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Exam 8: Inventories and the Cost of Goods Sold

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Question 61

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Lower-of-cost-or-market Elite Systems sells a single product. At December 31, the company's perpetual inventory records indicate 2,500 units on hand with a total cost (FIFO basis) of $155,000. The replacement cost of this product at this date is $35 per unit. Prepare journal entries to record (a) the write-down of the inventory to the lower-of-cost-or-market value at December 31, and (b) the cash sale of 100 units on January 4 at a retail price of $50 per unit. $\begin{array} { | l | c | } \hline \text { Date } & \text { General Journal } \\\hline 20 & \\\hline\end{array}$ (a) Dec. 31 (b) Jan. 4

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Question 62

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Accounting terminology Listed below are nine technical accounting terms introduced in this chapter: Just-in-time Average-cost method LIFO method Gross profit method Inventory shrinkage FIFO method Retail method Inventory turnover Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. _____ a. The flow assumptions in which the oldest units purchased are assumed to have remained in inventory. _____ b. A method of estimating the cost of goods sold and ending inventory based upon cost relationships from prior periods. _____ c. The practice of valuing inventory in the balance sheet at expected sales prices, rather than at cost. _____ d. An inventory flow assumption involving only one "cost layer." _____ e. The inventory flow assumption likely to result in the highest reported amount of gross profit during a period of rising prices. _____ f. A technique for minimizing a company's investment in inventory, particularly inventories of raw materials and finished goods. _____ g. A measure of a company's ability to sell its inventory quickly.

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(a) LIFO method, (b) Gross pro...

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Question 63

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The choice of inventory valuation method can help achieve each of the following independent goals, except:

Inventory flow assumptions Briefly discuss the factors management should consider in deciding: (a) Whether to use specific identification or a flow assumption in measuring the cost of goods sold. (b) Whether to use FIFO or LIFO. (Assume a long-run trend of slowly rising prices.)

During periods of inflation, the LIFO cost flow assumption will yield a lower inventory value than FIFO.

What were the goods available for sale for the month?

The write-down of inventory:

Inventory turnover In the spaces provided, indicate the likely effect of each of the following events or strategies upon the inventory turnover rate. Use the following code letters: I for Increase, D for Decrease, and NE for No Effect. ____ (a) Switched from the LIFO flow assumption to FIFO during a period of rising prices. ____ (b) Dramatically increased advertising expense. ____ (c) Increased the sales price of merchandise that is so popular it is difficult to keep in stock. ____ (d) Implemented internal control procedures to reduce a serious inventory shrinkage problem. ____ (e) Switched from a restrictive credit policy to offering liberal terms to credit customers.

Inventory flow assumptions Arrow, Inc. uses a perpetual inventory system. On January 22, 2010, the company had 200 units of a particular product on hand, with a total cost of $2,400. The per-unit costs were: On January 24, 2010, Arrow sold 65 units of this product. Using the three flow assumptions listed below, compute (1) the cost of goods sold, and (2) the cost of the inventory of this product on hand after this sale. Show your computations.

During periods of inflation, the specific identification cost flow assumption will yield a higher cost of goods sold than LIFO.

Assuming that Anderson uses the LIFO flow assumption, it should record this inventory shrinkage by:

Inventory flow assumptions Flat TV uses a perpetual inventory system. Shown below are Flat TV's beginning inventory of a particular product and purchases during January: On January 23 (prior to the purchase on January 25), Flat TV sold 13 units of this product. Determine the cost of goods sold relating to the sale on January 23 under each of the following flow assumptions. (Show your computations.)

Periodic inventory systems Funky Fashions uses a periodic inventory system. The beginning inventory of a particular product, and the purchases during the current year, were as follows: At December 31, the ending inventory of this product consisted of 1,300 units. Determine the cost of the year-end inventory and the cost of goods sold for this product under each of the following methods of inventory valuation:

The inventory turnover rate provides an indication of how quickly the average quantity of inventory on hand:

The gross profit method of valuing inventory:

The balance in the Inventory account at January 31 was:

The cost flow assumption selected by a company must correspond to the actual physical movement of the company's merchandise.

In a period of rising prices, a company is most likely to use the FIFO method of pricing inventory if:

Assume that Castle TV, Inc. uses the FIFO flow assumption. The cost of the 200 units in inventory at year-end is:

The Multi-Tech Company uses the gross profit method to estimate inventories. Fill in the missing amounts.