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Exam 6: Inventories and Cost of Sales

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Question 111

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Lucia Company reported cost of goods sold for Year 1 and Year 2 as follows: $\begin{array}{|l|c|c|}\hline & \text { Year 1 } & \text { Y ear 2 } \\\hline \text { Beginning inventory } & \$ 120,000 & \$ 130,000 \\\hline \text { Cost of goods purchased } & \underline{250,000} & \underline{275,000} \\\hline \begin{array}{l}\text { Cost of goods available for } \\\text { sale }\end{array} & 370,000 & 405,000 \\\hline \text { Ending inventory } & \underline{130,000} & \underline{135,000} \\\hline \text { Cost of goods sold } & \underline{\$ 240,000} & \underline{\$ 270,000} \\\hline\end{array}$ Lucia Company made two errors: 1) ending inventory at the end of Year 1 was understated by $15,000 and 2) ending inventory at the end of Year 2 was overstated by $6,000. Given this information, the correct cost of goods sold figure for Year 2 would be:

A) $291,000
B) $276,000
C) $264,000
D) $249,000
E) $285,000

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

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Question 112

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Goods in transit are automatically included in inventory regardless of whether title has passed to the buyer.

A) True
B) False

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Question 113

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The lower of cost or market rule for inventory valuation is always applied to individual units separately rather than to major categories of inventory or to the entire inventory.

A company had beginning inventory of 10 units at a cost of $20 each on March 1. On March 2, it purchased 10 units at $22 each. On March 6 it purchased 6 units at $25 each. On March 8, it sold 22 units for $54 each. Using the FIFO perpetual inventory method, what was the cost of the 22 units sold?

The conservatism constraint prescribes that:

When units are purchased at different costs over time, determining the cost per unit assigned to inventory items is simple.

Use the following information for Davis Company to compute inventory turnover for Year 2. $\begin{array} { | l | r | r | } \hline & \text { Year 2 } & \text { Year 1 } \\\hline \text { Cost of goods sold } & 279,500 & 291.800 \\\hline \text { Ending inventory } & 47.700 & 49.350 \\\hline\end{array}$

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

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?

Days' sales in inventory is calculated as:

Use the information below to determine the sales revenue, cost of goods sold and gross profit that would be reported for the company related to the March 16 sale assuming the company uses weighted average inventory valuation and a perpetual inventory system. $\begin{array} { | l | l | } \hline \text { January 1: } & \text { Purchased } 100 \text { units at \$10 per unit. } \\\hline \text { February 5: } & \text { Purchased } 60 \text { units at \$12 per unit. } \\\hline \text { March 16: } & \text { Sold } 40 \text { units for \$16 per unit. } \\\hline\end{array}$

Underwood had cost of goods sold of $8 million and its ending inventory was $2 million. Therefore, its days' sales in inventory equals 25 days.

Describe the internal controls that must be applied when taking a physical count of inventory.

A company's cost of goods sold was $15,500 and its average merchandise inventory was $4,500. Its inventory turnover equals 3.4.

Under FIFO, the most recent costs are assigned to ending inventory.

A company uses the periodic inventory system and had the following activity during the current monthly period. $\begin{array} { | l | l | l | } \hline \text { November 1: } & \text { Beginning inventory } & 100 \text { units @ \$20 } \\\hline \text { November 5: } & \text { Purchased } & 100 \text { units @ \$22 } \\\hline \text { November 8: } & \text { Purchas ed } & 50 \text { units @ \$23 } \\\hline \text { November 16: } & \text { Sold } & 200 \text { units @ \$45 } \\\hline \text { November 19: } & \text { Purchased } & 50 \text { units @ \$25 } \\\hline\end{array}$ Using the weighted-average inventory method, the company's ending inventory would be:

The understatement of the beginning inventory balance causes:

A company's inventory records report the following in November of the current year: $\begin{array} { | l | l | l | } \hline \text { Beginging } & \text { November 1 } & 5 \text { units @ \$20 } \\\hline \text { Purchase } & \text { November 2 } & 10 \text { units @ \$22 } \\\hline \text { Purchas e } & \text { November 12 } & 6 \text { units @ \$25 } \\\hline\end{array}$ On November 8, it sold 12 units for $54 each. -Using the LIFO perpetual inventory method, what amount of gross profit was earned from the 12 units sold?

FIFO is preferred when purchase costs are rising and managers have incentives to report higher income for reasons such as bonus plans, job security, and reputation.

The full disclosure principle: