Ch 07_inventory

Chapter 7—Inventories
TRUE/FALSE
1. A purchase order establishes an initial record of the receipt of the inventory.
2. A perpetual inventory system is an effective means of control over inventory.
3. Safeguarding inventory and proper reporting of the inventory in the books are the reasons for
controlling the inventory.
4. The selection of an inventory costing method has no significant impact on the financial statements.
5. When using the FIFO inventory costing method, the most recent costs are assigned to the cost of goods
sold.
6. FIFO is the inventory costing method that follows the physical flow of the goods.
7. If the perpetual inventory system is used, the account entitled Merchandise Inventory can be used to
debit the purchases of merchandise.
8. Under the periodic inventory system, the merchandise inventory account continuously discloses the
amount of inventory on hand.
9. Under the periodic inventory system, a physical inventory is taken to determine the cost of the
inventory on hand and the cost of the merchandise sold.
10. The three inventory costing methods will normally each yield different amounts of net income.
11. The average cost method will always yield results between FIFO and LIFO.
12. During periods of increasing costs, the use of the FIFO method of costing inventory will result in a
greater amount of net income than would result from the use of the LIFO cost method.
13. During periods of increasing costs, the use of the FIFO method of costing inventory will yield an
inventory amount for the balance sheet that is higher than LIFO would produce.
14. In valuing damaged merchandise for inventory purposes, net realizable value is the estimated selling
price less any direct costs of disposal.
15. The lower of cost or market is a method of inventory valuation.
16. "Market," as used in the phrase "lower of cost or market" for valuing inventory, refers to the price at
which the inventory is being offered for sale by its owner.
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17. The lower-of-cost-or-market method of determining the value of ending inventory can be applied on
an item by item, by major classification of inventory, or by the total inventory.
18. When merchandise inventory is shown on the balance sheet, both the method of determining the cost
of the inventory and the method of valuing the inventory should be shown.
19. Most large companies will use only one inventory costing methods for all of its different segments.
20. Direct disposal costs do not include special advertising or sales commissions.
21. One negative effect of carrying too much inventory is risk that customers will change their buying
habits.
22. Average inventory is computed by adding the inventory at the beginning of the period to the inventory
at the end of the period and dividing by two.
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MULTIPLE CHOICE
1. Under a perpetual inventory system, the amount of each type of merchandise on hand is available in
the
a.customer's ledger
b.creditor's ledger
c.inventory ledger
d.COGS account
2. Taking a physical count of inventory
a.is not necessary when a periodic inventory system is used
b.should be done near year-end
c.has no internal control relevance
d.is not necessary when a perpetual inventory system is used
3. Which of the following is not an example for safeguarding inventory?
a.Storing inventory in restricted areas.
b.Physical devices such as two-way mirrors, cameras, and alarms.
c.Matching receiving documents, purchase orders, and vendor’s invoice.
d.Returning inventory that is defective or broken.
4. Which of the following methods is appropriate for a business whose inventory consists of a relatively
small number of unique, high-cost items?
a.FIFO
b.LIFO
c.average
d.specific identification
5. When merchandise sold is assumed to be in the order in which the purchases were made, the company
is using
a.first-in, last-out
st-in, first-out
c.first-in, first-out
d.average cost
6. Cost flow is in the order in which costs were incurred when using
a.average cost
st-in, first-out
c.first-in, first-out
d.weighted average
7. Inventory costing methods place primary emphasis on assumptions about
a.flow of goods
b.flow of costs
c.flow of goods or flow of costs depending on the method
d.neither flow or goods or flow of costs
8. The inventory costing method that reports the most current prices in ending inventory is
a.FIFO
b.Specific identification
c.LIFO
© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
d.Average cost
9. If Addison uses FIFO, the cost of the ending merchandise inventory on September 30 is
a.$800
b.$650
c.$750
d.$700
Addison, Inc. uses a perpetual inventory system. The following is information about one inventory item for the month of September:
Sep. 1Inventory20 units at $20
4Sold10 units
10Purchased30 units at $25
17Sold20 units
30Purchased10 units at $30
10. When using a perpetual inventory system, the journal entry to record the cost of inventory sold is:
a.debit Cost of Goods Sold; credit Sales
b.debit Cost of Goods Sold; credit Inventory
c.debit Inventory; credit Cost of Goods Sold
d.No journal entry is made to record the cost of inventory sold.
11. Under the _________ inventory method, accounting records maintain a continuously updated
inventory value.
a.retail
b.periodic
c.physical
d.perpetual
12. The inventory data for an item for November are:
Nov. 1Inventory20 units at $19
4Sold10 units
10Purchased30 units at $20
17Sold20 units
30Purchased10 units at $21
Using a perpetual system, what is the cost of the merchandise sold for November if the company uses FIFO?
a.$610
b.$600
c.$590
d.$580
Use the following information to answer the following questions.
The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records during May. The company had no beginning inventory on May 1.
Date Product Z Units Cost
May 3Purchase5$30© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
May 10Sale3
May 17Purchase10$34
May 20Sale6
May 23Sale3
May 30Purchase10$40
13. Assuming that the company uses the perpetual inventory system, determine the cost of merchandise
sold for the sale of May 20 using the FIFO inventory cost method.
a.$250
b.$180
c.$196
d.$204
14. Assuming that the company uses the perpetual inventory system, determine the ending inventory value
for the month of May using the FIFO inventory cost method.
a.$494
b.$502
c.$422
d.$520
15. Assuming that the company uses the perpetual inventory system, determine the gross profit for the sale
of May 23 using the FIFO inventory cost method.
a.$78
b.$90
c.$102
d.$180
16. During a period of consistently rising prices, the method of inventory that will result in reporting the
greatest cost of merchandise sold is
a.FIFO
b.LIFO
c.average cost
d.weighted average
17. During times of rising prices, which of the following is not an accurate statement?
a.Average costing will yield results that are between those of FIFO and LIFO.
b.LIFO will result in a higher cost of goods sold than FIFO.
c.FIFO will result in a higher net income than LIFO.
d.LIFO will result in higher income taxes than FIFO.
18. If merchandise inventory is being valued at cost and the price level is steadily rising, the method of
costing that will yield the highest net income is
a.periodic
b.LIFO
c.FIFO
d.average
19. If the cost of an item of inventory is $50 and the current replacement cost is $57, the amount included
in inventory according to the lower of cost or market is
a.$7
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b.$50
c.$57
d.$107
20. Too much inventory on hand
a.reduces solvency
b.increases the cost to safeguard the assets
c.increases the losses due to price declines
d.all of the above
EXERCISE/OTHER
1. Three identical units of Item Magnesium XP are purchased during May, as shown below.
Item Magnesium XP Units Cost
May 3Purchase1$130
May 10Purchase1136
May 19Purchase1142
Total3$408
Assume that one unit is sold on May 23 for $153. Determine the gross profit for May and ending
inventory on May 31 using (a) FIFO and (b) average cost methods.
2. Assume that three identical units of merchandise are purchased during October, as follows:
Units Cost October5Purchase1$5
12Purchase1 7
28Purchase1 9
Total3$21 Assume one unit is sold on October 31 for $15. Determine Cost of Merchandise Sold, Gross Profit, and Ending Inventory under the Average Cost method.
October 31
Sales
Cost of Merchandise Sold
Gross Profit
Ending Inventory
3. Assume that three identical units of merchandise are purchased during October, as follows:
Units Cost October5Purchase1$ 5
12Purchase1 7
28Purchase1 9
Total3$21 Assume one unit is sold on October 31 for $15. Determine Cost of Merchandise Sold, Gross profit, and Ending Inventory under the FIFO method.
© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
October 31
Sales
Cost of Merchandise Sold
Gross Profit
Ending Inventory
4.Beginning inventory, purchases, and sales for Product - Weld TM are as follows:
Sep. 1Beginning Inventory24 units@$10
Sep. 5Sale17 units
Sep. 17Purchase10 units@$15
Sep. 30Sale8 units
Assuming a perpetual inventory system and the first-in, first-out method, determine (a) the cost of the merchandise sold for the September 30 sale and (b) the inventory on September 30.
5. The following units of a particular item were available for sale during the year:
Beginning inventory150 units @ $755
Sale120 units @ $925
First purchase400 units @ $785
Sale200 units @ $925
Second purchase300 units @ $805
Sale290 units @ $925
The firm uses the perpetual inventory system and there are 240 units of the item on hand at the end of the year. What is the total cost of ending inventory according to FIFO?
6. Brutus Corporation, a newly formed corporation, has the following transactions during May, 2011, it’s
first month of operation.
May 1 Purchased 500 units @ $25.00 each
May 4 Purchased 300 units @ $24.00 each
May 6 Sold 400 units @ $38.00 each
May 8 Purchased 700 units @ $23.00 each
May 13 Sold 450 units @ $37.50 each
May 20 Purchased 250 units @ $25.25 each
May 22 Sold 275 units @ $36.00 each
May 27 Sold 300 units @ $37.00 each
May 28 Purchased 550 units @ $26.00 each
May 30 Sold 100 units @ $39.00 each
Calculate total sales, cost of goods sold, gross profit and ending inventory using FIFO Perpetual
inventory methods.
© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
7. On the basis of the following data for Barker Industries as of December 31, 2011, determine the value
of the inventory at the lower of cost or market. Also, show how the merchandise inventory would appear on the balance sheet (assume that the cost was determined by the FIFO method).
Commodity Inventory Quantity Unit Cost Price Unit Market
Price
Size 4 9$17$19Size 5 10 17 14Size 6 14 23 20Size 7 12 13 15
Commodity Inventory Quantity Unit Cost Price Unit Market Price
Cost Market
Lower of C or M Size 4 Size 5 Size 6 Size 7
Baker Industries
Balance Sheet December 31, 2011
Assets。