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Exam 6: Inventories

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Question 1

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Assume that during the physical count of the inventory of a large corporation last year,$750,000 of merchandise was not counted.The error was not detected,and the financial statements for the current fiscal year were prepared.Identify the individual statements that would be affected and explain the effect the error would have on each of these statements.

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By understating last year's ending inventory,the company would have started the current year with an understated inventory balance.As a result,total assets would be understated by the same $750,000.The error would also cause cost of goods sold and gross margin on the statement of earnings to be understated and overstated,respectively.Earnings before income taxes would be overstated by $750,000.This year's overstatement of earnings before income taxes,retained earnings,and inventory would exactly offset the understatement of each item on the prior year's statements.

Question 2

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Goods held on consignment are

A) kept for sale on the premises of the consignor.
B) included as part of no one's ending inventory.
C) never owned by the consignee.
D) included in the consignee's ending inventory.

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Question 3

Multiple Choice

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Which inventory method generally best follows the matching principle?

Freyman's Shoe Store had net retail sales of $200,000 during the current year.The following additional information was obtained from the accounting records. $\begin{array}{lrr}&\text {At Cost}&\text {At Retail}\\\text { Beginning inventory } & \$ 30,000 & \$63,000 \\\text { Net purchases for the period } & 89,000 & 193,000 \\\text { Freight-in } & 9,000 &\end{array}$ Estimate the company's ending inventory at cost using the retail method.(Show your work.)

How is the matching rule applied when accounting for merchandise inventory?

Supply-chain management works well in a just-in-time operating environment.

In accounting for inventory,the assumed cost flow need not match the physical goods flow.

A cost-to-retail percentage must be calculated when applying the retail method.

Cost of goods sold equals $500,000,and average inventory equals $200,000.Days' inventory on hand equals

Use the following information to calculate cost of goods sold under each of three methods: (a)FIFO,(b)LIFO,and (c)average-cost.Assume the periodic inventory system is used.(Show your work.) $\begin{array}{lrll}\text { Apr. } & 1 & \text { Beginning inventory }& \text { 90 units@\$40} \\& 8 & \text { Sales } &\text { 70 units}\\& 17 & \text { Purchases }& \text { 150 units \$ 4}\\& 24 & \text { Sales }&\text { 110 units}\\& 30 & \text { Purchases }&\text { 60 units\$ 44 } \end{array}$

The FIFO inventory method produces the most up-to-date figure for ending inventory.

Goods in transit shipped FOB destination should be included in the buyer's ending inventory.

A retail store prices its goods to achieve a gross margin of 30 percent.Up to the date of a fire that destroyed the store's inventory,sales were $200,000 and cost of goods available for sale was $150,000.The estimated cost of the inventory destroyed is

When the average-cost method is applied to a perpetual inventory system,the sale and purchase of goods will change the unit cost of the goods that remain in inventory.

What is the chief objective of supply-chain management? How is it accomplished?

The LIFO method tends to smooth out the peaks and valleys of a business cycle.

Use this information to answer the following question. $\begin{array}{ll}\text { Beginning inventory } & 100 \text { units @\$8.00 } \\\text { Purchase-Oct. } & 200 \text { units } @ \$ 6.00 \\\text { Purchase-Dec. } & 100 \text { units } @ \$ 12.00\end{array}$ A periodic inventory system is used; ending inventory is 150 units. What is ending inventory under the average-cost method?

Days' inventory on hand equals 365 divided by

Assuming that ending inventory for 2009 was understated,indicate whether each of the following will be understated (U),overstated (O),or not affected (N). _____ 1.Beginning inventory for 2010 _____ 2.Cost of goods sold for 2009 _____ 3.Stockholders' equity at the end of 2010 _____ 4.Income before income taxes for 2010 _____ 5.Stockholders' equity at the end of 2009 _____ 6.Cost of goods sold for 2010 _____ 7.Income before income taxes for 2009

Use the following figures (stated in millions of dollars)to compute the inventory turnover and the days' inventory on hand: (Round answers to one decimal place). $\begin{array}{llr} \text { Cost of goods sold: } & \$ 6,584\\ \text { Beginning inventory: } &\$ 915\\ \text { Ending inventory:} & \$ 1,177 \end{array}$ a. Inventory turnover = ___________________ b. Days' inventory on hand = ___________________