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Exam 7: Reporting and Interpreting Cost of Goods Sold and Inventory

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Question 61

True/False

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During periods of increasing unit costs, the LIFO inventory method results in lower income taxes.

A) True
B) False

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Question 62

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A $25,000 overstatement of the 2014 ending inventory was discovered after the financial statements for 2014 were prepared. Which of the following describes the effect of the inventory error on the 2014 financial statements?

A) Current assets were overstated and net income was understated.
B) Current assets were understated and net income was understated.
C) Current assets were overstated and net income was overstated.
D) Current assets were understated and net income was overstateD.An overstatement of ending inventory overstates current assets and understates cost of goods sold and therefore overstates net income.

E) A) and B)
F) All of the above

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Question 63

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Moore Company purchased an item for inventory that cost $20 per unit and was priced to sell at $30. It was determined that the replacement cost is $18 per unit. Using the lower of cost or market rule, what amount should be reported on the balance sheet for inventory?

Carrie Company sold merchandise with an invoice price of $1,000 to Underwood, Inc., with terms of 2/10, n/30. Which of the following is the correct entry to record the payment by Underwood Inc., within the 10 days if the company uses the periodic inventory system and the gross method to record purchases?

The LIFO inventory method allocates the oldest inventory purchase costs to cost of goods sold.

Which of the following is correct when, in the same year, beginning inventory is understated by $1,300 and ending inventory is understated by $700?

William Company uses the periodic inventory system and has provided the following data: $\begin{array} { l r r } & \text { Units } & \text { Amount } \\\text { Beginning inventory } & 6,000 & \$ 30,000 \\\text { Purchases } & 32,000 & 192,000 \\\text { Sales } & 28,000 & 280,000\end{array}$ Required:

Compute the missing amounts that are numbered in parentheses for the income statement of each independent case. (Hint: Each case need not be calculated in the numerical order of the missing numbers.) $\begin{array}{lrcr}&\text { Case A } & \text { Case B } & \text { Case C } \\\text { Sales revenue } & \$ 800 & \$ 800 & \$(9) \\\text { Beginning inventory } & 100 & (5) & 90 \\\text { Purchases } & 500 & 420 & (10) \\\text { Total goods available } \\\text { for sale }& (1) & (6) & (11)\\\text { Ending inventory } & 150 & 110 & 160 \\\text { Cost of goods sold } & (2) & (7) & 340 \\\text { Gross profit } & (3) & (8) & (12) \\\text { Expenses } & 300 & 400 & 420 \\\text { Net Income } & (4) & (50) & 60\end{array}$

A company reported the following information for its most recent year of operation: purchases, $100,000; beginning inventory, $20,000; and cost of goods sold, $110,000. How much was the company's ending inventory?

A company can use the LIFO inventory method for income tax purposes and the FIFO inventory method for financial reporting purposes during a given year.

Atomic Company did not record a December 2013 purchase of inventory on credit until January 2014. Assuming that the December 31, 2013 ending inventory was correctly determined, what is the effect of this error on the financial statements for the year ended December 31, 2013?

Boulder, Inc. is computing its inventory at December 31, 2014. The following information relates to the five major inventory items regularly stocked for resale. Required: Using the lower of cost or market rule, compute the total valuation for each inventory item at December 31, 2014, and the total inventory valuation.

McMillan Company uses the periodic inventory system. It has compiled the following information in order to prepare the financial statements at December 31, 2014: $\begin{array}{lr}\text { Gross sales during 2014 } & \$ 2,000,000 \\\text { Sales returns and allowances during 2014 } & 50,000 \\\text { Beginning inventory, January 1,2014 } & 100,000 \\\text { Ending inventory, December 31, 2014 } & 120,000 \\\text { Purchases during 2014 } & 750,000\end{array}$ Required: Calculate each of the following: A. Cost of goods available for sale B. Cost of goods sold C. Gross profit

The records of Jimmy Company show 2014 purchases of $90,000. An actual count revealed a 2014 ending inventory of $8,000. The 2014 beginning inventory was $5,000. What was cost of goods sold for 2014?

Which of the following statements is correct?

Inventory turnover is calculated as cost of goods sold divided by average inventory.

Rio Company uses the FIFO inventory costing method and has a perpetual inventory system. All purchases and sales were cash transactions. The records reflected the following for January, 2014: $\begin{array} { l c c } & \text { Units } & \text { Unit Cost } \\\text { Beginning inventory } & 100 & \$ 1.00 \\\text { Purchase, January } 6 & 200 & 1.20 \\\text { Sale, January } 10 \text { (at } \$ 2.40 \text { per unit) } & 110 & \\\text { Purchase, January 14 } & 100 & 1.30 \\\text { Sale, January } 29 \text { (at } \$ 2.60 \text { per unit) } & 170 &\end{array}$ Required: Determine the following: A. 2014 cost of goods available for sale B. 2014 cost of goods sold C. 2014 ending inventory D. The journal entries for January 6 and 10

An overstatement of the 2013 ending inventory results in an understatement of net income during 2014.

Which of the following statements is correct?

During periods of decreasing unit costs, use of the FIFO inventory method results in lower gross profit than would use of the LIFO method.