20 Jan Ending inventory will

ACC556 Financial Accounting for Managers

CHAPTER 6 EXERCISE

Question 1 The LIFO reserve is

Answers:

the difference between the value of the inventory under LIFO and the value under FIFO.

an amount used to adjust inventory to the lower of cost or market.

the difference between the value of the inventory under LIFO and the value under average cost.

the amount used to adjust inventory to history cost.

Question 2 If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions.

Answers:

True

False

Question 3 Raw materials inventories are the goods that a manufacturing company has completed and are ready to be sold to customers.

Answers:

True

False

Question 4 Noise Makers Inc has the following inventory data:

July 1 Beginning inventory 20 units at $19 $ 380

7 Purchases 70 units at $20 1,400

22 Purchases 10 units at $22 220

$2,000

A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the average cost method, the value of ending inventory is

Answers:

$620.

$640.

$651.

$660.

Question 5 Which statement concerning lower of cost or market (LCM) is in?

Answers:

LCM is an example of a company choosing the accounting method that will be least likely to overstate assets and income.

Under the LCM basis, market does not apply because assets are always recorded and maintained at cost.

The LCM basis uses current replacement cost because a decline in this cost usually leads to a decline in the selling price of the inventory item.

LCM is applied after one of the cost flow assumptions has been applied.

Question 6 Jenks Company developed the following information about its inventories in applying the lower of cost or market (LCM) basis in valuing inventories:

Product Cost Market

A $57,000 $60,000

B 40,000 38,000

C 80,000 81,000

If Jenks applies the LCM basis, the value of the inventory reported on the balance sheet would be

Answers:

$177,000.

$179,000.

$175,000.

$181,000.

Question 7 Inventory costing methods place primary reliance on assumptions about the flow of

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good.

costs.

resale prices.

values.

Question 8 Selection of an inventory costing method by management does not usually depend on

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the fiscal year end.

income statement effects.

balance sheet effects.

tax effects.

Question 9 Many companies use just-in-time inventory methods. Which of the following is not an advantage of this method?

Answers:

It limits the risk of having obsolete items in inventory.

Companies may not have quantities to meet customer demand.

It lowers inventory levels and costs.

Companies can respond to individual customer requests.

Question 10 In periods of rising prices, which is an advantage of using the LIFO inventory costing method?

Answers:

Ending inventory will include latest (most recent) costs and thus be more realistic.

Cost of goods sold will include latest (most recent) costs and thus will be more realistic.

Net income will be the highest and thus reflect the prosperity of the company.

Phantom profits are reported.

Question 11 Which of the following should not be included in the physical inventory of a company?

Answers:

Goods held on consignment from another company.

Goods in transit from another company shipped FOB shipping point.

Goods shipped on consignment to another company.

All of these answer choices should be included.

Question 12 The LIFO method is rarely used because most companies do not sell the last goods they purchase first.

Answers:

True

False

Question 13 Goods held on consignment should be included in the consignor’s ending inventory.

Answers:

True

False

Question 14 A low number of days in inventory may indicate all of the following except

Answers:

Sales opportunities may be lost because of inventory shortages.

There is less chance of having obsolete inventory items.

The company has fewer funds tied up in inventory.

Management has achieved the best balance between too much and too little inventory levels.

Question 15 At December 31, 2014 Howell Company’s inventory records indicated a balance of $858,000. Upon further investigation it was determined that this amount included the following:

• $168,000 in inventory purchases made by Howell shipped from the seller 12/27/14 terms FOB destination, but not due to be received until January 2nd

• $111,000 in goods sold by Howell with terms FOB destination on December 27th. The goods are not expected to reach their destination until January 6th.

• $9,000 of goods received on consignment from Westwood Company

What is Howell’ sending inventory balance at December 31, 2014?

Answers:

$690,000

$849,000

$570,000

$681,000

Question 16Match the items below by entering the appropriate code letter in the space provided.

Question

Selected Match

Merchandise Inventory

Goods ready for sale to customers by retailers and wholesalers.

Work in process

Goods that are only partially completed in a manufacturing company.

FOB shipping point

Title to the goods transfers when the public carrier accepts the goods from the seller.

FOB destination

Title to goods transfers when the goods are delivered to the buyer.

Specific identification method

Tracks the actual physical flow for each inventory item available for sale.

First-in, first-out (FIFO) method

Ending inventory valuation consists of the most recent inventory purchases.

Last-in, first-out (LIFO) method

Cost of goods sold consists of the most recent inventory purchases.

Average cost method

The same unit cost is used to value ending inventory and cost of goods sold.

LIFO reserve

The difference between inventory reported using LIFO and inventory using FIFO.

Inventory turnover ratio

Measures the number of times the inventory sold during the period.

Question 17 Which of the following statements iswith respect to inventories?

Answers:

The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold.

It is generally good business management to sell the most recently acquired goods first.

Under FIFO, the ending inventory is based on the latest units purchased.

FIFO seldom coincides with the actual physical flow of inventory.

Question 18 Use the following information regarding Black Company and Red Company to answer the question “Which of the following is Red Company's “cost of goods sold” for 2014 (to the closest dollar)?” Hint: The Ending Inventory of 1 year is the Beginning Inventory of the next year.

Year Inventory Turnover Ratio Ending Inventory

Black Company 2012 $26,340

2013 10.7 $29,890

2014 10.2 $30,100\

Red Company 2012 $25,860

2013 9.0 $24,750

2014 9.5 $22,530

Answers:

$222,684

$235,125

$224,580

$214,035