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Exam 6: Inventories and Cost of Sales

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Question 21

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A company sells garden hoses and uses the perpetual inventory system to account for its merchandise. The beginning balance of the inventory and its transactions during September were as follows: September 1: Beginning balance of 18 units at $13 each September 12: Purchased 30 units at $14 each September 19: Sold 24 units at $30 selling price each September 20: Purchased 24 units at $17 each September 27: Sold 27 units at $30 selling price each If the ending inventory is reported at $276, what inventory method was used?

A) Weighted average method.
B) LIFO method.
C) Retail inventory method.
D) Specific identification method.
E) FIFO method.

F) A) and B)
G) None of the above

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Question 22

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Internal controls that should be applied when a business takes a physical count of inventory should include all of the following except:

A) A manager confirms that all inventories are ticketed only once.
B) Counters of inventory should be those who are responsible for the inventory.
C) Counters confirm the validity of inventory existence, amounts, and quality.
D) Prenumbered inventory tickets.
E) Second counts by a different counter.

F) A) and E)
G) C) and E)

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Question 23

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If the seller is responsible for paying freight charges, then ownership of inventory passes when goods arrive at their destination.

Explain why the lower of cost or market rule is used to value inventory.

McCarthy Company has inventory of 8 units at a cost of $200 each on October 1. On October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the FIFO perpetual inventory method, what is the value of inventory after the October 4 sale?

The FIFO inventory method assumes that costs for the latest units purchased are the first to be charged to the cost of goods sold.

The simple rule for inventory turnover is that a low ratio is preferable.

What specific costs and deductions are used to determine the final cost of merchandise inventory? Identify all costs including the incidental costs.

Health Defense sells first aid kits and uses the periodic inventory system to account for its merchandise. The beginning balance of the inventory and its transactions during January were as follows: January 1: Beginning balance of 18 units at $13 each January 12: Purchased 30 units at $14 each January 19: Sold 24 units at a selling price of $30 each January 20: Purchased 24 units at $17 each January 27: Sold 27 units at a selling price of $30 each If the ending inventory is reported at $357, what inventory method was used?

In applying the lower of cost or market method to inventory valuation, market is defined as:

When costs to purchase inventory regularly decline, which method of inventory costing will yield the lowest gross profit and income?

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

According to IRS guidelines, companies may use FIFO for financial reporting and LIFO for tax reporting.

Interim financial statements:

Jammer Company uses a weighted average perpetual inventory system and reports the following: $\begin{array} { | l | l | l | } \hline \text { August 2 } & \text { Purchase } & 10 \text { units at } \$ 12 \text { per unit. } \\\hline \text { August 18 } & \text { Purchase } & 15 \text { units at } \$ 15 \text { per unit. } \\\hline \text { August 29 } & \text { Sale } & 20 \text { units. } \\\hline \text { August 31 } & \text { Purchase } & 14 \text { units at } \$ 16 \text { per unit. } \\\hline\end{array}$ What is the per-unit value of ending inventory on August 31?

What is the effect of an error in the ending inventory balance on the accounts reported in the income statement?

Since an error in the period-end inventory causes an offsetting error in the next period:

The LIFO method of inventory valuation can result in a company's ending inventory being valued at less than the inventory's replacement cost because LIFO inventory leaves the oldest costs in inventory.

All of the following statements regarding U.S. GAAP and IFRS are true except:

Acceptable methods of assigning specific costs to inventory and cost of goods sold include all of the following except: