Inventory and Cost of Goods Sold (Quiz)

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  1. 1.

    The inventory cost flow assumption where the cost of the most recent purchase is matched first against sales revenues is

    FIFO
    Wrong.
    Under FIFO the first or oldest costs are the first costs being matched with revenues of the current period.
    LIFO
    Right!
    The most recent purchases are the last costs in and those costs are coming out of inventory first.
    Average
    Wrong.
    Try another answer.
  2. 2.

    The inventory cost flow assumption where the cost of the most recent purchases are likely to remain in inventory

    FIFO
    Right!
    Under FIFO the first or oldest costs come out of inventory first, leaving the most recent costs in inventory.
    LIFO
    Wrong.
    Under LIFO the most recent costs come out of inventory first, leaving the oldest costs in inventory.
    Average
    Wrong.
    Try another answer.
  3. 3.

    The inventory cost flow assumption where the oldest cost of inventory items is likely to remain on the balance sheet is

    FIFO
    Wrong.
    Under FIFO the first or oldest costs come out of inventory first, leaving the most recent costs in inventory.
    LIFO
    Right!
    Under LIFO the most recent costs come out of inventory first, leaving the oldest costs in inventory.
    Average
    Wrong.
    Try another answer.
  4. 4.

    The account Inventory will appear on the balance sheet as a current asset at an amount that often reflects the __________ of the merchandise on hand.

    Cost
    Right!
    Because of the cost principle, inventory is carried at cost. Only if there is some impairment or if replacement cost is less than cost or if the company is in a unique industry would the inventory be at an amount other than its cost.
    Sales Value
    Wrong.
    Because of the cost principle, inventory is carried at cost. Only if there is some impairment or if replacement cost is less than cost or if the company is in a unique industry would the inventory be at an amount other than its cost.
  5. 5.

    The inventory system that does NOT update the Inventory account automatically at the time of each purchase or sales is the _______________ method/system.

    Periodic
    Right!
    Under the periodic method the Inventory account is dormant throughout the accounting period. At the end of the accounting period the inventory account is adjusted to the amount on hand.
    Perpetual
    Wrong.
    Under the perpetual method the Inventory account IS continuously or perpetually updated with each purchase or sale of merchandise.
  6. 6.

    If a company is experiencing continuous cost increases for the merchandise that it purchases, which cost flow assumption will result in the least amount of profit and the least amount of income tax expense?

    FIFO
    Wrong.
    With rising costs, the first or oldest costs are the lower costs. Matching old, low costs against current sales will result in higher profits, higher taxable income, and higher income tax expense.
    LIFO
    Right!
    With rising costs of merchandise, the most recent purchases will have higher costs. Taking the last (most recent) costs out of inventory first will mean the recent higher costs will be matched against current sales. (This leaves the older lower costs in the Inventory account.) Matching the latest/recent/higher costs against current sales results in less profit, less taxable income, and less income tax expense than FIFO or an average cost.
    Average
    Wrong.
    Try another answer.
  7. 7.

    A company in the computer industry is experiencing continuously lower costs. Which cost flow assumption will result in less income tax expense for this company?

    FIFO
    Right!
    Because costs are declining over time, the first or oldest costs are the higher costs. Matching these higher/older costs against current revenues will result in lower profits, lower taxable income, and lower income tax expense.
    LIFO
    Wrong.
    Because costs are declining over time, the latest/most recent costs are lower than the older/first costs. Matching the latest/recent/lower costs with current revenues will mean higher profits, higher taxable income, and higher income tax expense.
    Average
    Wrong.
    Try another answer.
  8. 8.

    A company purchased items for inventory during 2011 at continuously higher costs. Its last two purchases of 2011 were 20 units on December 20 at a cost of $14 per unit and 30 units on December 30 at a cost of $15 per unit. On December 28, 2011 the company made its last sale for the year when it sold 10 units. Which inventory cost flow assumption will cause the $15 cost per unit to be expensed as part of the year 2011's cost of goods sold?

    LIFO Periodic
    Right!
    Under LIFO periodic the cost of the last purchase during the accounting period is expensed first, even if the item was not the unit physically sold.
    LIFO Perpetual
    Wrong.
    Under LIFO periodic the cost of the last purchase during the accounting period is expensed first, even if the item was not the unit physically sold. (Under LIFO perpetual the cost of the last purchase AS OF THE TIME OF THE SALE is expensed.)
    Neither
    Wrong.
    Try another answer.
  9. Use the following information for questions 9 through 14:
    A company purchased merchandise to be resold at increasing costs during the year 2011. The purchases were made at the following costs...



    The company sold 10 items at the end of each month.
  10. 9. What are the number of units and the cost of the goods available for sale?
    __________
    150
    units     $
    __________
    $1,770. This amount will be divided up between the cost of goods sold and the ending inventory. It can serve as a check figure.
    cost of goods available for sale
  11. 10.

    Assuming the LIFO periodic cost flow assumption, what will be the company's cost of goods sold for the 120 items sold in 2011?

    $1,380
    Wrong.
    See the calculations for $1,460.
    $1,386
    Wrong.
    See the calculations for $1,460.
    $1,400
    Wrong.
    See the calculations for $1,460.
    $1,460
    Right!
    LIFO periodic first matches to current period sales revenues the most recent costs of the period followed by the next to most recent, etc. In the year 2011 a total of 120 units were sold, so LIFO periodic requires that we select the last cost of 2011 first and keep 'peeling away' the costs until we reach a total of 120 units. This means we will expense to the cost of goods sold: 50 units at $13 + 40 units at $12 + 30 units at $11. This amounts to $650 + $480 + $330 = $1,460 for the 120 units sold.

    [The cost remaining in Inventory will be 10 units at $11 + 20 units at $10 = $110 + $200 = $310. This amount of $310 plus the $1,460 of cost of goods sold shown above = $1,770 the cost of goods available.]
  12. 11.

    Assuming the FIFO periodic cost flow assumption, what will be the company's cost of goods sold for the 120 items sold in 2011?

    $1,380
    Right!
    FIFO periodic (and perpetual) means that you first match the first or oldest costs with the current period's sales. For the 120 units sold in 2011 the cost of goods sold under the FIFO cost flow will be 20 units at $10 PLUS 40 units at $11 PLUS 40 units at $12 PLUS 20 units at $13 = $200 + $440 + $480 + $260 = $1,380.

    [The cost of goods remaining in Inventory will be 30 units at $13 = $390. This cost of $390 plus the cost of goods sold of $1,380 = $1,770 the cost of goods available.]
    $1,386
    Wrong.
    See the calculations for $1,380.
    $1,410
    Wrong.
    See the calculations for $1,380.
    $1,460
    Wrong.
    See the calculations for $1,380.
  13. 12.

    Assuming the periodic weighted-average cost flow assumption, what is the company's cost of goods sold for the 120 items sold in 2011?

    $1,386
    Wrong.
    See the calculations for $1,416.
    $1,410
    Wrong.
    See the calculations for $1,416.
    $1,416
    Right!
    Under the periodic method, the average cost is really a weighted-average determined by taking the $1,770 of cost of goods available and dividing it by the 150 units available for a weighted-average of $11.80 per unit. The $11.80 is applied to both the units sold and to the units remaining in Inventory. The cost of goods sold is 120 units X $11.80 = $1,416.

    [The cost of goods remaining in Inventory will be 30 units at $11.80 = $354. This cost of $354 plus the cost of goods sold of $1,416 = $1,770 which is the cost of goods available.]
    $1,460
    Wrong.
    See the calculations for $1,416.
  14. 13.

    Assuming the LIFO perpetual cost flow assumption, what will be the company's cost of goods sold for the 120 items sold in 2011?

    $1,386
    Wrong.
    See the calculations for $1,410.
    $1,410
    Right!
    Under LIFO perpetual you remove from Inventory the latest cost as of the time of the sale, and that cost goes to the cost of goods sold. Here is how the costs flow out of Inventory and onto the income statement as the Cost of Goods Sold under LIFO perpetual:
    [At Dec. 31 the ending inventory cost will be: (10 units at $10 each = $100) + 20 units at $13 each = $260) = $360. This $360 plus the Cost of Goods Sold of $1,410 = $1,770 which is the cost of goods available.] Note the difference between this and LIFO periodic in Item 10.
    $1,416
    Wrong.
    See the calculations for $1,410.
    $1,460
    Wrong.
    See the calculations for $1,410.
  15. 14.

    Assuming the perpetual moving-average cost flow assumption, what is the company's cost of goods sold for the 120 items sold in 2011?

    $1,386
    Right!
    Under the perpetual moving-average cost flow assumption, a new average cost is developed whenever additional items are added to the Inventory. When goods are sold, Inventory is reduced by moving-average cost per unit at the time of the sale. The costs removed from Inventory will move onto the income statement as the Cost of Goods Sold (COGS) as follows:

    Jan. 25 purchase: new avg. cost of $10.67 (20 units at $10, 40 units at $11)
    COGS on Jan 31, Feb 28, Mar 31, Apr 30, May 31= 50 units sold X avg. cost of $10.67 = $533.50
    June 20 purchase: new avg. cost of $11.73 (10 units at $10.67, 40 units at $12)
    COGS on June 30, July 31, Aug 31, Sep 30 = 40 units sold X avg. cost of $11.73 = $469.20
    Oct. 10 purchase: new avg. cost of $12.78 (10 units at $11.73, 50 units at $13)
    COGS on Oct 31, Nov 30, Dec 31 = 30 units sold X $12.78 = $383.40
    Total Cost of Goods Sold = $1,386.10

    (At Dec. 31 the ending inventory cost will be: 30 units at $12.78 = $383.40. This $383.40 plus the Cost of Goods Sold of $1,386.10 = $1,769.50 which is within $0.50 of the cost of goods available. This small difference is due to rounding the per unit costs to two decimal places.)
    $1,410
    Wrong.
    See the calculations for $1,386.
    $1,416
    Wrong.
    See the calculations for $1,386.
    $1,460
    Wrong.
    See the calculations for $1,386.
  16. 15.

    A company's inventory was destroyed in a fire on January 28, 2012. The company's December 31, 2011 inventory had a cost of $40,000. The company's gross profit has consistently been 30% of sales. During January the company purchased merchandise costing $36,000 and sales of $50,000 at regular selling prices. What is the estimated cost of the inventory that was destroyed on January 28, 2012?

    $26,000
    Wrong.
    See the calculations for $41,000.
    $35,000
    Wrong.
    See the calculations for $41,000.
    $41,000
    Right!
    The solution can be in the format of a multiple-step income statement for the period of January 1 through January 28:



    The ending inventory is the amount/difference between the cost of goods available and the cost of goods sold, or $41,000.

    * or Sales minus Gross Profit.
  17. 16.

    A retailer has the following information:



    The estimated cost of inventory to be shown on the retailer's January 31, 2012 balance sheet is

    $15,000
    Right!
    Under the retail method nearly all the amounts are given and you need to sort them into the cost column or into the retail column. The Goods Available line is very important, as it is also the average cost to retail ratio.



    *$20,000 at retail times $27,000/$36,000
    $16,000
    Wrong.
    See the calculations for $15,000.
    $20,000
    Wrong.
    See the calculations for $15,000.
  18. 17.

    A company has properly recorded all of its purchases of merchandise inventory, but made an error when counting its ending inventory. As a result of the error the company's Inventory account is overstated by $24,000. (This means that the amount in the Inventory account is too high by $24,000.) What is the impact of this error on the company's income statement? Specifically, the company's reported profit (ignoring income tax expense) in the period of the error is...

    Too High
    Right!
    The company's profits before income taxes are too high by $24,000 because too much of the cost of the goods available went to the balance sheet account Inventory. This meant that too little of costs went to the income statement item called Cost of Goods Sold. With too little Cost of Goods Sold being matched with Sales on the current period's income statement, the profit is too high by $24,000.You might think of the accounting equation. If the asset Inventory is too big, another part of the accounting equation is improper. In this case assets were overstated, and owner's (stockholders') equity is overstated as a result of the current period's profit being overstated.
    Too Low
    Wrong.
    See the answer for Too High.
    Not Affected
    Wrong.
    See the answer for Too High.
  19. 18.

    A retailer's inventory cost should include freight-in on the merchandise purchased with terms FOB shipping point?

    True
    Right!
    The cost of inventory is the cost paid to the supplier plus all costs necessary to get the merchandise in place and ready for sale including freight-in.
    False
    Wrong.
  20. 19. Net Purchases is Gross Purchases minus Purchase Returns and Allowances and
    __________
    Purchase Discounts
    .
  21. 20. The difference between the Cost of Goods Available and the Cost of Goods Sold is
    __________
    Ending Inventory
    .

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