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Exam 6: Inventories and Cost of Sales

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Question 81

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Starlight 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 LIFO perpetual inventory method, what amount will be reported in cost of goods sold for the 11 units that were sold?

A) $2,255.
B) $2,239.
C) $2,200.
D) $2,215.
E) $2,228.

F) C) and E)
G) B) and C)

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Question 82

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Most companies do not take a physical count of inventory each year, but rather rely on inventory records to determine the inventory value.

A) True
B) False

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Question 83

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A company reported the following data: $\begin{array} { | l | r | r | } \hline & \text { Year 1 } & \text { Y ear 2 } \\\hline \text { Cost of goods sold } & \$ 317,500 & \$ 279,100 \\\hline \text { Average inventory } & 72,000 & 93,000 \\\hline\end{array}$ Required: 1. Calculate the company's merchandise inventory turnover for each year. 2. Comment on the company's efficiency in managing its inventory.

When costs to purchase inventory regularly decline, which method of inventory costing will yield the lowest cost of goods sold?

The consistency concept allows a company to use different accounting methods from period to period in order to maximize profits.

A company uses the retail inventory method and has the following information available concerning its most recent accounting period: $\begin{array} { | l | r | r | } \hline & \text { At Cost } & \text { At Retail } \\\hline \text { Beginning-of-period inventory } & \$ 148,600 & \$ 245,200 \\\hline \text { Net purchases } & 677,400 & 1,229,800 \\\hline \text { Sales } & & 1,200,000 \\\hline\end{array}$ 1. What is the cost-to-retail ratio using the retail method? 2. What is the estimated cost of the ending inventory?

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

A company's current inventory consists of 5,000 units purchased at $6 per unit. Replacement cost has now fallen to $5 per unit. What is the entry the company must record to adjust inventory to market?

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.

A company had the following purchases and sales during its first year of operations: $\begin{array} { | l | l | l | } \hline & \text { Purchases } & \text { Sal es } \\\hline \text { January. } & 10 \text { units at } \$ 120 & 6 \text { units } \\\hline \text { February. } & 20 \text { units at } \$ 125 & 5 \text { units } \\\hline \text { May. } & 15 \text { units at \$130 } & 9 \text { units } \\\hline \text { September: } & 12 \text { units at \$135 } & 8 \text { units } \\\hline \text { November: } & 10 \text { units at } \$ 140 & 13 \text { units } \\\hline\end{array}$ On December 31, there were 26 units remaining in ending inventory. -Using the Periodic FIFO inventory valuation method, what is the value of cost of goods sold? (Assume all sales were made on the last day of the month.)

The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to net sales.

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

Generally accepted accounting principles require that the inventory of a company be reported at:

Discuss the important accounting features of a periodic inventory system including accounts and procedures used.

Match the following terms with the appropriate definition. 1. The required method of reporting inventory at market when market is lower than cost. 2. The method of assigning costs to inventory where the purchase cost of each item in inventory is identified and used to determine the cost of inventory. 3. A procedure for estimating inventory where the past gross profit rate is used to estimate the cost of goods sold, which is then subtracted from the cost of goods available for sale to determine the estimated ending inventory. 4. An owner of goods who ships them to another party who will then sell the goods for the owner. 5. One who receives and holds goods owned by another for purposes of selling the goods for the owner. 6. The principle that aims to select the less optimistic estimate when two or more estimates are about equally likely. 7. The number of times a company's average inventory is sold during an accounting period. 8. An estimate of days needed to convert the inventory available at the end of the period into receivables or cash. 9. A method for estimating inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail prices. 10. The accounting principle that a company use the same accounting methods period after period so that the financial statements of succeeding periods will be comparable.

A company had the following purchases and sales during its first month of operations: $\begin{array} { | l | l | } \hline \text { January } 1 & \text { Purchased } 10 \text { units at } \$ 4.00 \text { per unit } \\\hline \text { January } 9 & \text { Sold } 6 \text { units at } \$ 12.00 \text { per unit } \\\hline \text { January } 17 & \text { Purchased 8 units at } \$ 5.50 \text { per unit } \\\hline \text { January } 27 & \text { Sold } 7 \text { units at } \$ 12.00 \text { per unit } \\\hline\end{array}$ Using the Perpetual weighted average method, what is the value of cost of goods sold? (Round weighted average costs per unit to 2 decimal places.)

A company uses the periodic inventory system, and the following information is available. All purchases and sales are on credit. The selling price for the merchandise is $11 per unit. $\begin{array}{|l|l|r|r|r|}\hline & & \text { Units } & \text { Unit Cost } & \text { Total Cost } \\\hline 6 / 01 & \text { Inventory Balance } & 30 & \$ 3 & \$ 90 \\\hline 6 / 06 & \text { Purchase } & 70 & 4 & 280 \\\hline 6 / 11 & \text { Purchase } & 45 & 5 & 225 \\\hline 6 / 16 & \text { Purchase } & \underline{50} & 6 & 300 \\\hline & \text { Goods available } & \underline{195} & & \underline{1095} \\\hline 6 / 12 & \text { Sale } & 100 & & \\\hline 6 / 20 & \text { Sale } & \underline{60} & & \\\hline & \text { Goods sold } & \underline{160} & & \\\hline 6 / 31 & \text { Inventory Balance } & \underline{35} & &\\\hline \end{array}$ Required: Determine the cost of the ending inventory and the cost of goods sold for June using the LIFO method.

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

Apply the retail method to the following company information to calculate the cost of the ending inventory for the current period. $\begin{array} { | l | r | r | } \hline & { \text { Cost } } &{ \text { Ratail } } \\\hline \text { Beginning inventory } & \$ 20,224 & \$ 31,600 \\\hline \text { Net purchases } & 59,508 & 97,000 \\\hline \text { Sales } & & \$ 9,000 \\\hline\end{array}$

A company reported the following data: $\begin{array} { | l | r | r | } \hline & \text { Year 1 } & \text { Year 2 } \\\hline \text { Cost of goods sold } & \$ 425,000 & \$ 486,000 \\\hline \text { Foding inventory } & 140,000 & 175,000 \\\hline\end{array}$ Required: 1. Calculate the days' sales in inventory for each year. 2. Comment on the trend in inventory management.