# 10.8: Practice Questions

## Multiple Choice

1.

LO 10.1If a company has four lots of products for sale, purchase 1 (earliest) for $17, purchase 2 (middle) for$15, purchase 3 (middle) for $12, and purchase 4 (latest) for$14, which cost would be assumed to be sold first using LIFO costing?

1. $17 2.$15
3. $12 4.$14
2.

LO 10.1If a company has three lots of products for sale, purchase 1 (earliest) for $17, purchase 2 (middle) for$15, purchase 3 (latest) for $12, which of the following statements is true? 1. This is an inflationary cost pattern. 2. This is a deflationary cost pattern. 3. The next purchase will cost less than$12.
4. None of these statements can be verified.
3.

LO 10.1When inventory items are highly specialized, the best inventory costing method is ________.

1. specific identification
2. first-in, first-out
3. last-in, first-out
4. weighted average
4.

LO 10.1If goods are shipped FOB destination, which of the following is true?

1. Title to the goods will transfer as soon as the goods are shipped.
2. FOB indicates that a price reduction has been applied to the order.
3. The seller must pay the shipping.
4. The seller and the buyer will each pay 50% of the cost.
5.

LO 10.1On which financial statement would the merchandise inventory account appear?

1. balance sheet
2. income statement
3. both balance sheet and income statement
4. neither balance sheet nor income statement
6.

LO 10.1When would using the FIFO inventory costing method produce higher inventory account balances than the LIFO method would?

1. inflationary times
2. deflationary times
3. always
4. never
7.

LO 10.1Which accounting rule serves as the primary basis for the lower-of-cost-or-market methodology for inventory valuation?

1. conservatism
2. consistency
3. optimism
4. pessimism
8.

LO 10.1Which type or types of inventory timing system (periodic or perpetual) requires the user to record two journal entries every time a sale is made.

1. periodic
2. perpetual
3. both periodic and perpetual
4. neither periodic nor perpetual
9.

LO 10.2Which of these statements is false?

1. If cost of goods sold is incorrect, ending inventory is usually incorrect too.
2. beginning inventory + purchases = cost of goods sold
3. ending inventory + cost of goods sold = goods available for sale
4. goods available for sale – beginning inventory = purchases
10.

LO 10.3Which inventory costing method is almost always done on a perpetual basis?

1. specific identification
2. first-in, first-out
3. last-in, first-out
4. weighted average
11.

LO 10.3Which of the following describes features of a perpetual inventory system?

1. Technology is normally used to record inventory changes.
2. Merchandise bought is recorded as purchases.
3. An adjusting journal entry is required at year end, to match physical counts to the asset account.
4. Inventory is updated at the end of the period.
12.

LO 10.4Which of the following financial statements would be impacted by a current-year ending inventory error, when using a periodic inventory updating system?

1. balance sheet
2. income statement
3. neither statement
4. both statements
13.

LO 10.4Which of the following would cause periodic ending inventory to be overstated?

1. Goods held on consignment are omitted from the physical count.
2. Goods purchased and delivered, but not yet paid for, are included in the physical count.
3. Purchased goods shipped FOB destination and not yet delivered are included in the physical count.
4. None of the above
14.

LO 10.5Which of the following indicates a positive trend for inventory management?

1. increasing number of days’ sales in inventory ratio
2. increasing inventory turnover ratio
3. increasing cost of goods sold
4. increasing sales revenue

## Questions

1.

LO 10.1What is meant by the term gross margin?

2.

LO 10.1Can a business change from one inventory costing method to another any time they wish? Explain.

3.

LO 10.1Why do consignment arrangements present a challenge in inventory management? Explain.

4.

LO 10.1Explain the difference between the terms FOB destination and FOB shipping point.

5.

LO 10.1When would a company use the specific identification method of inventory cost allocation?

6.

LO 10.1Explain why a company might want to utilize the gross profit method or the retail inventory method for inventory valuation.

7.

LO 10.1Describe the goal of the lower-of-cost-or-market concept.

8.

LO 10.1Describe two separate and distinct ways to calculate goods available for sale.

9.

LO 10.3Describe costing inventory using first-in, first-out. Address the different treatment, if any, that must be given for periodic and perpetual inventory updating.

10.

LO 10.3Describe costing inventory using last-in, first-out. Address the different treatment, if any, that must be given for periodic and perpetual inventory updating.

11.

LO 10.3Describe costing inventory using weighted average. Address the different treatment, if any, that must be given for periodic and perpetual inventory updating.

12.

LO 10.4How long does it take an inventory error affecting ending inventory to correct itself in the financial statements? Explain.

13.

LO 10.4What type of issues would arise that might cause inventory errors?

14.

LO 10.5Explain the difference between the flow of cost and the flow of goods as it relates to inventory.

15.

LO 10.5What insights can be gained from inventory ratio analysis, such as inventory turnover ratio and number of days’ sales in inventory ratio?

## Exercise Set A

EA1.

LO 10.1Calculate the goods available for sale for Atlantis Company, in units and in dollar amounts, given the following facts about their inventory for the period:

EA2.

LO 10.1E Company accepts goods on consignment from R Company and also purchases goods from S Company during the current month. E Company plans to sell the merchandise to customers during the following month. In each of these independent situations, who owns the merchandise at the end of the current month and should therefore include it in their company’s ending inventory? Choose E, R, or S.

1. Goods ordered from R, delivered and displayed on E’s showroom floor at the end of the current month.
2. Goods ordered from S, in transit, with shipping terms FOB destination.
3. Goods ordered from R, in transit, with no stated shipping terms.
4. Goods ordered from S, delivered and displayed on E’s showroom floor at the end of the current month, with shipping terms FOB destination.
5. Goods ordered from S, in transit, with shipping terms FOB shipping point.
EA3.

LO 10.1The following information is taken from a company’s records. Applying the lower-of-cost-or-market approach, what is the correct value that should be reported on the balance sheet for the inventory?

EA4.

LO 10.2Complete the missing piece of information involving the changes in inventory, and their relationship to goods available for sale, for the two years shown:

EA5.

LO 10.2Akira Company had the following transactions for the month.

Calculate the ending inventory dollar value for the period for each of the following cost allocation methods, using periodic inventory updating. Provide your calculations.

1. first-in, first-out (FIFO)
2. last-in, first-out (LIFO)
3. weighted average (AVG)
EA6.

LO 10.2Akira Company had the following transactions for the month.

Calculate the gross margin for the period for each of the following cost allocation methods, using periodic inventory updating. Assume that all units were sold for $25 each. Provide your calculations. 1. first-in, first-out (FIFO) 2. last-in, first-out (LIFO) 3. weighted average (AVG) EA7. LO 10.2Prepare journal entries to record the following transactions, assuming periodic inventory updating and first-in, first-out (FIFO) cost allocation. EA8. LO 10.3Calculate the cost of goods sold dollar value for A65 Company for the month, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for first-in, first-out (FIFO). EA9. LO 10.3Calculate the cost of goods sold dollar value for A66 Company for the month, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for last-in, first-out (LIFO). EA10. LO 10.3Calculate the cost of goods sold dollar value for A67 Company for the month, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for weighted average (AVG). EA11. LO 10.3Prepare journal entries to record the following transactions, assuming perpetual inventory updating and first-in, first-out (FIFO) cost allocation. Assume no beginning inventory. EA12. LO 10.3Prepare Journal entries to record the following transactions, assuming perpetual inventory updating, and last-in, first-out (LIFO) cost allocation. Assume no beginning inventory. EA13. LO 10.4If a group of inventory items costing$15,000 had been omitted from the year-end inventory count, what impact would the error have on the following inventory calculations? Indicate the effect (and amount) as either (a) none, (b) understated $______, or (c) overstated$______.

Inventory Item None or amount? Understated or overstated?
Beginning Inventory
Purchases
Goods Available for Sale
Ending Inventory
Cost of Goods Sold

Table10.1

EA14.

LO 10.4If Wakowski Company’s ending inventory was actually $86,000 but was adjusted at year end to a balance of$68,000 in error, what would be the impact on the presentation of the balance sheet and income statement for the year that the error occurred, if any?

EA15.

LO 10.4Shetland Company reported net income on the year-end financial statements of $125,000. However, errors in inventory were discovered after the reports were issued. If inventory was understated by$15,000, how much net income did the company actually earn?

EA16.

LO 10.5Compute Altoona Company’s (a) inventory turnover ratio and (b) number of days’ sales in inventory ratio, using the following information.

EA17.

LO 10.5Complete the missing pieces of McCarthy Company’s inventory calculations and ratios.

## Exercise Set B

EB1.

LO 10.1Calculate the goods available for sale for Soros Company, in units and in $(dollar amounts), given the following facts about their inventory for the period. EB2. LO 10.1X Company accepts goods on consignment from C Company, and also purchases goods from P Company during the current month. X Company plans to sell the merchandise to customers during the following month. In each of these independent situations, who owns the merchandise at the end of the current month, and should therefore include it in their company’s ending inventory? Choose X, C, or P. 1. Goods ordered from P, in transit, with shipping terms FOB destination. 2. Goods ordered from P, in transit, with shipping terms FOB shipping point. 3. Goods ordered from P, inventory in stock, held in storage until floor space is available. 4. Goods ordered from C, inventory in stock, set aside for customer pickup and payments to finalize sale. EB3. LO 10.1Considering the following information, and applying the lower-of-cost-or-market approach, what is the correct value that should be reported on the balance sheet for the inventory? EB4. LO 10.2Complete the missing piece of information involving the changes in inventory, and their relationship to goods available for sale, for the two years shown. EB5. LO 10.2Bleistine Company had the following transactions for the month. Calculate the ending inventory dollar value for each of the following cost allocation methods, using periodic inventory updating. Provide your calculations. 1. first-in, first-out (FIFO) 2. last-in, first-out (LIFO) 3. weighted average (AVG) EB6. LO 10.2Bleistine Company had the following transactions for the month. Calculate the gross margin for the period for each of the following cost allocation methods, using periodic inventory updating. Assume that all units were sold for$50 each. Provide your calculations.

1. first-in, first-out (FIFO)
2. last-in, first-out (LIFO)
3. weighted average (AVG)
EB7.

LO 10.2Prepare journal entries to record the following transactions, assuming periodic inventory updating and first-in, first-out (FIFO) cost allocation.

EB8.

LO 10.3Calculate the cost of goods sold dollar value for B65 Company for the month, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for first-in, first-out (FIFO).

EB9.

LO 10.3Calculate the cost of goods sold dollar value for B66 Company for the month, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for last-in, first-out (LIFO).

EB10.

LO 10.3Calculate the cost of goods sold dollar value for B67 Company for the month, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for weighted average (AVG).

EB11.

LO 10.3Prepare journal entries to record the following transactions, assuming perpetual inventory updating and first-in, first-out (FIFO) cost allocation. Assume no beginning inventory.

EB12.

LO 10.3Prepare journal entries to record the following transactions, assuming perpetual inventory updating and last-in, first-out (LIFO) cost allocation. Assume no beginning inventory.

EB13.

LO 10.4If a group of inventory items costing $3,200 had been double counted during the year-end inventory count, what impact would the error have on the following inventory calculations? Indicate the effect (and amount) as either (a) none, (b) understated$______, or (c) overstated $______. Inventory Item None or amount? Understated or overstated? Beginning Inventory Purchases Goods Available for Sale Ending Inventory Cost of Goods Sold Table10.2 EB14. LO 10.4If Barcelona Company’s ending inventory was actually$122,000, but the cost of consigned goods, with a cost value of $20,000 were accidentally included with the company assets, when making the year-end inventory adjustment, what would be the impact on the presentation of the balance sheet and income statement for the year that the error occurred, if any? EB15. LO 10.4Tanke Company reported net income on the year-end financial statements of$850,200. However, errors in inventory were discovered after the reports were issued. If inventory was overstated by $21,000, how much net income did the company actually earn? EB16. LO 10.5Compute Westtown Company’s (A) inventory turnover ratio and (B) number of days’ sales in inventory ratio, using the following information. EB17. LO 10.5Complete the missing pieces of Delgado Company’s inventory calculations and ratios. ## Problem Set A PA1. LO 10.1When prices are rising (inflation), which costing method would produce the highest value for gross margin? Choose between first-in, first-out (FIFO); last-in, first-out (LIFO); and weighted average (AVG). Evansville Company had the following transactions for the month. Calculate the gross margin for each of the following cost allocation methods, assuming A62 sold just one unit of these goods for$10,000. Provide your calculations.

1. first-in, first-out (FIFO)
2. last-in, first-out (LIFO)
3. weighted average (AVG)
PA2.

LO 10.2Trini Company had the following transactions for the month.

Calculate the ending inventory dollar value for each of the following cost allocation methods, using periodic inventory updating. Provide your calculations.

1. first-in, first-out (FIFO)
2. last-in, first-out (LIFO)
3. weighted average (AVG)
PA3.

LO 10.2Trini Company had the following transactions for the month.

Calculate the cost of goods sold dollar value for the period for each of the following cost allocation methods, using periodic inventory updating. Provide your calculations.

1. first-in, first-out (FIFO)
2. last-in, first-out (LIFO)
3. weighted average (AVG)
PA4.

LO 10.3Calculate the cost of goods sold dollar value for A74 Company for the sale on March 11, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for (a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) weighted average (AVG).

PA5.

LO 10.3Use the first-in, first-out (FIFO) cost allocation method, with perpetual inventory updating, to calculate (a) sales revenue, (b) cost of goods sold, and c) gross margin for A75 Company, considering the following transactions.

PA6.

LO 10.3Use the last-in, first-out (LIFO) cost allocation method, with perpetual inventory updating, to calculate (a) sales revenue, (b) cost of goods sold, and c) gross margin for A75 Company, considering the following transactions.

PA7.

LO 10.3Use the weighted-average (AVG) cost allocation method, with perpetual inventory updating, to calculate (a) sales revenue, (b) cost of goods sold, and c) gross margin for A75 Company, considering the following transactions.

PA8.

LO 10.3Prepare journal entries to record the following transactions, assuming perpetual inventory updating and first-in, first-out (FIFO) cost allocation. Assume no beginning inventory.

PA9.

LO 10.3Calculate a) cost of goods sold, b) ending inventory, and c) gross margin for A76 Company, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for first-in, first-out (FIFO).

PA10.

LO 10.3Calculate a) cost of goods sold, b) ending inventory, and c) gross margin for A76 Company, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for last-in, first-out (LIFO).

PA11.

LO 10.3Calculate a) cost of goods sold, b) ending inventory, and c) gross margin for A76 Company, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for weighted average (AVG).

PA12.

LO 10.3Compare the calculations for gross margin for A76 Company, based on the results of the perpetual inventory calculations using FIFO, LIFO, and AVG.

PA13.

LO 10.4Company Elmira reported the following cost of goods sold but later realized that an error had been made in ending inventory for year 2021. The correct inventory amount for 2021 was 32,000. Once the error is corrected, (a) how much is the restated cost of goods sold for 2021? and (b) how much is the restated cost of goods sold for 2022?

PA14.

LO 10.4Assuming a company’s year-end inventory were overstated by $5,000, indicate the effect (overstated/understated/no effect) of the error on the following balance sheet and income statement accounts. 1. Income Statement: Cost of Goods Sold 2. Income Statement: Net Income 3. Balance Sheet: Assets 4. Balance Sheet: Liabilities 5. Balance Sheet: Equity PA15. LO 10.5Use the following information relating to Shana Company to calculate the inventory turnover ratio and the number of days’ sales in inventory ratio. PA16. LO 10.5Use the following information relating to Clover Company to calculate the inventory turnover ratio, gross margin, and the number of days’ sales in inventory ratio, for years 2022 and 2023. ## Problem Set B PB1. LO 10.1When prices are falling (deflation), which costing method would produce the highest gross margin for the following? Choose first-in, first-out (FIFO); last-in, first-out (LIFO); or weighted average, assuming that B62 Company had the following transactions for the month. Calculate the gross margin for each of the following cost allocation methods, assuming B62 sold just one unit of these goods for$400. Provide your calculations.

1. first-in, first-out (FIFO)
2. last-in, first-out (LIFO)
3. weighted average (AVG)
PB2.

LO 10.2DeForest Company had the following transactions for the month.

Calculate the ending inventory dollar value for the period for each of the following cost allocation methods, using periodic inventory updating. Provide your calculations.

1. first-in, first-out (FIFO)
2. last-in, first-out (LIFO)
3. weighted average (AVG)
PB3.

LO 10.2DeForest Company had the following transactions for the month.

Calculate the ending inventory dollar value for the period for each of the following cost allocation methods, using periodic inventory updating. Provide your calculations.

1. first-in, first-out (FIFO)
2. last-in, first-out (LIFO)
3. weighted average (AVG)
PB4.

LO 10.3Calculate the cost of goods sold dollar value for B74 Company for the sale on November 20, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for (a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) weighted average (AVG).

PB5.

LO 10.3Use the first-in, first-out method (FIFO) cost allocation method, with perpetual inventory updating, to calculate (a) sales revenue, (b) cost of goods sold, and c) gross margin for B75 Company, considering the following transactions.

PB6.

LO 10.3Use the last-in, first-out method (LIFO) cost allocation method, with perpetual inventory updating, to calculate (a) sales revenue, (b) cost of goods sold, and c) gross margin for B75 Company, considering the following transactions.

PB7.

LO 10.3Use the weighted-average (AVG) cost allocation method, with perpetual inventory updating, to calculate (a) sales revenue, (b) cost of goods sold, and c) gross margin for B75 Company, considering the following transactions.

PB8.

LO 10.3Prepare journal entries to record the following transactions, assuming perpetual inventory updating, and last-in, first-out (LIFO) cost allocation. Assume no beginning inventory.

PB9.

LO 10.3Calculate a) cost of goods sold, b) ending inventory, and c) gross margin for B76 Company, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for first-in, first-out (FIFO).

PB10.

LO 10.3Calculate a) cost of goods sold, b) ending inventory, and c) gross margin for B76 Company, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for last-in, first-out (LIFO).

PB11.

LO 10.3Calculate a) cost of goods sold, b) ending inventory, and c) gross margin for B76 Company, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for weighted average (AVG).

PB12.

LO 10.3Compare the calculations for gross margin for B76 Company, based on the results of the perpetual inventory calculations using FIFO, LIFO, and AVG.

PB13.

LO 10.4Company Edgar reported the following cost of goods sold but later realized that an error had been made in ending inventory for year 2021. The correct inventory amount for 2021 was 12,000. Once the error is corrected, (a) how much is the restated cost of goods sold for 2021? and (b) how much is the restated cost of goods sold for 2022?

PB14.

LO 10.4Assuming a company’s year-end inventory were understated by $16,000, indicate the effect (overstated/understated/no effect) of the error on the following balance sheet and income statement accounts. 1. Income Statement: Cost of Goods Sold 2. Income Statement: Net Income 3. Balance Sheet: Assets 4. Balance Sheet: Liabilities 5. Balance Sheet: Equity PB15. LO 10.5Use the following information relating to Singh Company to calculate the inventory turnover ratio and the number of days’ sales in inventory ratio. PB16. LO 10.5Use the following information relating to Medinas Company to calculate the inventory turnover ratio, gross margin, and the number of days’ sales in inventory ratio, for years 2022 and 2023. ## Thought Provokers TP1. LO 10.1Search the SEC website (https://www.sec.gov/edgar/searchedga...anysearch.html) and locate the latest Form 10-K for a company you would like to analyze. When you are choosing, make sure the company sells a product (has inventory on the balance sheet and cost of goods sold on the income statement). Submit a short memo that states the following: 1. The name and ticker symbol of the company you have chosen. 2. Answer the following questions from the company’s statement of Form 10-K financial statements: • What amount of merchandise inventory does the company report on their balance sheet? • What amount of cost of goods sold does the company report on their income statement? Provide the weblink to the company’s Form 10-K, to allow accurate verification of your answers. TP2. LO 10.2Assume your company uses the periodic inventory costing method, and the inventory count left out an entire warehouse of goods that were in stock at the end of the year, with a cost value of$222,000. How will this affect your net income in the current year? How will it affect next year’s net income?

TP3.

LO 10.3Search the internet for recent news items (within the past year) relating to inventory issues. Submit a short memo describing what you found and explaining why it is important to the future of inventory accounting or management. For example, this can be related to technology, bar code, RFID, shipping, supply chain, logistics, or other inventory-related topics that are currently trending. Provide the weblink to the source of your information.

TP4.

LO 10.3Search the internet for information about the technological breakthrough relating to inventory issues, referred to as the Internet of Things (IoT). How do you think the development of such technology will change the way accountants manage inventory in the future? Provide the weblink to the source or sources of your information.

TP5.

LO 10.4Consider the dilemma you might someday face if you are the CFO of a company that is struggling to satisfy investors, creditors, stockholders, and internal company managers. All of these financial statement users are clamoring for higher profits and more net assets (also known as equity). If at some point, you suddenly found yourself not meeting the internal and external earnings and equity targets that these parties expect, you would probably search for some way to make the financial statements look better. What if your boss, the CEO, suggested that maybe you should make just one simple journal entry to record all the goods that your company is holding on consignment, as if that significant amount of goods were owned by your company? She might say that this action on your part would fix a lot of problems at once, since adding the consigned goods to merchandise inventory would simultaneously increase net assets on the balance sheet and increase net income on the income statement (since it would decrease cost of goods sold). How would you respond to this request?

Write a memo, detailing your willingness or not to embrace this suggestion, giving reasons behind your decision. Remember to exercise diplomacy, even if you must dissent from the opinion of a supervisor. Note that the challenge of the assignment is to keep your integrity intact while also keeping your job, if possible.

TP6.

LO 10.5Use a spreadsheet and the following excerpts from Hileah Company’s financial information to build a template that automatically calculates (A) inventory turnover and (B) number of days’ sales in inventory, for the year 2018.

TP7.

LO 10.5Search the SEC website (https://www.sec.gov/edgar/searchedga...anysearch.html) and locate the latest Form 10-K for a company you would like to analyze. Submit a short memo that states the following:

1. The name and ticker symbol of the company you have chosen.
2. Describe two items relating to inventory from the company’s notes to financial statements:
• one familiar item that you expected to be in the notes to the financial statement, based on this chapter’s coverage; and
• one unfamiliar item that you did not expect to be in the notes to the financial statements.
3. Provide the weblink to the company’s Form 10-K, to allow accurate verification of your answers