18.	TF	27.	TF	111.	MC	126.	MC	135.	MC	144.	MC
19.	TF	28.	TF	112.	MC	127.	MC	136.	MC	228.	CS
20.	TF	29.	TF	113.	MC	128.	MC	137.	MC	229.	CS
21.	TF	30.	TF	114.	MC	129.	MC	138.	MC	235.	Ma
22.	TF	31.	TF	115.	MC	130.	MC	139.	MC	238.	SA
23.	TF	32.	TF	117.	MC	131.	MC	140.	MC	239.	SA
24.	TF	108.	MC	119.	MC	132.	MC	141.	MC	240.	SA
25.	TF	109.	MC	124.	MC	133.	MC	142.	MC	241.	SA
Learning Objective 4
33.	TF	36.	TF	147.	MC	150.	MC	211.	Ex	242.	SA
34.	TF	145.	MC	148.	MC	151.	MC	232.	CS
35.	TF	146.	MC	149.	MC	197.	BE	235.	Ma
Learning Objective 5
37.	TF	155.	MC	160.	MC	165.	MC	170.	MC
38.	TF	156.	MC	161.	MC	166.	MC	198.	BE
152.	MC	157.	MC	162.	MC	167.	MC	212.	Ex
153.	MC	158.	MC	163.	MC	168.	MC	233.	CS
154.	MC	159.	MC	164.	MC	169.	MC	235.	Ma
Learning Objective 6
39.	TF	172.	MC	175.	MC	178.	MC	213.	Ex	234.	CS
40.	TF	173.	MC	176.	MC	179.	MC	214.	Ex	235.	Ma
171.	MC	174.	MC	177.	MC	180.	MC	215.	Ex	243.	SA
Learning Objective 7
41.	TF	181.	MC	183.	MC	185.	MC	216.	Ex	218.	Ex
42.	TF	182.	MC	184.	MC	186.	MC	217.	Ex
Learning Objective 8
43.	TF	187.	MC	189.	MC	191.	MC	220.	Ex	222.	Ex
44.	TF	188.	MC	190.	MC	219.	Ex	221.	Ex	223.	Ex

Note: TF = True-False C = Completion

MC = Multiple Choice Ex = Exercise

Ma = Matching SA = Short Answer Essay

CHAPTER LEARNING OBJECTIVES

1. Determine how to classify Inventory and inventory quantities. Merchandisers need only one inventory classification. merchandise inventory to describe the different items that make up total inventory. Manufacturers, on the other hand, usually classify inventory into three categories: finished goods work in process and raw materials. To determine inventory quantities, manufacturers (1) take a physical inventory of goods on hand and (2) determine the ownership of goods in transit on an consignment.
2. Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system. The primary basis of accounting for inventories is cost. Cost includes all expenditures necessary to acquire goods and place them in a condition ready for sale. Cost of goods available for sale includes (a) cost of beginning inventory and (b) cost of goods purchased. The inventory cost flow methods are: specific identification and three assumed cost flow methods—FIFO, LIFO, and average-cost.
3. Explain the financial statement and tax effects of each of the inventory cost flow assumptions. The cost of goods available for sale may be allocated to cost of goods sold and ending inventory by specific identification or by a method based on an assumed cost flow. When prices are rising, the first-in, first-out (FIFO) method results in lower cost of goods sold and higher net income than the average-cost and the last-in, first-out (LIFO) methods. The reverse is true when prices are falling. In the balance sheet, FIFO results in an ending inventory that is closest to current value, whereas the inventory under LIFO is the farthest from current value. LIFO results in the lowest income taxes (because of lower taxable income).
4. Explain the lower-of-cost-or-market basis of accounting for inventories. Companies use the lower-of-cost-or-market (LCM) basis when the current replacement cost (market) is less than cost. Under LCM, companies recognize the loss in the period in which the price decline occurs.
5. Compute and interpret the inventory turnover. The inventory turnover is calculated as cost of goods sold divided by average inventory. It can be converted to average days in inventory by dividing 365 days by the inventory turnover. A higher turnover or lower average days in inventory suggests that management is trying to keep inventory levels low relative to its sales level.
6. Describe the LIFO reserve and explain its importance for comparing results of different companies. The LIFO reserve represents the difference between ending inventory using LIFO and ending inventory if FIFO were employed instead. For some companies this difference can be significant, and ignoring it can lead to inappropriate conclusions when using the current ratio or inventory turnover.

*7. Apply the inventory cost flow methods to perpetual inventory records. Under FIFO, the cost of the earliest goods on hand prior to each sale is charged to cost of goods sold. Under LIFO, the cost of the most recent purchase prior to sale is charged to cost of goods sold. Under the average-cost method, a new average cost is computed after each purchase.

* 8. Indicate the effects of inventory errors on the financial statements. In the income statement of the current year: (1) An error in beginning inventory will have a reverse effect on net income (e.g. overstatement of inventory results in understatement of net income, and vice versa). (2) An error in ending inventory will have a similar effect on net income (e.g. overstatement of inventory results in overstatement of net income). If ending inventory errors are not corrected in the following period, their effect on net income for that period is reversed, and total net income for the two years will be correct. In the balance sheet: Ending inventory errors will have the same effect on total assets and total stockholders’ equity and no effect on liabilities.

TRUE-FALSE STATEMENTS

1. Raw materials inventories are the goods that a manufacturing company has completed and are ready to be sold to customers.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. A manufacturer’s inventory consists of raw materials, work in process, and finished goods.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. When the terms of sale are FOB shipping point, legal title to the goods remains with the seller until the goods reach the buyer.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Goods in transit shipped FOB shipping point should be included in the buyer’s ending inventory.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods by the buyer.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. If the ownership of merchandise passes to the buyer when the seller ships the merchandise, the terms are stated as FOB destination.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Under the periodic inventory system, both the sales amount and the cost of goods sold amount are recorded when each item of merchandise is sold.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

1. Under a periodic inventory system, the merchandise on hand at the end of the period is determined by a physical count of the inventory.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Consigned goods are held for sale by one party although ownership of the goods is retained by another party.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Goods held on consignment should be included in the consignor’s ending inventory.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. In accounting for inventory, the assumed flow of costs must match the physical flow of goods.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. Inventory methods such as FIFO and LIFO deal more with flow of costs than with flow of goods.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. The average cost inventory method relies on a simple average calculation.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. If prices never changed there would be no need for alternative inventory methods.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. The First-in, First-out (FIFO) inventory method results in an ending inventory valued at the most recent cost.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. The expense recognition principle requires that the cost of goods sold be matched against the ending merchandise inventory in order to determine income.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. If the unit price of inventory is increasing during a period, a company using the LIFO inventory method will show less gross profit for the period, than if it had used the FIFO inventory method.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. A company may use more than one inventory cost flow method at the same time.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Use of the LIFO inventory valuation method enables a company to report paper or phantom profits.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. The LIFO inventory method agrees with the actual physical movement of goods in most businesses.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. In periods of falling prices, LIFO will result in a higher ending inventory valuation than FIFO.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. In periods of falling prices, FIFO will result in a larger net income than the LIFO method.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. A major criticism of the FIFO inventory method is that it magnifies the effects of the business cycle on business income.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. The LIFO method is rarely used because most companies do not sell the last goods they purchase first.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. The LIFO inventory method tends to smooth out the peaks and valleys of a business cycle.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. Computers has made the periodic inventory system more popular and easier to apply.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Leverage Technology, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications

1. When the market value of inventory is lower than its cost, the inventory is written down to its market value.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. The lower-of-cost-or-market rule implies that it is unrealistic to carry inventory at a cost that is in excess of its market value.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Accountants believe that the write down from cost to market should not be made in the period in which the price decline occurs.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. Under the LCM basis, market is defined as selling price, not current replacement cost.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. The inventory turnover is calculated as cost of goods sold divided by ending inventory.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. The LIFO reserve is the difference between ending inventory using LIFO and ending inventory if FIFO were used instead.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. The FIFO reserve is a required disclosure for companies that use FIFO.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*41. When the average cost method is applied in a perpetual inventory system, the sale of goods will change the unit cost that remains in inventory.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*42. When the average cost method is applied to a perpetual inventory system, a moving average cost per unit is computed with each purchase.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*43. An error in the ending inventory of the current period will have a similar effect on net income of the next accounting period.

Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*44. An error that overstates the ending inventory will also cause net income for the period to be overstated.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to True-False Statements

1. F 9. T 17. T 25. F 33. T *41. F
2. T 10. T 18. F 26. T 34. T *42. T
3. F 11. F 19. F 27. F 35. F *43. F
4. T 12. T 20. T 28. T 36. F *44. T
5. T 13. F 21. T 29. T 37. F
6. F 14. T 22. T 30. F 38. T
7. F 15. T 23. T 31. T 39. T
8. T 16. F 24. F 32. F 40. F

MULTIPLE CHOICE QUESTIONS

1. Manufactured inventory that has begun the production process but is not yet completed is
2. work in process.
3. raw materials.
4. merchandise inventory.
5. finished goods.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

1. The factor which determines whether or not goods should be included in a physical count of inventory is
2. physical possession.
3. legal title.
4. management’s judgment.
5. whether or not the purchase price has been paid.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. If goods in transit are shipped FOB destination
2. the seller has legal title to the goods until they are delivered.
3. the buyer has legal title to the goods until they are delivered.
4. the transportation company has legal title to the goods while the goods are in transit.
5. no one has legal title to the goods until they are delivered.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Independent internal verification of the physical inventory process occurs when
2. the employee is required to count all items twice for sake of verification.
3. the items counted are compared to the inventory account balance.
4. a second employee counts the inventory and compares the result to the count made by the first employee.
5. all prenumbered inventory tags are accounted for.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. An employee assigned to counting computer monitors in boxes should
2. estimate the number if there is a large quantity to be counted.
3. read each box and rely on the box description for the contents.
4. determine that the box contains a monitor.
5. rely on the warehouse records of the number of computer monitors.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls

1. After the physical inventory is completed,
2. quantities are listed on inventory summary sheets.
3. quantities are entered into various general ledger inventory accounts.
4. the accuracy of the inventory summary sheets is checked by the person listing the quantities on the sheets.
5. unit costs are determined by dividing the quantities on the summary sheets by the total inventory costs.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls

1. When is a physical inventory usually taken?
2. When goods are not being sold or received.
3. When the company has its greatest amount of inventory.
4. At the end of the company’s fiscal year.
5. When the company has its greatest amount of inventory and at the end of the company’s fiscal year.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. Which of the following should not be included in the physical inventory of a company?
2. Goods held on consignment from another company.
3. Goods in transit from another company shipped FOB shipping point.
4. Goods shipped on consignment to another company.
5. All of these answer choices should be included.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Tidwell Company’s goods in transit at December 31 include sales made

(1) FOB destination

(2) FOB shipping point

and purchases made

(3) FOB destination

(4) FOB shipping point.

Which items should be included in Tidwell’s inventory at December 31?

1. Sales made FOB shipping point and purchase made FOB destination
2. (1) and (4)
3. (1) and (3)
4. (2) and (4)

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. The term “FOB” denotes
2. free on board.
3. freight on board.
4. free only (to) buyer.
5. freight charge on buyer.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Goods held on consignment are
2. never owned by the consignee.
3. included in the consignee’s ending inventory.
4. kept for sale on the premises of the consignor.
5. included as part of no one’s ending inventory.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Many companies use just-in-time inventory methods. Which of the following is not an advantage of this method?
2. It limits the risk of having obsolete items in inventory.
3. Companies may not have quantities to meet customer demand.
4. It lowers inventory levels and costs.
5. Companies can respond to individual customer requests.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. When a perpetual inventory system is used, which of the following is a purpose of taking a physical inventory?
2. To check the accuracy of the perpetual inventory records
3. To determine cost of goods sold for the accounting period
4. To compute inventory ratios
5. All are a purpose of taking a physical inventory when a perpetual inventory system is used.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Which statement is false?
2. Taking a physical inventory involves actually counting, weighing, or measuring each kind of inventory on hand.
3. No matter whether a periodic or perpetual inventory system is used, all companies need to determine inventory quantities at the end of each accounting period.
4. An inventory count is generally more accurate when goods are not being sold or received during the counting.
5. Companies that use a perpetual inventory system must take a physical inventory to determine inventory on hand on the balance sheet date and to determine cost of goods sold for the accounting period.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Reeves Company is taking a physical inventory on March 31, the last day of its fiscal year. Which of the following must be included in this inventory count?
2. Goods in transit to Reeves, FOB destination
3. Goods that Reeves is holding on consignment for Parker Company
4. Goods in transit that Reeves has sold to Smith Company, FOB shipping point
5. Goods that Reeves is holding in inventory on March 31 for which the related Accounts Payable is 15 days past due

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. At December 31, 2014 Mohling Company’s inventory records indicated a balance of $602,000. Upon further investigation it was determined that this amount included the following:
   • $112,000 in inventory purchases made by Mohling shipped from the seller 12/27/14 terms FOB destination, but not due to be received until January 2nd
   • $74,000 in goods sold by Mohling with terms FOB destination on December 27^th. The goods are not expected to reach their destination until January 6^th.
   • $6,000 of goods received on consignment from Dollywood Company

What is Mohling’s correct ending inventory balance at December 31, 2014?

1. $490,000
2. $596,000
3. $410,000
4. $484,000

Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $602,000 – $112,000 – $6,000 = $484,000

1. At December 31, 2014 Howell Company’s inventory records indicated a balance of $858,000. Upon further investigation it was determined that this amount included the following:

• $168,000 in inventory purchases made by Howell shipped from the seller 12/27/14 terms FOB destination, but not due to be received until January 2nd
• $111,000 in goods sold by Howell with terms FOB destination on December 27^th. The goods are not expected to reach their destination until January 6^th.
• $9,000 of goods received on consignment from Westwood Company

What is Howell’s correct ending inventory balance at December 31, 2014?

1. $690,000
2. $849,000
3. $570,000
4. $681,000

Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $858,000 – $168,000 – $9,000 = $681,000

1. Manufacturers usually classify inventory into all the following general categories except:
2. work in process
3. finished goods
4. merchandise inventory
5. raw materials

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. For companies that use a perpetual inventory system, all of the following are purposes for taking a physical inventory except to:
2. check the accuracy of the records.
3. determine the amount of wasted raw materials.
4. determine losses due to employee theft.
5. determine ownership of the goods.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Inventory costing methods place primary reliance on assumptions about the flow of
2. goods.
3. costs.
4. resale prices.
5. values.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. The LIFO inventory method assumes that the cost of the latest units purchased are
2. the last to be allocated to cost of goods sold.
3. the first to be allocated to ending inventory.
4. the first to be allocated to cost of goods sold.
5. not allocated to cost of goods sold or ending inventory.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Alpha First Company just began business and made the following four inventory purchases in June:

June 1 150 units $ 780

June 10 200 units 1,170

June 15 200 units 1,260

June 28 150 units 990

$4,200

A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is

1. $1,092
2. $1,131
3. $1,386
4. $1,368

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $780 + [($1,170 ¸ 200) ´ (210 – 150)] = $1,131

1. Baker Bakery Company just began business and made the following four inventory purchases in June:

June 1 150 units $ 780

June 10 200 units 1,170

June 15 200 units 1,260

June 28 150 units 990

$4,200

A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is

1. $1,092
2. $1,131
3. $1,368
4. $1,386

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $990 + [($1,260 ¸ 200) ´ (210 – 150)] = $1,368

1. Charlene Cosmetics Company just began business and made the following four inventory purchases in June:

June 1 150 units $ 780

June 10 200 units 1,170

June 15 200 units 1,260

June 28 150 units 990

$4,200

A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the average cost method, the amount allocated to the ending inventory on June 30 is

1. $1,229.
2. $1,368.
3. $1,323.
4. $1,260.

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($4,200 ¸ 700) ´ 210 = $1,260

1. Echo Sound Company just began business and made the following four inventory purchases in June:

June 1 150 units $ 780

June 10 200 units 1,170

June 15 200 units 1,260

June 28 150 units 990

$4,200

A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. The inventory method which results in the highest gross profit for June is

1. the FIFO method.
2. the LIFO method.
3. the average cost method.
4. not determinable.

Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

1. Atom Company just began business and made the following four inventory purchases in June:

June 1 150 units $ 825

June 10 200 units 1,120

June 15 200 units 1,140

June 28 150 units 885

$3,970

A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is

1. $1,105.
2. $1,100.
3. $1,170.
4. $1,180.

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $825 + [($1,120 ¸ 200) ´ (200 – 150)] = $1,105

1. Quark Inc. just began business and made the following four inventory purchases in June:

June 1 150 units $ 825

June 10 200 units 1,120

June 15 200 units 1,140

June 28 150 units 885

$3,970

A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is

1. $1,105.
2. $1,100.
3. $1,170.
4. $1,180.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $885 + [($1,140 ¸ 200) ´ (200 – 150)] = $1,170

1. A company just began business and made the following four inventory purchases in June:

June 1 150 units $ 825

June 10 200 units 1,120

June 15 200 units 1,140

June 28 150 units 885

$3,970

A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the average-cost method, the amount allocated to the ending inventory on June 30 is

1. $1,134.
2. $1,180.
3. $1,100.
4. $1,120.

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: [($3,970 ¸ 700) ´ 200] = $1,134

1. A company purchased inventory as follows:

200 units at $5.00

300 units at $5.50

The average unit cost for inventory is

1. $5.00.
2. $5.25.
3. $5.30.
4. $5.50.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: [($200 ´ $5.00) + (300 ´ $5.50)] ¸ (200 + 300) = $5.30

1. Noise Makers Inc has the following inventory data:

July 1 Beginning inventory 20 units at $19 $ 380

7 Purchases 70 units at $20 1,400

22 Purchases 10 units at $22 220

$2,000

A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the average cost method, the value of ending inventory is

1. $620.
2. $640.
3. $651.
4. $660.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: [($2,000 ¸ 100) ´ 32] = $640

1. Olympus Climbers Company has the following inventory data:

July 1 Beginning inventory 20 units at $19 $ 380

7 Purchases 70 units at $20 1,400

22 Purchases 10 units at $22 220

$2,000

A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is

1. $620.
2. $660.
3. $1,340.
4. $1,380.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $380 + [(100 – 32 – 20) ´ $20] = $1,340

1. Pop-up Party Favors Inc has the following inventory data:

July 1 Beginning inventory 20 units at $19 $ 380

7 Purchases 70 units at $20 1,400

22 Purchases 10 units at $22 220

$2,000

A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is

1. $620.
2. $660.
3. $640.
4. $704.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $220 + [(32 – 10) ´ $20] = $660

1. Quiet Phones Company has the following inventory data:

July 1 Beginning inventory 20 units at $19 $ 380

7 Purchases 70 units at $20 1,400

22 Purchases 10 units at $22 220

$2,000

A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is

1. $620.
2. $660.
3. $1,340.
4. $1,380.

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $220 + [(100 – 32 – 10) ´ $20] = $1,380

1. Radical Radials Company has the following inventory data:

July 1 Beginning inventory 20 units at $19 $ 380

7 Purchases 70 units at $20 1,400

22 Purchases 10 units at $22 220

$2,000

A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is

1. $620
2. $608
3. $640
4. $704.

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $380 + [(32 – 20) ´ $20] = $620

1. Orange-Aide Company has the following inventory data:

July 1 Beginning inventory 20 units at $20 $ 400

7 Purchases 70 units at $21 1,470

22 Purchases 10 units at $22 220

$2,090

A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the average cost method, the value of ending inventory is

1. $535
2. $523

c $525

d $550

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: [($2,090 ¸ 100) ´ $25] = $523

1. Peach Pink Inc. has the following inventory data:

July 1 Beginning inventory 20 units at $20 $ 400

7 Purchases 70 units at $21 1,470

22 Purchases 10 units at $22 220

$2,090

A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is

1. $1,555
2. $1,585
3. $1,505.
4. $1,540.

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $400 + [(100 – 25 – 20) ´ $21] = $1,555

1. Grape Gratuities Company has the following inventory data:

July 1 Beginning inventory 20 units at $20 $ 400

7 Purchases 70 units at $21 1,470

22 Purchases 10 units at $22 220

$2,090

A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is

1. $585.
2. $505.
3. $535.
4. $550.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $220 + [(25 – 10) ´ $21] = $535

1. Apple-A-Day Company has the following inventory data:

July 1 Beginning inventory 20 units at $20 $ 400

7 Purchases 70 units at $21 1,470

22 Purchases 10 units at $22 220

$2,090

A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is

1. $1,585
2. $1,540
3. $1,555.
4. $1,540.

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $220 + [(100 – 25 – 10) ´ $21] = $1,585

1. Bonkers Bananas has the following inventory data:

July 1 Beginning inventory 20 units at $20 $ 400

7 Purchases 70 units at $21 1,470

22 Purchases 10 units at $22 220

$2,090

A physical count of merchandise inventory on July 30 reveals that there are 25 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is

1. $550
2. $505
3. $535
4. $500.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $400 + [(25 – 20) ´ $21] = $505

1. Which of the following is an inventory costing method?
2. Periodic
3. Specific identification
4. Perpetual
5. Lower of cost or market

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Inventory costing methods place primary reliance on assumptions about the flow of
2. good.
3. costs.
4. resale prices.
5. values.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Which of the following terms best describes the assumption made in applying the four inventory methods?
2. Goods flow
3. Cost flow
4. Asset flow
5. Physical flow

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. An assumption about cost flow is necessary
2. because it is required by the income tax regulation.
3. even when there is no change in the purchase price on inventory.
4. only when the flow of goods cannot be determined.
5. because prices usually change, and tracking which units have been sold is difficult.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. Piper Pipes has the following inventory data:

July 1 Beginning inventory 30 units at $120

5 Purchases 180 units at $112

14 Sale 120 units

21 Purchases 90 units at $115

30 Sale 84 units

Assuming that a periodic inventory system is used, what is the cost of goods sold on a LIFO basis.

1. $10,992
2. $11,022
3. $23,088.
4. $23,118

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (90 ´ $115) + [(120 + 84 – 90) ´ $112] = $23,118

1. Trumpeting Trumpets has the following inventory data:

July 1 Beginning inventory 30 units at $120

5 Purchases 180 units at $112

14 Sale 120 units

21 Purchases 90 units at $115

30 Sale 84 units

Assuming that a periodic inventory system is used, what is the cost of goods sold on a FIFO basis.

1. $10,992
2. $11,022
3. $23,088.
4. $23,118

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (30 ´ $120) + [(120 + 84 – 30) ´ $112] = $23,088

1. Sassy Saxophones has the following inventory data:

July 1 Beginning inventory 30 units at $120

5 Purchases 180 units at $112

14 Sale 120 units

21 Purchases 90 units at $115

30 Sale 84 units

Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a LIFO basis.

1. $10,992
2. $11,022
3. $23,088.
4. $23,118

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (30 + 180 – 120 + 90 – 84) =96; (30 ´ $120) + (66 ´ $112) = $10,992

1. Clear Clarinets has the following inventory data:

July 1 Beginning inventory 30 units at $120

5 Purchases 180 units at $112

14 Sale 120 units

21 Purchases 90 units at $115

30 Sale 84 units

Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis.

1. $10,932
2. $11,022
3. $23,088.
4. $23,118

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (30 + 180 – 120 + 90 – 84) = 96; (90 ´ $115) + (6 ´ $112) = $11,022

1. Which of the following items will increase inventoriable costs for the buyer of goods?
2. Purchase returns and allowances granted by the seller
3. Purchase discounts taken by the purchaser
4. Freight charges paid by the seller
5. Freight charges paid by the purchaser

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

1. Of the following companies, which one would not likely employ the specific identification method for inventory costing?
2. Music store specializing in organ sales
3. Farm implement dealership
4. Antique shop
5. Hardware store

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. A problem with the specific identification method is that
2. inventories can be reported at actual costs.
3. management can manipulate income.
4. matching is not achieved.
5. the lower of cost or market basis cannot be applied.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. The selection of an appropriate inventory cost flow assumption for an individual company is made by
2. the external auditors.
3. the SEC.
4. the internal auditors.
5. management.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. Which of the following is not a common cost flow assumption used in costing inventory?
2. First-in, first-out
3. Middle-in, first-out
4. Last-in, first-out
5. Average cost

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is
2. called the matching principle.
3. called the consistency principle.
4. nonexistent; that is, there is no such accounting requirement.
5. called the physical flow assumption.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. Which of the following statements is true regarding inventory cost flow assumptions?
2. A company may use more than one costing method concurrently.
3. A company must comply with the method specified by industry standards.
4. A company must use the same method for domestic and foreign operations.
5. A company may never change its inventory costing method once it has chosen a method.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. Which of the following statements is correct with respect to inventories?
2. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold.
3. It is generally good business management to sell the most recently acquired goods first.
4. Under FIFO, the ending inventory is based on the latest units purchased.
5. FIFO seldom coincides with the actual physical flow of inventory.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. Given equal circumstances, which inventory method would probably be the most time consuming?
2. FIFO
3. LIFO
4. Average cost
5. Specific identification.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. Serene Stereos has the following inventory data:

Nov. 1 Inventory 30 units @ $4.00 each

8 Purchase 120 units @ $4.30 each

17 Purchase 60 units @ $4.20 each

25 Purchase 90 units @ $4.40 each

A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under FIFO is

1. $438
2. $846
3. $421
4. $863

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (30 ´ $4.00) + (120 ´ $4.30) + [(300 – 100 – 30 – 120) ´ $4.20] = $846

1. Automobile Audio has the following inventory data:

Nov. 1 Inventory 30 units @ $4.00 each

8 Purchase 120 units @ $4.30 each

17 Purchase 60 units @ $4.20 each

25 Purchase 90 units @ $4.40 each

A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under FIFO is

1. $438
2. $846
3. $421
4. $863

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (90 ´ $4.40) + [(100 – 90) ´ $4.20] = $438

1. Carryable CDs has the following inventory data:

Nov. 1 Inventory 30 units @ $4.00 each

8 Purchase 120 units @ $4.30 each

17 Purchase 60 units @ $4.20 each

25 Purchase 90 units @ $4.40 each

A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under LIFO is

1. $438
2. $846
3. $421
4. $863

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (90 ´ $4.40) + (60 ´ $4.20) + [(200 – 150) ´ $4.30] = $863

1. Delightful Discs has the following inventory data:

Nov. 1 Inventory 30 units @ $4.00 each

8 Purchase 120 units @ $4.30 each

17 Purchase 60 units @ $4.20 each

25 Purchase 90 units @ $4.40 each

A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under LIFO is

1. $438
2. $421
3. $846
4. $863

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (30 ´ $4.00) + [(100 – 30) ´ $4.30] = $421

1. Laser Listening has the following inventory data:

Nov. 1 Inventory 30 units @ $4.00 each

8 Purchase 120 units @ $4.30 each

17 Purchase 60 units @ $4.20 each

25 Purchase 90 units @ $4.40 each

A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Assuming that the specific identification method is used and that ending inventory consists of 30 units from each of the three purchases and 10 units from the November 1 inventory, cost of goods sold is

1. $427.
2. $857.
3. $854.
4. $836.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (20 ´ $4.00) + (90 ´ $4.30) + (30 ´ $4.20) + (60 ´$4.40) = $857

1. Which inventory costing method should a gasoline retailer use?
2. Average cost
3. LIFO
4. FIFO
5. Either LIFO or FIFO.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. In periods of rising prices, which is an advantage of using the LIFO inventory costing method?
2. Ending inventory will include latest (most recent) costs and thus be more realistic.
3. Cost of goods sold will include latest (most recent) costs and thus will be more realistic.
4. Net income will be the highest and thus reflect the prosperity of the company.
5. Phantom profits are reported.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Hogan Industries had the following inventory transactions occur during 2014:

Units Cost/unit

Feb. 1, 2014 Purchase 36 $45

Mar. 14, 2014 Purchase 62 $47

May 1, 2014 Purchase 44 $49

The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to whole dollars)

1. $4,882
2. $4,730
3. $1,696
4. $1,544

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (44 ´ $49) + [(102 – $44) ´ $47] = $4,882; [(102 ´ $63) – $4,882] = $1,544

1. Hogan Industries had the following inventory transactions occur during 2014:

Units Cost/unit

Feb. 1, 2014 Purchase 36 $45

Mar. 14, 2014 Purchase 62 $47

May 1, 2014 Purchase 44 $49

The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $600, what is the company’s after-tax income using LIFO? (rounded to whole dollars)

1. $944
2. $1,096
3. $767
4. $661

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (44 ´ $49) + [(102 – $44) ´ $47] = $4,882; [(102 ´ $63) – $4,882] = $1,544; ($1,544 – $600) ´ .70 $661

1. Hogan Industries had the following inventory transactions occur during 2014:

Units Cost/unit

Feb. 1, 2014 Purchase 36 $45

Mar. 14, 2014 Purchase 62 $47

May 1, 2014 Purchase 44 $49

The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to whole dollars)

1. $4,882
2. $4,730
3. $1,696
4. $1,544

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (36 ´ $45) + (62 ´ $47) + [(102 – 98) ´ $49] = $4,730; [(102 ´ $63) – $4,730] = $1,696

1. Hogan Industries had the following inventory transactions occur during 2014:

Units Cost/unit

Feb. 1, 2014 Purchase 36 $45

Mar. 14, 2014 Purchase 62 $47

May 1, 2014 Purchase 44 $49

The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses of $600, what is the company’s after-tax income using FIFO? (rounded to whole dollars)

1. $944
2. $1,096
3. $767
4. $661

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (36 ´ $45) + (62 ´ $47) + [(102 – 98) ´ $49] = $4,730; [(102 ´ $63) – $4,730] = $1,696; ($1,696 – $600) ´ .70 = $767

1. Dole Industries had the following inventory transactions occur during 2014:

Units Cost/unit

Feb. 1, 2014 Purchase 72 $90

Mar. 14, 2014 Purchase 124 $94

May 1, 2014 Purchase 88 $98

The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to whole dollars)

1. $19,528
2. $18,920
3. $6,784
4. $6,176

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (88 ´ $98) + [(204 – 88) ´ $94] = $19,528; [(204 ´ $126) – $19,528] = $6,176

1. Dole Industries had the following inventory transactions occur during 2014:

Units Cost/unit

Feb. 1, 2014 Purchase 72 $90

Mar. 14, 2014 Purchase 124 $94

May 1, 2014 Purchase 88 $98

The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $2,000, what is the company’s after-tax income using LIFO? (rounded to whole dollars)

1. $4,176
2. $4,323
3. $3,349
4. $2,923

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (88 ´ $98) + [(204 – 88) ´ $94] = $19,528; [(204 ´ $126) – $19,528] = $6,176; ($6,176 – $2,000) ´ .70 = $2,923

1. Dole Industries had the following inventory transactions occur during 2014:

Units Cost/unit

Feb. 1, 2014 Purchase 72 $90

Mar. 14, 2014 Purchase 124 $94

May 1, 2014 Purchase 88 $98

The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to whole dollars)

1. $19,528
2. $18,920
3. $6,784
4. $6,176

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (72 ´ $90) + (124 ´ $94) + [(204 – 196) ´ $98] = $18,920; [(204 ´ $126) – $18,920] = $6,784

115 Dole Industries had the following inventory transactions occur during 2014:

Units Cost/unit

Feb. 1, 2014 Purchase 72 $90

Mar. 14, 2014 Purchase 124 $94

May 1, 2014 Purchase 88 $98

The company sold 204 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses of $2,000, what is the company’s after-tax income using FIFO? (rounded to whole dollars)

1. $4,176
2. $4,784
3. $3,349
4. $2,923

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (72 ´ $90) + (124 ´ $94) + [(204 – 196) ´ $98] = $18,920; [(204 ´ $126) – $18,920] = $6,784; ($6,784 – $2,000) ´ .70 = $3,349

1. Hoover Company had beginning inventory of $15,000 at March 1, 2014. During the month, the company made purchases of $55,000. The inventory at the end of the month is $17,300. What is cost of goods sold for the month of March?
2. $52,700
3. $55,000
4. $70,000
5. $72,300

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($15,000 + $55,000) – $17,300 = $52,700

1. A company just starting in business purchased three merchandise inventory items at the following prices. First purchase $80; Second purchase $95; Third purchase $85. If the company sold two units for a total of $290 and used FIFO costing, the gross profit for the period would be
2. $115.
3. $125.
4. $110.
5. $100.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $290 – ($80 + $95) = $115

1. At May 1, 2014, Heineken Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows:

400 units at $7

600 units at $8

The company sold 1,000 units during the month for $12 per unit. Heineken uses the average cost method. The average cost per unit for May is

1. $7.00.
2. $7.50.
3. $7.60.
4. $8.00.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: [(200 + $7) + (400 ´ $7) + (600 ´ $8)] ¸ 1,200 = $7.50

1. At May 1, 2014, Heineken Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows:

400 units at $7

600 units at $8

The company sold 1,000 units during the month for $12 per unit. Heineken uses the average cost method. Heineken’s gross profit for the month of May is

1. $4,500
2. $7,500
3. $9,000
4. $12,000

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: [(200 ´ $7) + (400 ´ $7) + (600 ´ $8)] ¸ 1,200 = $7.50; [($12 – $7.50)] ´ 1,000 = $4,500

1. At May 1, 2014, Heineken Company had beginning inventory consisting of 200 units with a unit cost of $7. During May, the company purchased inventory as follows:

400 units at $7

600 units at $8

The company sold 1,000 units during the month for $12 per unit. Heineken uses the average cost method. The value of Heineken’s inventory at May 31, 2014 is

1. $1,400
2. $1,500
3. $1,600
4. $9,000

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: [(200 ´ $7) + (400 ´ $7) + (600 ´ $8)] ¸ 1,200 = $7.50; [($1,200 – $1,000) ´ $7.50] = $1,500

1. Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2014 are as follows:

Units Per unit price Total

Balance, 1/1/2014 200 $5.00 $1,000

Purchase, 1/15/2014 100 5.30 530

Purchase, 1/28/2014 100 5.50 550

An end of the month (1/31/2014) inventory showed that 160 units were on hand. How many units did the company sell during January 2014?

1. 60
2. 160
3. 200
4. 240

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: [(200 + 100 + 100) – 160] = 240

1. Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2014 are as follows:

Units Per unit price Total

Balance, 1/1/2014 200 $5.00 $1,000

Purchase, 1/15/2014 100 5.30 530

Purchase, 1/28/2014 100 5.50 550

An end of the month (1/31/2014) inventory showed that 160 units were on hand. If the company uses FIFO, what is the value of the ending inventory?

1. $880
2. $800
3. $868
4. $1,212

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $550 + [(160 – 100) ´ $5.30] = $868

1. Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2014 are as follows:

Units Per unit price Total

Balance, 1/1/2014 200 $5.00 $1,000

Purchase, 1/15/2014 100 5.30 530

Purchase, 1/28/2014 100 5.50 550

An end of the month (1/31/2014) inventory showed that 160 units were on hand. If the company uses LIFO, what is the value of the ending inventory?

1. $843
2. $800
3. $868
4. $1,280

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (160 ´ $5.00) = $800

1. Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2014 are as follows:

Units Per unit price Total

Balance, 1/1/2014 200 $5.00 $1,000

Purchase, 1/15/2014 100 5.30 530

Purchase, 1/28/2014 100 5.50 550

An end of the month (1/31/2014) inventory showed that 160 units were on hand. If the company uses FIFO and sells the units for $10 each, what is the gross profit for the month?

1. $1,188
2. $1,212
3. $2,400
4. $1,600

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (200 ´ $5.00) + [(400 – 160 – 200) ´ $5.30] = $1,212; [(400 – 160) ´ $10] – $1,212 = $1.188

1. In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the
2. FIFO method.
3. LIFO method.
4. average-cost method.
5. tax method.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. In a period of declining prices, which of the following inventory methods generally results in the lowest balance sheet figure for inventory?
2. Average cost method
3. LIFO method
4. FIFO method
5. Need more information to answer

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. In a period of rising prices, which of the following inventory methods generally results in the lowest net income figure?
2. Average cost method
3. LIFO method
4. FIFO method
5. Need more information to answer

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. Which inventory method generally results in costs allocated to ending inventory that will approximate their current cost?
2. LIFO
3. FIFO
4. Average cost method
5. Whichever method that produces the highest ending inventory figure

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using
2. LIFO will have the highest ending inventory.
3. FIFO will have the highest cost of goods sold.
4. FIFO will have the highest ending inventory.
5. LIFO will have the lowest cost of goods sold.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. If companies have identical inventoriable costs but use different inventory flow assumptions when the price of goods have not been constant, then the
2. cost of goods sold of the companies will be identical.
3. cost of goods purchased during the year will be identical.
4. ending inventory of the companies will be identical.
5. net income of the companies will be identical.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense?
2. FIFO
3. LIFO
4. Average cost method
5. Income tax expense for the period will be the same under all assumptions.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Given equal circumstances and generally rising costs, which inventory method will increase the tax expense the most?
2. FIFO
3. LIFO
4. Average cost
5. Income tax expense for the period will be the same under all assumptions.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. The specific identification method of costing inventories is used when the
2. physical flow of units cannot be determined.
3. company sells large quantities of relatively low cost homogeneous items.
4. company sells large quantities of relatively low cost heterogeneous items.
5. company sells a limited quantity of high-unit cost items.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. The specific identification method of inventory costing
2. always maximizes a company’s net income.
3. always minimizes a company’s net income.
4. has no effect on a company’s net income.
5. may enable management to manipulate net income.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. The managers of Hong Company receive performance bonuses based on the net income of the firm. Which inventory costing method are they likely to favor in periods of declining prices?
2. LIFO
3. Average Cost
4. FIFO
5. Physical inventory method

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. In periods of inflation, phantom or paper profits may be reported as a result of using the
2. perpetual inventory method.
3. FIFO costing assumption.
4. LIFO costing assumption.
5. periodic inventory method.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Selection of an inventory costing method by management does not usually depend on
2. the fiscal year end.
3. income statement effects.
4. balance sheet effects.
5. tax effects.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. The accountant at Landry Company is figuring out the difference in income taxes the company will pay depending on the choice of either FIFO or LIFO as an inventory costing method. The tax rate is 30% and the FIFO method will result in income before taxes of $8,740. The LIFO method will result in income before taxes of $8,100. What is the difference in tax that would be paid between the two methods?
2. $640
3. $448
4. $192
5. Cannot be determined from the information provided.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: [($8,740 – $8,100) ´ .30] = 192

1. The accountant at Patton Company has determined that income before income taxes amounted to $11,000 using the FIFO costing assumption. If the income tax rate is 30% and the amount of income taxes paid would be $600 greater if the LIFO assumption were used, what would be the amount of income before taxes under the LIFO assumption?
2. $11,600
3. $13,000
4. $9,000
5. $10,400

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: [($600 ¸ 30) + $11,000] = $13,000

1. The manager of Weiser is given a bonus based on net income before taxes. The net income after taxes is $35,700 for FIFO and $29,400 for LIFO. The tax rate is 30%. The bonus rate is 20%. How much higher is the manager’s bonus if FIFO is adopted instead of LIFO?
2. $9,000
3. $12,600
4. $1,800
5. $6,300

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: [($35,700 – $29,400) ¸.70] = $9,000; $9,000 ´ .20 = $1,800

1. The consistent application of an inventory costing method enhances
2. conservatism.
3. accuracy.
4. comparability.
5. efficiency.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants to maintain a high current ratio. Which inventory costing method should Ace consider using?
2. LIFO
3. Average
4. FIFO
5. No inventory costing method directly affects the current ratio.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants the most realistic cost of goods sold. Which inventory costing method should Ace consider using?
2. Average because all inventory costs will then represent an average amount.
3. Specific identification is the most realistic method because it involves the actual costs.
4. LIFO because cost of goods sold represents the latest costs.
5. FIFO because cost of goods sold represents the earliest costs.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants the most realistic ending inventory. Which inventory costing method should Ace consider using?
2. Average because all inventory costs will then represent an average amount.
3. Specific identification is the most realistic method because it involves the actual costs.
4. LIFO because ending inventory represents the earliest costs.
5. FIFO because ending inventory represents the latest costs.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. The lower of cost or market basis of valuing inventories is an example of
2. comparability.
3. the historical cost principle.
4. conservatism.
5. consistency.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. When applying the lower of cost or market rule to inventory valuation, market generally means
2. current replacement cost.
3. original cost.
4. resale value.
5. original cost, less physical deterioration.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. The situation that requires a departure from the cost basis of accounting to the lower of cost or market basis in valuing inventory is necessitated by
2. a decline in the value of the inventory.
3. an increase in selling price.
4. an increase in the value of the inventory.
5. a desire for more profit.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. Which statement concerning lower of cost or market (LCM) is incorrect?
2. LCM is an example of a company choosing the accounting method that will be least likely to overstate assets and income.
3. Under the LCM basis, market does not apply because assets are always recorded and maintained at cost.
4. The LCM basis uses current replacement cost because a decline in this cost usually leads to a decline in the selling price of the inventory item.
5. LCM is applied after one of the cost flow assumptions has been applied.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

1. Jenks Company developed the following information about its inventories in applying the lower of cost or market (LCM) basis in valuing inventories:

Product Cost Market

A $57,000 $60,000

B 40,000 38,000

C 80,000 81,000

If Jenks applies the LCM basis, the value of the inventory reported on the balance sheet would be

1. $177,000.
2. $179,000.
3. $175,000.
4. $181,000.

Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $57,000 + $38,000 + $80,000] = $175,000

1. Nelson Corporation sells three different products. The following information is available on December 31:

Inventory Item	Units	Cost per unit	Market value per unit
X	150	$4.00	$3.50
Y	300	$2.00	$1.50
Z	750	$3.00	$4.00

When applying the lower of cost or market rule to each item, what will Nelson’s total ending inventory balance be?

1. $3,450
2. $3,225
3. $3,975
4. $3,300

Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (150 ´ $3.50) + (300 ´ $1.50] + (750 ´ $3.00) = $3,325

1. Whitman Corporation sells six different products. The following information is available on December 31:

Inventory Item	Units	Cost per unit	Market value per unit	Estimated Selling Price
Tin	30	$ 500	$ 505	$ 515
Titanium	10	5,000	4,950	5,100
Stainless Steel	40	2,000	1,910	1,985
Aluminum	40	350	285	290
Iron	20	400	410	425
Fiberglass	20	300	295	310

When applying the lower of cost or market rule to each item, what will Whitman’s total ending inventory balance be?

1. $173,000
2. $166,200
3. $166,550
4. $166,400

Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (30 ´ $500) + (10 ´ $4,950] + (40 ´ $1,910) + (40 + $285) + (20 ´ $400) + (20 ´ 295) = $166,200

1. Johnson Company has a high inventory turnover that has increased over the last year. All of the following statements are true regarding this situation except Johnson County:
2. is minimizing funds tied up in inventory.
3. is increasing the amount of inventory on hand relative to sales.
4. may be losing sales due to inventory shortages.
5. has a cost of goods sold that is increasing relative to its average inventory.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. Use the following information regarding Black Company and Red Company to answer the question “Which amount is equal to Black Company’s “days in inventory” for 2014 (to the closest decimal place)?”

	Year	Inventory Turnover	Ending Inventory
Black Company	2012		$26,340
	2013	10.7	$29,890
	2014	10.4	$30,100
Red Company	2012		$25,860
	2013	9.0	$24,750
	2014	9.5	$22,530

1. 35.1 days
2. 34.1 days
3. 82.5 days
4. 29.5 days

Ans: A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution: 365 ¸ 10.4 = 35.1

1. Use the following information regarding Black Company and Red Company to answer the question “Which amount is equal to Red Company’s “days in inventory” for 2013 (to the closest decimal place)?”

	Year	Inventory Turnover	Ending Inventory
Black Company	2012		$26,340
	2013	10.7	$29,890
	2014	10.4	$30,100
Red Company	2012		$25,860
	2013	9.0	$24,750
	2014	9.5	$22,530

1. 67.8 days
2. 38.4 days
3. 28.1 days
4. 40.6 days

Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution: 365 ¸ 9 = 40.6

1. Use the following information regarding Black Company and Red Company to answer the question “Which of the following is Black Company’s “cost of goods sold” for 2013 (to the closest dollar)?”

	Year	Inventory Turnover	Ending Inventory
Black Company	2012		$26,340
	2013	10.7	$29,890
	2014	10.4	$30,100
Red Company	2012		$25,860
	2013	8.8	$24,750
	2014	9.5	$22,530

1. $300,830
2. $281,838
3. $319,823
4. $320,946

Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution: 10.7 ´ $29,890 = $319,823

1. Use the following information regarding Black Company and Red Company to answer the question “Which of the following is Red Company’s “cost of goods sold” for 2014 (to the closest dollar)?”

	Year	Inventory Turnover Ratio	Ending Inventory
Black Company	2012		$26,340
	2013	10.7	$29,890
	2014	10.2	$30,100
Red Company	2012		$25,860
	2013	9.0	$24,750
	2014	9.5	$22,530

1. $222,684
2. $235,125
3. $224,580
4. $214,035

Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution: 9.5 ´ $22,530 = $214,035

1. Which of the following companies would most likely have the highest inventory turnover?
2. An art gallery.
3. An automobile manufacturer.
4. A piano manufacturer.
5. A bakery.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. An aircraft company would most likely have a
2. high inventory turnover.
3. low profit margin.
4. high volume.
5. low inventory turnover.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. The inventory turnover is calculated by dividing cost of goods sold by
2. beginning inventory.
3. ending inventory.
4. average inventory.
5. 365 days.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. Days in inventory is calculated by dividing 365 days by
2. average inventory.
3. beginning inventory.
4. ending inventory.
5. the inventory turnover.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. Which of these would cause the inventory turnover ratio to increase the most?
2. Increasing the amount of inventory on hand.
3. Keeping the amount of inventory on hand constant but increasing sales.
4. Keeping the amount of inventory on hand constant but decreasing sales.
5. Decreasing the amount of inventory on hand and increasing sales.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. The following information was available for Camara Company at December 31, 2014: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $560,000; and sales $800,000. Camara’s inventory turnover in 2014 was
2. 8.0 times.
3. 6.7 times.
4. 5.6 times.
5. 4.7 times.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution: $560,000 ¸ [($80,000 + $120,000) ¸2] = 5.6

1. The following information was available for Camara Company at December 31, 2014: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $560,000; and sales $800,000. Camara’s days in inventory in 2014 was
2. 45.6 days.
3. 54.5 days.
4. 65.2 days.
5. 77.7 days.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution: 365 ¸ 5.6 = 65.2

1. The following information was available for Bowyer Company at December 31, 2014: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; and sales $1,200,000. Bowyer’s inventory turnover in 2014 was
2. 15.0 times.
3. 11.0 times.
4. 12.6 times.
5. 9.8 times.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution: $880,000 ¸ [($90,000 + $70,000) ¸2] = 11

1. The following information was available for Bowyer Company at December 31, 2014: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; and sales $1,200,000. Bowyer’s days in inventory in 2014 was
2. 24.3 days.
3. 33.2 days.
4. 29 days.
5. 37.2 days.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution: 365 ¸ 11 = 33.2

1. A low number of days in inventory may indicate all of the following except
2. Sales opportunities may be lost because of inventory shortages.
3. There is less chance of having obsolete inventory items.
4. The company has fewer funds tied up in inventory.
5. Management has achieved the best balance between too much and too little inventory levels.

Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

1. Redeker Company had the following records:

2014 2013 2012

Ending inventory $34,580 $32,650 $30,490

Cost of goods sold 182,000 178,000 174,200

What is Redeker’s inventory turnover for 2013? (rounded)

1. 5.6 times
2. 5.5 times
3. 0.2 times
4. 5.3 times

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution: $178,000 ¸ [($32,650 + $30,490) ¸2] = 5.6

1. Redeker Company had the following records:

2014 2013 2012

Ending inventory $34,580 $32,650 $30,490

Cost of goods sold 182,000 163,500 174,200

What is Redeker’s average days in inventory for 2014? (rounded)

1. 67.6 days
2. 66.4 days
3. 68.9 days
4. 68.25 days

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution: $365 ¸ 5.5 = 67.6

1. Barnett Company had the following records:

2014 2013 2012

Ending inventory $34,580 $32,650 $30,490

Cost of goods sold 273,000 255,250 261,300

What is Barnett’s inventory turnover for 2013? (rounded)

1. 7.6 times
2. 8.1 times
3. 0.1 times
4. 7.8 times

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution: $255,250 ¸ [($32,650 + $30,490) ¸2] = 8.1

1. Barnett Company had the following records:

2014 2013 2012

Ending inventory $34,580 $37,650 $30,490

Cost of goods sold 273,000 255,250 261,300

What is Barnett’s average days in inventory for 2013? (rounded)

1. 45.1 days
2. 48.0 days
3. 46.8 days
4. 365 days

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution: 365 ¸ 8.1 = 45.1

1. The difference between ending inventory using LIFO and ending inventory using FIFO is referred to as the
2. FIFO reserve.
3. inventory reserve.
4. LIFO reserve.
5. periodic reserve.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. The LIFO reserve is
2. the difference between the value of the inventory under LIFO and the value under FIFO.
3. an amount used to adjust inventory to the lower of cost or market.
4. the difference between the value of the inventory under LIFO and the value under average cost.
5. the amount used to adjust inventory to history cost.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Reporting which one of the following allows analysts to make adjustments to compare companies using different cost flow methods?
2. FIFO reserve
3. Inventory turnover
4. LIFO reserve
5. Current replacement cost

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Butler Company reported ending inventory at December 31, 2014 of $1,200,000 under LIFO. It also reported a LIFO reserve of $210,000 at January 1, 2014, and $300,000 at December 31, 2014. Cost of goods sold for 2014 was $4,600,000. If Butler Company had used FIFO during 2014, its cost of goods sold for 2014 would have been
2. $4,900,000.
3. $4,690,000.
4. $4,510,000.
5. $4,300,000.

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: [$4,600,000 – ($300,000 – $210,000)] = 4,510,000

1. To adjust a company’s LIFO cost of goods sold to FIFO cost of goods sold
2. the ending LIFO reserve is added to LIFO cost of goods sold.
3. the ending LIFO reserve is subtracted from LIFO cost of goods sold.
4. an increase in the LIFO reserve is subtracted from LIFO cost of goods sold.
5. a decrease in the LIFO reserve is subtracted from LIFO cost of goods sold.

Ans: D, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. All of the following statements are true regarding the LIFO reserve except:
2. Companies using LIFO are required to report the LIFO reserve.
3. The equation (LIFO inventory – LIFO reserve = FIFO inventory) adjusts the inventory balance from LIFO to FIFO.
4. The financial statement differences of using LIFO normally increase the longer a company uses LIFO.
5. Current ratios and the inventory turnover can be significantly affected if a company has material LIFO reserves.

Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

1. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “What is Danforth’s LIFO reserve for 2013?”

(amounts in $ millions)	Boxter	Clifford	Danforth	Evans
Inventory Method for 2013 & 2014	LIFO	FIFO	LIFO	FIFO
2013 Ending inventory assuming LIFO	$324	N/A	$225	N/A
2013 Ending inventory assuming FIFO	$427	$535	$310	$663
2014 Ending inventory assuming LIFO	$436	N/A	$167	N/A
2014 Ending inventory assuming FIFO	$578	$612	$209	$542
2013 Current assets (reported on balance sheet)	$1,677	$2,031	$1,308	$2,748
2013 Current liabilities	$987	$1,209	$545	$1,200
2014 Current assets (reported on balance sheet)	$2,225	$2,605	$1,100	$2,390
2014 Current liabilities	$1,306	$1,410	$465	$1,000
2014 Cost of goods sold	$4,678	$5,042	$3,000	$7,000

1. $535
2. $85
3. $42
4. $58

Ans: B, LO: 6, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $310 – $225 = $85

1. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “Using the LIFO reserve adjustment, which company would has the strongest liquidity position for 2014 as expressed by the current ratio?”

(amounts in $ millions)	Boxter	Clifford	Danforth	Evans
Inventory Method for 2013 & 2014	LIFO	FIFO	LIFO	FIFO
2013 Ending inventory assuming LIFO	$324	N/A	$225	N/A
2013 Ending inventory assuming FIFO	$427	$535	$310	$663
2014 Ending inventory assuming LIFO	$436	N/A	$167	N/A
2014 Ending inventory assuming FIFO	$578	$612	$209	$542
2013 Current assets (reported on balance sheet)	$1,677	$2,031	$1,308	$2,748
2013 Current liabilities	$987	$1,209	$545	$1,200
2014 Current assets (reported on balance sheet)	$2,225	$2,605	$1,100	$2,390
2014 Current liabilities	$1,306	$1,410	$465	$1,000
2014 Cost of goods sold	$4,678	$5,042	$3,000	$7,000

1. Boxter
2. Clifford
3. Danforth
4. Evans

Ans: C, LO: 6, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

1. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “Using the LIFO adjustment, what is Boxter’s inventory turnover ratio for 2014 (to the closest decimal place)?”

(amounts in $ millions)	Boxter	Clifford	Danforth	Evans
Inventory Method for 2013 & 2014	LIFO	FIFO	LIFO	FIFO
2013 Ending inventory assuming LIFO	$324	N/A	$225	N/A
2013 Ending inventory assuming FIFO	$427	$535	$310	$663
2014 Ending inventory assuming LIFO	$436	N/A	$167	N/A
2014 Ending inventory assuming FIFO	$578	$612	$209	$542
2013 Current assets (reported on balance sheet)	$1,677	$2,031	$1,308	$2,748
2013 Current liabilities	$987	$1,209	$545	$1,200
2014 Current assets (reported on balance sheet)	$2,225	$2,605	$1,100	$2,390
2014 Current liabilities	$1,306	$1,410	$465	$1,000
2014 Cost of goods sold	$4,678	$5,042	$3,000	$7,000

1. 12.3 times
2. 9.3 times
3. 7.5 times
4. 6.4 times

Ans: A, LO: 6, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $4,678 ¸ [($324 + $436) ¸ 2] = $380

1. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “Using the LIFO adjustment, which company shows the greatest improvement in its current ratio from 2013 to 2014?”

(amounts in $ millions)	Boxter	Clifford	Danforth	Evans
Inventory Method for 2013 & 2014	LIFO	FIFO	LIFO	FIFO
2013 Ending inventory assuming LIFO	$324	N/A	$225	N/A
2013 Ending inventory assuming FIFO	$427	$535	$310	$663
2014 Ending inventory assuming LIFO	$436	N/A	$167	N/A
2014 Ending inventory assuming FIFO	$578	$612	$209	$542
2013 Current assets (reported on balance sheet)	$1,677	$2,031	$1,308	$2,748
2013 Current liabilities	$987	$1,209	$545	$1,200
2014 Current assets (reported on balance sheet)	$2,225	$2,605	$1,100	$2,390
2014 Current liabilities	$1,306	$1,410	$465	$1,000
2014 Cost of goods sold	$4,678	$5,042	$3,000	$7,000

1. Boxter
2. Clifford
3. Danforth
4. Evans

Ans: B, LO: 6, Bloom: C, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*181. In a perpetual inventory system,

1. LIFO cost of goods sold will be the same as in a periodic inventory system.
2. average costs are based entirely on unit cost simple averages.
3. a new average is computed under the average cost method after each sale.
4. FIFO cost of goods sold will be the same as in a periodic inventory system.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*182. Classic Floors has the following inventory data:

July 1 Beginning inventory 15 units at $6.00

5 Purchases 60 units at $6.60

14 Sale 40 units

21 Purchases 30 units at $7.20

30 Sale 28 units

Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for July?

1. $465.60
2. $236.40
3. $702.00
4. $348.00

Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (40 ´ $6.60) + (28 ´ $7.20) = $465.60

*183. Classic Floors has the following inventory data:

July 1 Beginning inventory 15 units at $6.00

5 Purchases 60 units at $6.60

14 Sale 40 units

21 Purchases 30 units at $7.20

30 Sale 28 units

Assuming that a perpetual inventory system is used, what is the value of ending inventory on a LIFO basis for July?

1. $465.60
2. $702.00
3. $354.00
4. $236.40

Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (15 ´ $6.00) + (20 ´ $6.60) + (2 ´ $7.20)= $236.40

*184. Snug-As-A-Bug Blankets has the following inventory data:

July 1 Beginning inventory 15 units at $60

5 Purchases 90 units at $56

14 Sale 60 units

21 Purchases 45 units at $58

30 Sale 42 units

Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for July?

1. $5,802
2. $5,772
3. $5,796.
4. $5,916

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (60 ´ $56) + (42 ´ $58) = $5,796

*185. Snug-As-A-Bug Blankets has the following inventory data:

July 1 Beginning inventory 15 units at $60

5 Purchases 90 units at $56

14 Sale 60 units

21 Purchases 45 units at $58

30 Sale 42 units

Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis for July?

1. $2,748
2. $2,754
3. $2,772.
4. $5,796

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: (15 ´ $60) + (30 ´ $56) + (3 ´ $58) = $2,754

*186. Snug-As-A-Bug Blankets has the following inventory data:

July 1 Beginning inventory 15 units at $60

5 Purchases 90 units at $56

14 Sale 60 units

21 Purchases 45 units at $58

30 Sale 42 units

Assuming that a perpetual inventory system is used, what is ending inventory (rounded) under the average cost method for July?

1. $2,750
2. $2,784
3. $2,406.
4. $2,772

Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: [(15 ´ $60) + (90 ´ $56)] ¸ 105 = $56.571; [(45 ´ $56.571) + (45 ´ $58)] ¸ 90 = $57.286; 48 ´ $57.286 = $2,750

*187. 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 Net Income

1. Understated Understated
2. Overstated Overstated
3. Understated Overstated
4. Overstated Understated

Ans: C, LO: 8, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*188. If beginning inventory is understated by $10,000, the effect of this error in the current period is

Cost of Goods Sold Net Income

1. Understated Understated
2. Overstated Overstated
3. Understated Overstated
4. Overstated Understated

Ans: C, LO: 8, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*189. A company uses the periodic inventory method and the beginning inventory is overstated by $4,000 because the ending inventory in the previous period was overstated by $4,000; the ending inventory for this period is correct. The amounts reflected in the current end of the period balance sheet are

Asset Stockholders’ Equity

1. Overstated Overstated
2. Correct Correct
3. Understated Understated
4. Overstated Correct

Ans: B, LO: 8, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

*190. An overstatement of the beginning inventory results in

1. no effect on the period’s net income.
2. an overstatement of net income.
3. an understatement of net income.
4. a need to adjust purchases.

Ans: C, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

*191. An overstatement of ending inventory in one period results in

1. no effect on net income of the next period.
2. an overstatement of net income of the next period.
3. an understatement of net income of the next period.
4. an overstatement of the ending inventory of the next period.

Ans: C, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Multiple Choice Questions

1. a 66. b 87. d 108. d 129. c 150. b 171. c
2. b 67. c 88. d 109. d 130. b 151. b 172. a
3. a 68. d 89. c 110. c 131. b 152. b 173. c
4. c 69. a 90. a 111. c 132. a 153. a 174. c
5. c 70. a 91. b 112. d 133. d 154. d 175. d
6. a 71. c 92. d 113. d 134. d 155. a 176. b
7. c 72. a 93. d 114. c 135. a 156. d 177. b
8. a 73 c 94. b 115. c 136. b 157. d 178. c
9. b 74. b 95. d 116. a 137. a 158. d 179. a
10. a 75. c 96. b 117. a 138. c 159. c 180. b
11. a 76. b 97. c 118. b 139. b 160. d *181. d
12. b 77. d 98. a 119. a 140. c 161. d *182. a
13. a 78. a 99. c 120. b 141. c 162. c *183 d
14. d 79. b 100. d 121. d 142. c 163. c *184. c
15. d 80. a 101. b 122. c 143. c 164. b *185. b
16. d 81 c 102. a 123. b 144. d 165. b *186. a
17. d 82. a 103. d 124. a 145. c 166. a *187. c
18. c 83. b 104. b 125. a 146. a 167. a 188. c
19. d 84. b 105. b 126. c 147. a 168. a *189. b
20. b 85. b 106. d 127. b 148. b 169. b *190. c
21. c 86. b 107. b 128. b 149. c 170. a *191. c

BRIEF EXERCISES

Be. 192

Shellan Kamp Company identifies the following items for possible inclusion in the physical inventory. Indicate whether each item should be included or excluded from the inventory taking.

1. Goods shipped on consignment by Shellan Kamp to another company.
2. Goods in transit from a supplier shipped FOB destination.
3. Goods shipped via common carrier to a customer with terms FOB shipping point.
4. Goods held on consignment from another company.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Solution 192 (5 min.)

1. Included
2. Excluded
3. Excluded
4. Excluded

Be. 193

In the first month of operations, Dieker Company made three purchases of merchandise in the following sequence: (1) 200 units at $6, (2) 300 units at $7, and (3) 400 units at $8. Assuming there are 250 units on hand, compute the cost of the ending inventory under (1) the FIFO method and (2) the LIFO method. Dieker uses a periodic inventory system.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 193 (5 min.)

1. FIFO

250 x $8 = $2,000

1. LIFO

200 x $6 = $1,200

50 x $7 = 350

$1,550

Be. 194

Hess Company’s inventory records show the following data for the month of September:

Units Unit Cost

Inventory, September 1 100 $3.00

Purchases: September 8 450 3.50

September 18 300 3.70

A physical inventory on September 30 shows 150 units on hand.

Calculate the value of ending inventory and cost of goods sold if the company uses FIFO inventory costing and a periodic inventory system.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 194 (5 min.)

Ending inventory of 150 units: 150 × $3.70 = $555

Cost of goods sold:

Units available for sale (100 + 450 + 300) = 850

Units sold 850 – 150 = 700

100 × $3 = $ 300

450 × $3.50 = 1,575

150 × $3.70 = 555

Cost of goods sold $ 2,430

Be. 195

Hess Company’s inventory records show the following data for the month of September:

Units Unit Cost

Inventory, September 1 100 $3.00

Purchases: September 8 450 3.50

September 18 300 3.70

A physical inventory on September 30 shows 150 units on hand.

Calculate the value of ending inventory and cost of goods sold if the company uses LIFO inventory costing and a periodic inventory system.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 195 (3 min.)

Ending inventory: (100 units × $3.00) + (50 units × $3.50) = $475

Cost of goods sold: (300 units × $3.70) + (400 units × $3.50) = $2,510

Be. 196

The management of Otto Corp. is considering the effects of various inventory costing methods on its financial statements and its income tax expense. Assuming that the price the company pays for inventory is increasing, which method will:

1. result in the lowest income tax expense?
2. provide the highest net income?
3. provide the highest ending inventory?
4. result in the most stable earnings over a number of years?

Ans: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 196 (5 min.)

1. In times of rising costs, the LIFO method will result in the lowest income tax expense.
2. In times of rising costs, the FIFO method will result in the highest net income.
3. In times of rising costs, the FIFO method will result in the highest ending inventory.
4. In times of rising costs, the average cost method will result in the most stable earnings over a number of years.

Be. 197

The Entertainment Center accumulates the following cost and market data at December 31.

Inventory Cost Market

Categories Data _ _ Data_

Camera $11,000 $10,200

Camcorders 8,000 8,500

DVDs 14,000 12,600

What is the lower-of-cost-or-market value of the inventory?

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 197 (5 min.)

Inventory Cost Market Lower of Cost

Categories Data _ _ Data_ or Market

Camera $11,000 $10,200 $10,200

Camcorders 8,000 8,500 8,000

DVDs 14,000 12,600 12,600

$30,800

Be. 198

At December 31, 2014, the following information (in thousands) was available for Kitselman Inc.: ending inventory $22,600; beginning inventory $21,400; cost of goods sold $198,000; and sales revenue $430,000. Calculate the inventory turnover and days in inventory for Kitselman.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Solution 198 (5 min.)

Inventory Turnover =	$198,000	= 9.0 times
	($22,600 + $21,400)/2
Days in Inventory =	365	= 40.6 days
	9.0

EXERCISES

Ex. 199

The Cain Company has just completed a physical inventory count at year end, December 31, 2014. Only the items on the shelves, in storage, and in the receiving area were counted and costed on the FIFO basis. The inventory amounted to $80,000. During the audit, the independent CPA discovered the following additional information:

(a) There were goods in transit on December 31, 2014, from a supplier with terms FOB destination, costing $10,000. Because the goods had not arrived, they were excluded from the physical inventory count.

(b) On December 27, 2014, a regular customer purchased goods for cash amounting to $1,000 and had them shipped to a bonded warehouse for temporary storage on December 28, 2014. The goods were shipped via common carrier with terms FOB shipping point. The customer picked the goods up from the warehouse on January 4, 2015. Cain Company had paid $500 for the goods and, because they were in storage, Cain included them in the physical inventory count.

(c) Cain Company, on the date of the inventory, received notice from a supplier that goods ordered earlier, at a cost of $4,000, had been delivered to the transportation company on December 28, 2014; the terms were FOB shipping point. Because the shipment had not arrived on December 31, 2014, it was excluded from the physical inventory.

(d) On December 31, 2014, there were goods in transit to customers, with terms FOB shipping point, amounting to $800 (expected delivery on January 8, 2015). Because the goods had been shipped, they were excluded from the physical inventory count.

(e) On December 31, 2014, Cain Company shipped $2,500 worth of goods to a customer, FOB destination. The goods arrived on January 5, 2014. Because the goods were not on hand, they were not included in the physical inventory count.

(f) Cain Company, as the consignee, had goods on consignment that cost $3,000. Because these goods were on hand as of December 31, 2014, they were included in the physical inventory count.

Instructions

Analyze the above information and calculate a corrected amount for the ending inventory. Explain the basis for your treatment of each item.

Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 199 (20 min.)

Start with $80,000

Item (a) – (Because the goods were shipped FOB destination title will pass to Cain upon arrival. Properly excluded.)

Item (b) – 500 (Goods should be excluded. The customer accepted title when the goods left Cain FOB shipping point.)

Item (c) + 4,000 (Goods belong to Cain. Title passed when supplier delivered the goods to the transportation company.)

Item (d) – (Because the goods were shipped FOB shipping point Cain no longer has title to these goods. Properly excluded.)

Item (e) + 2,500 (Goods were shipped FOB destination. Cain retains title until the customer receives them.)

Item (f) – 3,000 (These goods are owned by the consignor, not the consignee, and should not be included in Cain’s inventory.)

Corrected inventory $83,000

Ex. 200

Dalton Company was undergoing an end of year audit of its financial records. The auditors were in the process of reviewing Dalton’s inventory for year end, December 31, 2014. They completed an end of year inventory. The value of the ending inventory prior to any adjustments was $185,000, but before finishing up they had a few questions. Discussion with Dalton’s accountant revealed the following:

(a) Dalton sold goods costing $60,000 to Summey Company FOB shipping point on December 28. The goods are not expected to reach Summey until January 12. The goods were not included in the physical inventory because they were not in the warehouse.

(b) The physical count of the inventory did not include goods costing $95,000 that were shipped to Dalton FOB destination on December 27 and were still in transit at year-end.

(c) Dalton received goods costing $25,000 on January 2. The goods were shipped FOB shipping point on December 26 by Strong Company. The goods were not included in the physical count.

(d) Dalton sold goods costing $40,000 to Hampton Company FOB destination on December 30. The goods were received by Hampton Company on January 8. Because the goods had been shipped, they were excluded from the physical inventory count.

(e) Dalton received goods costing $42,000 on January 2 that were shipped FOB destination on December 29. The shipment was a rush order that was suppose to arrive December 31. This purchase was included in the ending inventory of $192,000.

(f) Dalton Company, as the consignee, had goods on consignment that cost $3,000. Because these goods were on hand as of December 31, they were included in the physical inventory count.

Instructions

Analyze the above information and calculate a corrected amount for the ending inventory. Explain the basis for your treatment of each item.

Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 200 (20 min.)

Start with $185,000

Item (a) – (Because the goods were shipped FOB shipping point title passed to Button upon shipping. Properly excluded.)

Item (b) – (Goods should be excluded. Title does not pass to Dalton until goods are received).

Item (c) +25,000 (Goods belong to Dalton. Title passed when supplier delivered the goods to the transportation company.)

Item (d) +40,000 (Because the goods were shipped FOB destination point Dalton has title to these goods.)

Item (e) –42,000 (Goods were shipped FOB destination. Dalton does not take title until they receive them no matter when expected.)

Item (f) – 3,000 (These goods are owned by the consignor, not the consignee, and should not be included in Dalton’s inventory.)

Corrected inventory $205,000

Ex. 201

Dennis Lee, an auditor with Knapp CPAs, is performing a review of Dobson Company’s inventory account. Dobson did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $640,000. However, the following information was not considered when determining that amount.

1. Included in the company’s count were goods with a cost of $200,000 that the company is holding on consignment. The goods belong to Agler Corporation.
2. The physical count did not include goods purchased by Dobson with a cost of $40,000 that were shipped FOB shipping point on December 28 and did not arrive at Dobson’s warehouse until January 3.
3. Included in the inventory account was $22,000 of office supplies that were stored in the warehouse and were to be used by the company’s supervisors and managers during the coming year.
4. The company received an order on December 29 that was boxed and was sitting on the loading dock awaiting pick-up on December 31. The shipper picked up the goods on January 1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods had a selling price of $40,000 and a cost of $30,000. The goods were not included in the count because they were sitting on the dock.
5. On December 29, Dobson shipped goods with a selling price of $90,000 and a cost of $70,000 to Central Sales Corporation FOB shipping point. The goods arrived on January 3. Central Sales had only ordered goods with a selling price of $10,000 and a cost of $8,000. However, a sales manager at Dobson had authorized the shipment and said that if Central wanted to ship the goods back next week, it could.
6. Included in the count was $50,000 of goods that were parts for a machine that the company no longer made. Given the high-tech nature of Dobson’s products, it was unlikely that these obsolete parts had any other use. However, management would prefer to keep them on the books at cost, “since that is what we paid for them, after all.”

Ex. 201 (Cont.)

Instructions

Prepare a schedule to determine the correct inventory amount. Provide explanations for each item above, saying why you did or did not make an adjustment for each item.

Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 201 (20 min.)

Ending inventory-as reported		$640,000
1.	Subtract from inventory: The goods belong to Agler Corporation. Dobson is merely holding them as a consignee.	(200,000)
2.	Add to inventory: The goods belong to Dobson as soon as they are shipped (December 28).	40,000
3.	Subtract from inventory: Office supplies should be carried in a separate account. They are not considered inventory held for resale.	(22,000)
4.	Add to inventory: The goods belong to Dobson until they are shipped (Jan. 1).	30,000
5.	Add to inventory: Central Sales ordered goods with a cost of $7,000. Dobson should record the corresponding sales revenue of $10,000. Dobson’s decision to ship extra “unordered” goods does not constitute a sale. The manager’s statement that Central could ship the goods back indicates that Dobson knows this over-shipment is not a legitimate sale. The manager acted unethically in an attempt to improve Dobson’s reported income by over-shipping.	62,000*
6.	Subtract from inventory: GAAP requires that inventory be valued at the lower of cost or market. Obsolete parts should be adjusted from cost to zero if they have no other use.	(50,000)
Correct inventory		$500,000

*($70,000–$8,000)

Ex. 202

Grother Company uses the periodic inventory method and had the following inventory information available:

Units Unit Cost Total Cost

1/1 Beginning Inventory 100 $4 $ 400

1/20 Purchase 500 $5 2,500

7/25 Purchase 100 $7 700

10/20 Purchase 300 $8 2,400

1,000 $6,000

A physical count of inventory on December 31 revealed that there were 350 units on hand.

Ex. 202 (Cont.)

Instructions

Answer the following independent questions and show computations supporting your answers.

1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________.
2. Assume that the company uses the average cost method. The value of the ending inventory on December 31 is $__________.
3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________.
4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less?

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 202 (20 min.)

1. FIFO: Ending inventory $2,750

300 units @$8 = $2,400

50 units @$7 = 350

350 units $2,750

1. Average Cost: Ending inventory $2,100

$6,000 ¸ 1,000 = $6.00 per unit ´ 350 units = $2,100

1. LIFO: Ending Inventory $1,650

100 units @$4 = $ 400

250 units @$5 = 1,250

350 units $1,650

1. FIFO: Cost of goods sold $3,250

100 units @$4 = $ 400

500 units @$5 = 2,500

50 units @$7 = 350

650 units $3,250

LIFO: Cost of goods sold $4,475

300 units @$8 $2,400

100 units @$7 700

250 units @$5 1,250

650 units $4,350

Income would have been $1,100; ($4,350 vs. $3,250) greater if the company used FIFO instead of LIFO.

Ex. 203

Hansen Company uses the periodic inventory method and had the following inventory information available:

Units Unit Cost Total Cost

1/1 Beginning Inventory 100 $3 $ 300

1/20 Purchase 500 $4 2,000

7/25 Purchase 100 $5 500

10/20 Purchase 300 $6 1,800

1,000 $4,600

A physical count of inventory on December 31 revealed that there were 380 units on hand.

Instructions

Answer the following independent questions and show computations supporting your answers.

1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________.
2. Assume that the company uses the average cost method. The value of the ending inventory on December 31 is $__________.
3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________.
4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less?

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 203 (20 min.)

1. FIFO: Ending inventory $2,200

300 units @$6 = $1,800

80 units @$5 = 400

380 units $2,200

1. Average Cost: Ending inventory $1,748

$4,600 ¸ 1,000 = $4.60 per unit ´ 380 units = $1,748

1. LIFO: Ending Inventory $1,420

100 units @$3 = $ 300

280 units @$4 = 1,120

380 units $1,420

1. FIFO: Cost of goods sold $2,400

100 units @$3 = $ 300

500 units @$4 = 2,000

20 units @$5 = 100

620 units $2,400

LIFO: Cost of goods sold $3,180

300 units @$6 $1,800

100 units @$5 500

220 units @$4 880

620 units $3,180

Solution 203 (Cont.)

Income would have been $780; ($3,180 vs. $2,400) greater if the company used FIFO instead of LIFO.

Ex. 204

Faster Company uses the periodic inventory method and had the following inventory information available:

Units Unit Cost Total Cost

1/1 Beginning Inventory 15 $8.00 $ 120

1/20 Purchase 60 $8.80 528

7/25 Purchase 30 $8.40 252

10/20 Purchase 45 $9.60 432

150 $1,332

A physical count of inventory on December 31 revealed that there were 55 units on hand.

Instructions

Answer the following independent questions and show computations supporting your answers.

1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________.
2. Assume that the company uses the Average Cost method. The value of the ending inventory on December 31 is $__________.
3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________.
4. Assume that the company uses the FIFO method. The value of the cost of goods sold at December 31 is $__________.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 204 (20 min.)

1. FIFO: Ending inventory $516

45 units @$9.60 = 432

10 units @$8.40 = 84

55 units $516

1. Average Cost: Ending inventory $488

$1,332 ¸ 150 = $8.88 per unit ´ 55 units = $488

1. LIFO: Ending Inventory $472

15 units @$8.00 = $ 120

40 units @$8.80 = 352

55 units $472

1. FIFO: Cost of goods sold $816

15 units @$8.00 = $ 120

60 units @$8.80 = 528

20 units @$8.40 = 168

95 units $ 816

Ex. 205

Compute the cost to be assigned to ending inventory for each of the methods indicated given the following information about purchases and sales during the year.

January 1 Beginning Inventory 150 items @ $4 = $ 600

May 1 Purchases 450 items @ $6 = 2,700

Total Available 600 items $3,300

Total Sales 430 items

December 31 Ending Inventory 170

Cost assigned on an average cost basis $__________

Cost assigned on a FIFO basis $__________

Costs assigned on a LIFO basis $__________

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution 205 (5 min.)

$935 [($3,300/600) x 170]

$1,020 (170 x $6)

$ 720 [(150 x $4)+(20 x $6)]