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Exam 7: Inventory and Cost of Goods Sold

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Question 1

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A company that makes the following journal entry at the time of purchasing inventory is using which of the following inventory systems? $\begin{array} { | l | l | l | } \hline \text { Dr. Inventory } & \text { xxx } & \\\hline \text { Cr. Accounts Payable } & & \mathrm { xxx } \\\hline\end{array}$

A) Periodic system
B) Just in time system
C) Specific identification method
D) Perpetual system

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Question 2

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Inventory is a tangible asset purchased for use in the company's operations.

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Question 3

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Telly Company reported profit in 20X1 of $22,000 and in 20X2 of $32,000. Later it was discovered that the 20X1 ending inventory was overstated by $5,000. Compute the amount of profit (disregard income tax) for 20X1 and 20X2. 20X1 $____________________ 20X2 $__________________

Under the periodic inventory system, the balance in the inventory account changes each time a purchase or sale is recorded.

The following statement of earnings is complete except for a few captions with solid lines on the left, and amounts with dotted lines on the right. You are to fill in the most likely captions and amounts: Smith Retail Company Statement of Earnings for the Y ear Ended December 31, 20X2 $\begin{array}{|l|r|r|}\hline \text { Gross Sales Revenue } & &\$\underline{\quad\quad}\\\hline\underline{\quad\quad}&\$ 3,000\\\hline \text { Sales discounts } &\underline{\quad\quad}&5,000 \\\hline \underline{\quad\quad}&&\$101,000 \\\hline \text { Cost of goods sold: } & \\\hline\underline{\quad\quad} & \$ 12,000 \\\hline \underline{\quad\quad}&\underline{\quad\quad} \\\hline \underline{\quad\quad}& 77,000 \\\hline \text { Ending Inventory } &\underline{\quad\quad} \\\hline \underline{\quad\quad}& &\underline{\quad\quad}\\\hline \underline{\quad\quad}&&38,000\\\hline \text { Operating expenses }&&\underline{\quad\quad}\\\hline \underline{\quad\quad}&&\$16,000\\\hline \end{array}$ Smith Retail Company Income Statement For the Year Ended December 31, 20X2

Richmond Company had the following information taken from its 20X1 adjusted trial balance: Sales, $200,000; Sales Discounts, $4,000; Beginning Inventory, $10,000; and Purchases, $140,000. A physical count of the merchandise on hand at the end of the year showed $20,000. Compute the gross margin (gross profit) that would appear in the statement of earnings.

On February 20, 20X1, Ross Sound Company purchased $10,000 of stereo equipment for resale on credit, subject to the terms 3/15, n/30. The periodic inventory system is used. If the company paid for these goods on March 20, the entry made to record the payment should include which of the following?

For each independent situation given below, determine the effect on pretax profit for each. Enter "+" to indicate pretax profit is overstated, "-" to indicate pretax profit is understated, or "NA" to indicate that pretax profit is not affected. $\quad$$\quad$$\text { Independent Situations }$ $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $\text { Effect on Pre-tax Profit }$$\begin{array} { | l | l | l | l | } \hline && 20 X1 & 20X 2 \\\hline \text { A. } & 20 \times 1 \text { ending inventory overstated } & & \\\hline \text { B. } & 20 \times 1 \text { ending inventory understated } & & \\\hline \text { C. } & 20 \times 2 \text { ending inventory overstated } & & \\\hline \text { D. } & 20 \times 2 \text { beginning inventory overstated } & & \\\hline \text { E. } & 20 \times 1 \text { beginning inventory understated } & & \\\hline \text { F. } & \begin{array} { l } 20 \times 2 \text { beginning inventory understated and 20X2 } \\\text { ending inventory understated by the same amount }\end{array} & & \\\hline\end{array}$

When a perpetual inventory system is used, the purchases returns and allowances account will not be part of the general ledger accounts.

An overstatement of the beginning inventory results in

The inventory turnover ratio is calculated by dividing cost of goods sold by

A company that has decreased its inventory between years will cause a decrease in cash flow from operations.

The cost of goods sold account is which of the following?

A company recorded net purchases of $20.3 billion for 20X2. In 20X1, ending trade payables was $1.2 billion and in 20X2, it was $1.6 billion. How much cash was paid to suppliers in 20X2?

An increase in inventory turnover means, days in inventory

In periods of falling prices, FIFO will result in the same ending inventory valuation as the average cost formula.

Why would high technology firms probably choose FIFO as their inventory valuation method?

An error in the ending inventory of the current period will have a similar but inverse effect on profit of the next accounting period.

The lower of cost and net realizable value basis of valuing inventories ensures that inventories are

Halles Medical Instruments has net sales and gross profit of $1,841,000 and $971,000 respectively. Assuming the cost of goods available were $1,584,000, what was the cost of Halle's ending inventory?