ch08 valuation of inventories 2

8/20/2019 Ch08 Valuation of Inventories 2

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CHAPTER 8

VALUATION OF INVENTORIES:A COST-BASIS APPROACH

TRUE-FALSE—Conceptual

Anse! No" #esc!$pt$onT 1. Work-in-process inventory.F 2. Merchandising and manufacturing inventory accounts.F 3. Perpetual inventory system.F . !etermining "hen title passes.T #. $nventory errors.T %. &verstatement of purchases and ending inventory.F '. Period vs. product costs.T (. )eporting Purchase !iscounts *ost.F +. ,ost flo" assumption.T 1. F$F& periodic vs. perpetual system.T 11. Purchase commitments.F 12. sing *$F& for reporting purposes.F 13. *$F& li/uidation.T 1. *$F& li/uidations.T 1#. !ollar-value *$F&F 1%. !ollar-value *$F& method.F 1'. *$F&-F$F& comparison.T 1(. *$F& conformity rule.F 1+. 0election of inventory method.T 2. ppropriateness of *$F&.

%ULTIPLE CHOICE—Conceptual

Anse! No" #esc!$pt$on

d 21. ntries under perpetual inventory system. 22. ,lassification of goods in transit.a 23. ,lassification of goods in transit.d 2. $dentify inventory o"nership.d 2#. $dentify a product financing arrangement.

a 2%. $dentify o"nership under product financing arrangement. 2'. ,lassification of goods on consignment.c 02(. 4aluation of inventories. P2+. ,lassification of eginning inventory. P3. ffect of eginning inventory overstated.d 031. ffect of understating purchases. 32. ffect of recording merchandise on consignment.a 33. ffect of ending inventory overvaluation.a 3. ffect of inventory errors on income.d 3#. ffect of understating purchases and ending inventory.


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Test Ban& 'o! Inte!(e)$ate Account$n*+ Tel't, E)$t$on

%ULTIPLE CHOICE—Conceptual cont".

Anse! No" #esc!$pt$on 3%. $dentification of product costs.d 3'. !etermine product costs. 3(. $nterest capitali5ation in manufacturing inventory.d 3+. !etermine cost of purchased inventory6 using net method.a . !etermine cost of purchased inventory6 using gross method.a 1. )ecording inventory purchases at gross or net amounts.c 2. )ecording inventory purchases at gross or net amounts.a 3. 7ature of trade discounts.d 0. $dentifying inventoriale costs. P#. Method appro8imating current cost.a %. verage cost inventory valuation. '. Weighted-average inventory method.a (. 7ature of F$F& valuation of inventory. +. Flo" of costs in a manufacturing situation.a #. F$F& and decreasing prices. #1. F$F& and increasing prices.a #2. F$F& and increasing prices. #3. F$F& and *$F& inventory assumptions.c #. *$F& and increasing prices.d ##. 9no"ledge of inventory valuation methods.d #%. Periodic and perpetual inventory methods.d #'. *$F& reserve account classification.a 0#(. !ollar-value *$F& method.a 0#+. $dentifying advantages of *$F&.d %. *$F& for ta8 purposes and e8ternal reporting.c %1. *$F& advantages.

P These /uestions also appear in the Prolem-0olving 0urvival :uide.0 These /uestions also appear in the 0tudy :uide.

%ULTIPLE CHOICE—Co(putat$onal

Anse! No" #esc!$pt$onc %2. ,lassification as inventory.c %3. ,lassification as inventory.d %. Perpetual inventory method.d %#. Perpetual inventory method.d %%. ffect of inventory and depreciation errors on income.

a %'. ffect of inventory and depreciation errors on retained earnings.a %(. ffect of inventory errors on "orking capital.d %+. ,alculate cost of goods availale for sale.d '. ccounting for a purchase return ;net method


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4aluation of $nventories> ,ost-?asis pproach


Anse! No" #esc!$pt$ona ''. Perpetual inventory@*$F& valuation.c '(. Perpetual inventory@*$F& valuation.d '+. Perpetual inventory@F$F& valuation. (. Perpetual inventory@average cost valuation.c (1. ,ost flo" assumptions. (2. ,ost flo" assumptions.c (3. *$F& reserve.c (. *$F& reserve. (#. *$F& li/uidation. (%. *$F& li/uidationc ('. !ollar-value *$F&. ((. !ollar-value *$F&.c (+. !ollar-value *$F&. +. !ollar-value *$F&.c +1. ,alculate ending inventory using dollar-value *$F&.c +2. ,alculate ending inventory using dollar-value *$F&.a +3. ,alculate ending inventory using dollar-value *$F&. +. ,alculate price inde8 using doule e8tension method.

%ULTIPLE CHOICE—CPA A)apte)

Anse! No" #esc!$pt$on

a +#. $dentification of inventory costs.c +%. !etermine cost of purchased inventory.d +'. !etermine cost of sales. +(. ,alculate ccounts Payale at year end.d ++. ,alculate ccounts Payale at year end.a 1. ,alculate ccounts Payale at year end. 11. !etermine cost of purchased inventory.c 12. !etermine cost of purchased inventory.c 13. ,alculate unit cost using moving-average method.a 1. Periodic and perpetual inventory methods.c 1#. F$F& and *$F& "ith increasing prices.c 1%. ,alculate ending inventory using *$F&.a 1'. !ollar-value *$F& and the doule e8tension approach. 1(. ,alculate ending inventory using dollar-value *$F&.

E0ERCISES

Ite( #esc!$pt$on

(-1+ )ecording purchases at net amounts.(-11 )ecording purchases at net amounts.(-111 ,omparison of F$F& and *$F&.(-112 F$F& and *$F& inventory methods.(-113 F$F& and *$F& periodic inventory methods.(-11 Perpetual *$F&.

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E0ERCISES cont".

Ite( #esc!$pt$on(-11# Perpetual *$F& and periodic F$F&.(-11% nalysis of gross profit.(-11' !ollar-value *$F&.

PROBLE%S

Ite( #esc!$pt$onP(-11( $nventory cut-off.P(-11+ nalysis of errors.P(-12 ccounting for purchase discounts.P(-121 $nventory methods.P(-122 !ollar-value *$F&.P(-123 !ollar-value *$F&.

CHAPTER LEARNIN2 OB3ECTIVES

1. $dentify ma=or classifications of inventory.

2. !istinguish et"een perpetual and periodic inventory systems.

3. $dentify the effects of inventory errors on the financial statements.

. nderstand the items to include as inventory cost.

#. !escrie and compare the cost flo" assumptions used to account for inventories.

%. 8plain the significance and use of a *$F& reserve.

'. nderstand the effect of *$F& li/uidations.

(. 8plain the dollar-value *$F& method.

+. $dentify the ma=or advantages and disadvantages of *$F&.

1. nderstand "hy companies select given inventory methods.

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SU%%AR5 OF LEARNIN2 OB3ECTIVES B5 6UESTIONS

Item Type Item Type Item Type Item Type Item Type Item Type Item Type

Lea!n$n* O7ect$9e

1. TF 2. TF %2. M, %3. M,Lea!n$n* O7ect$9e /

3. TF 22. M, 2#. M, 02(. M, %#. M, +'. M, 1. M,. TF 23. M, 2%. M, P2+. M, +#. M, +(. M, 11(. P

21. M, 2. M, 2'. M, %. M, +%. M, ++. M,

Lea!n$n* O7ect$9e 1

#. TF P3. M, 32. M, 3. M, %%. M, %(. M,%. TF 031. M, 33. M, 3#. M, %'. M, 11+. P

Lea!n$n* O7ect$9e 4

'. TF 3'. M, . M, 3. M, '. M, 11. M, 11. (. TF 3(. M, 1. M, 0. M, '1. M, 12. M, 12. P

3%. M, 3+. M, 2. M, %+. M, +(. M, 1+. Lea!n$n* O7ect$9e ;

+. TF (. M, #3. M, '3. M, '(. M, 13. M, 112. 1. TF +. M, #. M, '. M, '+. M, 1. M, 113.

P#. M, #. M, ##. M, '#. M, (. M, 1#. M, 11. %. M, #1. M, #%. M, '%. M, (1. M, 1%. M, 11#. '. M, #2. M, '2. M, ''. M, (2. M, 111. 121. P

Lea!n$n* O7ect$9e <

11. TF 12. TF #'. M, (3. M, (. M,

Lea!n$n* O7ect$9e =

13. TF 1. TF 11%. Lea!n$n* O7ect$9e 8

1#. TF ('. M, +. M, +3. M, 1(. M, 123. P1%. TF ((. M, +1. M, +. M, 11'.

0#(. M, (+. M, +2. M, 1'. M, 122. P

Lea!n$n* O7ect$9e >

1'. TF 1(. TF 0#+. M, %. M, %1. M,

Lea!n$n* O7ect$9e ?

1+. TF 2. TF 111.

7ote> TF A True-FalseM, A Multiple ,hoice A 8erciseP A Prolem

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TRUE FALSE—Conceptual

1. manufacturing concern "ould report the cost of units only partially processed asinventory in the alance sheet.

2. ?oth merchandising and manufacturing companies normally have multiple inventoryaccounts.

3. When using a perpetual inventory system6 freight charges on goods purchased aredeited to Freight-$n.

. $f a supplier ships goods f.o.. destination6 title passes to the uyer "hen the supplier delivers the goods to the common carrier.

#. $f ending inventory is understated6 then net income is understated.

%. $f oth purchases and ending inventory are overstated y the same amount6 net income

is not affected.

'. Freight charges on goods purchased are considered a period cost and therefore are notpart of the cost of the inventory.

(. Purchase !iscounts *ost is a financial e8pense and is reported in the Bother e8pensesand lossesC section of the income statement.

+. The cost flo" assumption adopted must e consistent "ith the physical movement of thegoods.

1. $n all cases "hen F$F& is used6 the cost of goods sold "ould e the same "hether a

perpetual or periodic system is used.

11. The change in the *$F& )eserve from one period to the ne8t is recorded as an ad=ustmentto ,ost of :oods 0old.

12. Many companies use *$F& for oth ta8 and internal reporting purposes.

13. *$F& li/uidation often distorts net income6 ut usually leads to sustantial ta8 savings.

1. *$F& li/uidations can occur fre/uently "hen using a specific-goods approach.

1#. !ollar-value *$F& techni/ues help protect *$F& layers from erosion.

1%. The dollar-value *$F& method measures any increases and decreases in a pool in termsof total dollar value and physical /uantity of the goods.

1'. disadvantage of *$F& is that it does not match more recent costs against currentrevenues as "ell as F$F&.

1(. The *$F& conformity rule re/uires that if a company uses *$F& for ta8 purposes6 it mustalso use *$F& for financial accounting purposes.

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1+. se of *$F& provides a ta8 enefit in an industry "here unit costs tend to decrease asproduction increases.

2. *$F& is inappropriate "here unit costs tend to decrease as production increases.

T!ue False Anse!s—Conceptual

Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans"

1. T %. T 11. T 1%. F2. F '. F 12. F 1'. F3. F (. T 13. F 1(. T. F +. F 1. T 1+. F#. T 1. T 1#. T 2. T

%ULTIPLE CHOICE—Conceptual

21. When using a perpetual inventory system6a. no Purchases account is used.. a ,ost of :oods 0old account is used.c. t"o entries are re/uired to record a sale.d. all of these.

22. :oods in transit "hich are shipped f.o.. shipping point should ea. included in the inventory of the seller.. included in the inventory of the uyer.c. included in the inventory of the shipping company.d. none of these.

23. :oods in transit "hich are shipped f.o.. destination should ea. included in the inventory of the seller.. included in the inventory of the uyer.c. included in the inventory of the shipping company.d. none of these.

2. Which of the follo"ing items should e included in a companyDs inventory at the alancesheet dateEa. :oods in transit "hich "ere purchased f.o.. destination.. :oods received from another company for sale on consignment.c. :oods sold to a customer "hich are eing held for the customer to call for at his or her

convenience.d. 7one of these.

se the follo"ing information for /uestions 2# and 2%.

!uring 2' Foley ,orporation transferred inventory to 9line ,orporation and agreed torepurchase the merchandise early in 2(. 9line then used the inventory as collateral to orro"from 7or"alk ?ank6 remitting the proceeds to Foley. $n 2( "hen Foley repurchased theinventory6 9line used the proceeds to repay its ank loan.

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2#. This transaction is kno"n as a;n<a. consignment.. installment sale.c. assignment for the enefit of creditors.d. product financing arrangement.

2%. &n "hose ooks should the cost of the inventory appear at the !ecemer 316 2'alance sheet dateEa. Foley ,orporation. 9line ,orporationc. 7or"alk ?ankd. 9line ,orporation6 "ith Foley making appropriate note disclosure of the transaction

2'. :oods on consignment area. included in the consigneeDs inventory.. recorded in a ,onsignment &ut account "hich is an inventory account.c. recorded in a ,onsignment $n account "hich is an inventory account.d. all of these

02(. 4aluation of inventories re/uires the determination of all of the follo"ing except a. the costs to e included in inventory.. the physical goods to e included in inventory.c. the cost of goods held on consignment from other companies.d. the cost flo" assumption to e adopted.

P2+. The accountant for the &rion 0ales ,ompany is preparing the income statement for 2'and the alance sheet at !ecemer 316 2'. &rion uses the periodic inventory system.The anuary 16 2' merchandise inventory alance "ill appear a. only as an asset on the alance sheet.. only in the cost of goods sold section of the income statement.

c. as a deduction in the cost of goods sold section of the income statement and as acurrent asset on the alance sheet.

d. as an addition in the cost of goods sold section of the income statement and as acurrent asset on the alance sheet.

P3. $f the eginning inventory for 2% is overstated6 the effects of this error on cost of goodssold for 2%6 net income for 2%6 and assets at !ecemer 316 2'6 respectively6 area. overstatement6 understatement6 overstatement.. overstatement6 understatement6 no effect.c. understatement6 overstatement6 overstatement.d. understatement6 overstatement6 no effect.

031. The failure to record a purchase of merchandise on account even though the goods areproperly included in the physical inventory results ina. an overstatement of assets and net income.. an understatement of assets and net income.c. an understatement of cost of goods sold and liailities and an overstatement of

assets.d. an understatement of liailities and an overstatement of o"nersD e/uity.

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32. ?elle ,o. received merchandise on consignment. s of March 316 ?elle had recorded thetransaction as a purchase and included the goods in inventory. The effect of this on itsfinancial statements for March 31 "ould ea. no effect.. net income "as correct and current assets and current liailities "ere overstated.c. net income6 current assets6 and current liailities "ere overstated.d. net income and current liailities "ere overstated.

33. ller ,o. received merchandise on consignment. s of anuary 316 ller included thegoods in inventory6 ut did not record the transaction. The effect of this on its financialstatements for anuary 31 "ould ea. net income6 current assets6 and retained earnings "ere overstated.. net income "as correct and current assets "ere understated.c. net income and current assets "ere overstated and current liailities "ere

understated.d. net income6 current assets6 and retained earnings "ere understated.

3. ,ross ,o. accepted delivery of merchandise "hich it purchased on account. s of !ecemer 316 ,ross had recorded the transaction6 ut did not include the merchandise inits inventory. The effect of this on its financial statements for !ecemer 31 "ould ea. net income6 current assets6 and retained earnings "ere understated.. net income "as correct and current assets "ere understated.c. net income "as understated and current liailities "ere overstated.d. net income "as overstated and current assets "ere understated.

3#. &n une 1#6 2'6 Tolon ,orporation accepted delivery of merchandise "hich it pur-chased on account. s of une 36 Tolon had not recorded the transaction or included themerchandise in its inventory. The effect of this on its alance sheet for une 36 2'"ould ea. assets and stockholdersD e/uity "ere overstated ut liailities "ere not affected.

. stockholdersD e/uity "as the only item affected y the omission.c. assets6 liailities6 and stockholdersD e/uity "ere understated.d. none of these.

3%. Which of the follo"ing is correctEa. 0elling costs are product costs.. Manufacturing overhead costs are product costs.c. $nterest costs for routine inventories are product costs.d. ll of these.

3'. ll of the follo"ing costs should e charged against revenue in the period in "hich costsare incurred except for

a. manufacturing overhead costs for a product manufactured and sold in the sameaccounting period.

. costs "hich "ill not enefit any future period.c. costs from idle manufacturing capacity resulting from an une8pected plant shutdo"n.d. costs of normal shrinkage and scrap incurred for the manufacture of a product in

ending inventory.

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3(. Which of the follo"ing types of interest cost incurred in connection "ith the purchase or manufacture of inventory should e capitali5ed as a product costEa. Purchase discounts lost. $nterest incurred during the production of discrete pro=ects such as ships or real estate

pro=ectsc. $nterest incurred on notes payale to vendors for routine purchases made on a

repetitive asisd. ll of these should e capitali5ed.

3+. The use of a !iscounts *ost account implies that the recorded cost of a purchasedinventory item is itsa. invoice price.. invoice price plus the purchase discount lost.c. invoice price less the purchase discount taken.d. invoice price less the purchase discount allo"ale "hether taken or not.

. The use of a Purchase !iscounts account implies that the recorded cost of a purchasedinventory item is itsa. invoice price.. invoice price plus any purchase discount lost.c. invoice price less the purchase discount taken.d. invoice price less the purchase discount allo"ale "hether taken or not.

se the follo"ing information for /uestions 1 and 2.

!uring 2'6 "hich "as the first year of operations6 *uther ,ompany had merchandisepurchases of G+(#6 efore cash discounts. ll purchases "ere made on terms of 2H16 nH3.Three-fourths of the items purchased "ere paid for "ithin 1 days of purchase. ll of the goodsavailale had een sold at year end.

1. Which of the follo"ing recording procedures "ould result in the highest cost of goods soldfor 2'E

1. )ecording purchases at gross amounts2. )ecording purchases at net amounts6 "ith the amount of discounts not taken

sho"n under Iother e8pensesI in the income statementa. 1. 2c. ither 1 or 2 "ill result in the same cost of goods sold.d. ,annot e determined from the information provided.

2. Which of the follo"ing recording procedures "ould result in the highest net income for 2'E

1. )ecording purchases at gross amounts2. )ecording purchases at net amounts6 "ith the amount of discounts not taken

sho"n under Iother e8pensesI in the income statementa. 1. 2c. ither 1 or 2 "ill result in the same net income.d. ,annot e determined from the information provided.

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3. When using the periodic inventory system6 "hich of the follo"ing generally "ould not eseparately accounted for in the computation of cost of goods soldEa. Trade discounts applicale to purchases during the period. ,ash ;purchase< discounts taken during the periodc. Purchase returns and allo"ances of merchandise during the periodd. ,ost of transportation-in for merchandise purchased during the period

0. ,osts "hich are inventoriale include all of the follo"ing except a. costs that are directly connected "ith the ringing of goods to the place of usiness of

the uyer.. costs that are directly connected "ith the converting of goods to a salale condition.c. uying costs of a purchasing department.d. selling costs of a sales department.

P#. Which inventory costing method most closely appro8imates current cost for each of thefollo"ing>

nding $nventory ,ost of :oods 0olda. F$F& F$F&. F$F& *$F&c. *$F& F$F&d. *$F& *$F&

%. $n situations "here there is a rapid turnover6 an inventory method "hich produces aalance sheet valuation similar to the first-in6 first-out method isa. average cost.. ase stock.c. =oint cost.d. prime cost.

'. The pricing of issues from inventory must e deferred until the end of the accounting

period under the follo"ing method of inventory valuation>a. moving average.. "eighted-average.c. *$F& perpetual.d. F$F&.

(. n inventory pricing procedure in "hich the oldest costs incurred rarely have an effect onthe ending inventory valuation isa. F$F&.. *$F&.c. ase stock.d. "eighted-average.

+. Which method of inventory pricing est appro8imates specific identification of the actualflo" of costs and units in most manufacturing situationsEa. verage cost. First-in6 first-outc. *ast-in6 first-outd. ?ase stock

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#. ssuming no eginning inventory6 "hat can e said aout the trend of inventory prices if cost of goods sold computed "hen inventory is valued using the F$F& method e8ceedscost of goods sold "hen inventory is valued using the *$F& methodEa. Prices decreased.. Prices remained unchanged.c. Prices increased.d. Price trend cannot e determined from information given.

#1. $n a period of rising prices6 the inventory method "hich tends to give the highest reportednet income isa. ase stock.. first-in6 first-out.c. last-in6 first-out.d. "eighted-average.

#2. $n a period of rising prices6 the inventory method "hich tends to give the highest reportedinventory isa. F$F&.

. moving average.c. *$F&.d. "eighted-average.

#3. Juayle ,orporationDs inventory cost on its alance sheet "as lo"er using first-in6 first-outthan it "ould have een using last-in6 first-out. ssuming no eginning inventory6 in "hatdirection did the cost of purchases move during the periodEa. p. !o"nc. 0teadyd. ,annot e determined

#. $n a period of rising prices6 the inventory method "hich tends to give the highest reportedcost of goods sold isa. F$F&.. average cost.c. *$F&.d. none of these.

##. Which of the follo"ing statements is not valid as it applies to inventory costing methodsEa. $f inventory /uantities are to e maintained6 part of the earnings must e invested

;plo"ed ack< in inventories "hen F$F& is used during a period of rising prices.. *$F& tends to smooth out the net income pattern y matching current cost of goods

sold "ith current revenue6 "hen inventories remain at constant /uantities.

c. When a firm using the *$F& method fails to maintain its usual inventory position;reduces stock on hand elo" customary levels


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#%. The ac/uisition cost of a certain ra" material changes fre/uently. The ook value of theinventory of this material at year end "ill e the same if perpetual records are kept as it"ould e under a periodic inventory method only if the ook value is computed under thea. "eighted-average method.. moving average method.c. *$F& method.d. F$F& method.

#'. When a company uses *$F& for e8ternal reporting purposes and F$F& for internalreporting purposes6 an llo"ance to )educe $nventory to *$F& account is used. Thisaccount should e reporteda. on the income statement in the &ther )evenues and :ains section.. on the income statement in the ,ost of :oods 0old section.c. on the income statement in the &ther 8penses and *osses section.d. on the alance sheet in the ,urrent ssets section.

0#(. Which of the follo"ing statements is not true as it relates to the dollar-value *$F& inven-tory methodEa. $t is easier to erode *$F& layers using dollar-value *$F& techni/ues than it is "ith

specific goods pooled *$F&.. nder the dollar-value *$F& method6 it is possile to have the entire inventory in only

one pool.c. 0everal pools are commonly employed in using the dollar-value *$F& inventory

method.d. nder dollar-value *$F&6 increases and decreases in a pool are determined and

measured in terms of total dollar value6 not physical /uantity.

0#+. Which of the follo"ing is not considered an advantage of *$F& "hen prices are risingEa. The inventory "ill e overstated.. The more recent costs are matched against current revenues.

c. There "ill e a deferral of income ta8.d. companyDs future reported earnings "ill not e affected sustantially y future price

declines.

%. Which of the follo"ing is true regarding the use of *$F& for inventory valuationEa. $f *$F& is used for e8ternal financial reporting6 then it must also e used for internal

reports.. For purposes of e8ternal financial reporting6 *$F& may not e used "ith the lo"er of

cost or market approach.c. $f *$F& is used for e8ternal financial reporting6 then it cannot e used for ta8 purposes.d. 7one of these.

%1. $f inventory levels are stale or increasing6 an argument "hich is not an advantage of the*$F& method as compared to F$F& isa. income ta8es tend to e reduced in periods of rising prices.. cost of goods sold tends to e stated at appro8imately current cost on the income

statement.c. cost assignments typically parallel the physical flo" of goods.d. income tends to e smoothed as prices change over time.

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%ult$ple C,o$ce Anse!s—Conceptual

Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans" Ite( Ans"

21. d 2'. 33. a 3+. d #. #1. #'. d22. 2(. c 3. a . a %. a #2. a #(. a

23. a 2+. 3#. d 1. a '. #3. #+. a

2. d 3. 3%. 2. c (. a #. c %. d

2#. d 31. d 3'. d 3. a +. ##. d %1. c

2%. a 32. 3(. . d #. a #%. d

0olutions to those Multiple ,hoice /uestions for "hich the ans"er is Bnone of these.C

2. :oods in transit "hich "ere purchased f.o.. shipping point.3#. ssets and liailities "ere understated ut stockholdersK e/uity "as not affected.%. $f *$F& is used for ta8 purposes6 then it must also e used for e8ternal financial reporting.


%2. Tones Manufacturing ,ompany has the follo"ing account alances at year end>

&ffice supplies G 6)a" materials 2'6Work-in-process #+6Finished goods '26Prepaid insurance %6

What amount should Tones report as inventories in its alance sheetE

a. G'26.. G'%6.c. G1#(6.d. G1%26.

%3. 0mith Manufacturing ,ompany has the follo"ing account alances at year end>

&ffice supplies G 6)a" materials 2'6Work-in-process #+6Finished goods +26Prepaid insurance %6

What amount should 0mith report as inventories in its alance sheetEa. G+26.. G+%6.c. G1'(6.d. G1(26.

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%. ?riggs ,orporation uses the perpetual inventory method. &n March 16 it purchasedG16 of inventory6 terms 2H16 nH3. &n March 36 ?riggs returned goods that costG16. &n March +6 ?riggs paid the supplier. &n March +6 ?riggs should credita. purchase discounts for G2.. inventory for G2.c. purchase discounts for G1(.d. inventory for G1(.

%#. Larder ,orporation uses the perpetual inventory method. &n March 16 it purchasedG36 of inventory6 terms 2H16 nH3. &n March 36 Larder returned goods that costG36. &n March +6 Larder paid the supplier. &n March +6 Larder should credita. purchase discounts for G%.. inventory for G%.c. purchase discounts for G#.d. inventory for G#.

se the follo"ing information for /uestions %% through %(.

!e8ter6 $nc. is a calendar-year corporation. $ts financial statements for the years 2' and 2%contained errors as follo"s>

2' 2%nding inventory G36 overstated G(6 overstated!epreciation e8pense G26 understated G%6 overstated

%%. ssume that the proper correcting entries "ere made at !ecemer 316 2%. ?y ho"much "ill 2' income efore ta8es e overstated or understatedEa. G16 understated. G16 overstatedc. G26 overstatedd. G#6 overstated

%'. ssume that no correcting entries "ere made at !ecemer 316 2%. Ignoring incometaxes, y ho" much "ill retained earnings at !ecemer 316 2' e overstated or understatedEa. G16 understated. G#6 overstatedc. G#6 understatedd. G+6 understated

%(. ssume that no correcting entries "ere made at !ecemer 316 2%6 or !ecemer 3162' and that no additional errors occurred in 2(. Ignoring income taxes6 y ho" much"ill "orking capital at !ecemer 316 2( e overstated or understatedE

a. G. G26 overstatedc. G26 understatedd. G#6 understated

8 - ;


16/39


%+. The follo"ing information is availale for 9err ,ompany for 2'>

Freight-in G 36Purchase returns '#60elling e8penses 1#6nding inventory 2%6

The cost of goods sold is e/ual to of selling e8penses. What is the cost of goodsavailale for saleEa. G%6.. G(+6.c. G(1#6.d. G(%6.

se the follo"ing information for /uestions ' and '1.

)ichey ,o. records purchases at net amounts. &n May # )ichey purchased merchandise onaccount6 G1%66 terms 2H16 nH3. )ichey returned G162 of the May # purchase and receivedcredit on account. t May 31 the alance had not een paid.

'. The amount to e recorded as a purchase return isa. G16(.. G1622.c. G162.d. G161'%.

'1. ?y ho" much should the account payale e ad=usted on May 31Ea. G.. G3.c. G32.d. G2+%.

se the follo"ing information for /uestions '2 and '3.

The follo"ing information "as availale from the inventory records of 7eer ,ompany for anuary>

nits nit ,ost Total ,ost?alance at anuary 1 36 G+.'' G2+631

Purchases>anuary % 26 1.3 26%anuary 2% 26' 1.'1 2(6+1'

0ales>anuary ' ;26#<

anuary 31 ;6<?alance at anuary 31 162

'2. ssuming that 7eer does not maintain perpetual inventory records6 "hat should e theinventory at anuary 316 using the "eighted-average inventory method6 rounded to thenearest dollarEa. G126%%.. G1262(.c. G126312.d. G12632.

8 -


17/39


'3. ssuming that 7eer maintains perpetual inventory records6 "hat should e the inventoryat anuary 316 using the moving-average inventory method6 rounded to the nearestdollarEa. G126%%.. G1262(.c. G126312.d. G12632.

se the follo"ing information for /uestions ' and '#.

9iner ,o. has the follo"ing data related to an item of inventory>

$nventory6 March 1 1 units N G.2Purchase6 March ' 3# units N G.Purchase6 March 1% ' units N G.#$nventory6 March 31 13 units

'. The value assigned to ending inventory if 9iner uses *$F& is

a. G#'+.. G##2.c. G#%.d. G#(#.

'#. The value assigned to cost of goods sold if 9iner uses F$F& isa. G#'+.. G##2.c. G16'23.d. G16%+%.

'%. ?aker ,ompany has een using the *$F& method of inventory valuation for 1 years6since it egan operations. $ts 2' ending inventory "as G66 ut it "ould have eenG%6 if F$F& had een used. Thus6 if F$F& had een used6 ?akerDs income eforeincome ta8es "ould have eena. G26 greater over the 1-year period.. G26 less over the 1-year period.c. G26 greater in 2'.d. G26 less in 2'.

se the follo"ing information for /uestions '' through (.

Transactions for the month of une "ere>

Purchases 0alesune 1 ;alance< ( N G3.2 une 2 % N G#.#

3 262 N 3.1 % 16% N #.#' 162 N 3.3 + 16 N #.#

1# 16( N 3. 1 N %.22 # N 3.# 1( 16 N %.

2# 2 N %.

8 - =


18/39


''. ssuming that perpetual inventory records are kept in units only6 the ending inventory on a*$F& asis isa. G611.. G61%.c. G62+.d. G6'.

'(. ssuming that perpetual inventory records are kept in dollars6 the ending inventory on a*$F& asis isa. G611.. G61%.c. G62+.d. G6'.

'+. ssuming that perpetual inventory records are kept in dollars6 the ending inventory on aF$F& asis isa. G611.. G61%.c. G62+.d. G6'.

(. ssuming that perpetual inventory records are kept in units only6 the ending inventory onan average-cost asis6 rounded to the nearest dollar6 isa. G6+%.. G623(.c. G62+.d. G6322.

(1. ohnson ,ompany had # units of BTankC in its inventory at a cost of G each. $tpurchased6 for G26(6 3 more units of BTankC. ohnson then sold units at a selling

price of G1 each6 resulting in a gross profit of G16%. The cost flo" assumption used yohnsona. is F$F&.. is *$F&.c. is "eighted average.d. cannot e determined from the information given.

(2. 9ingman ,ompany had # units of B!inkC in its inventory at a cost of G# each. $tpurchased6 for G266 3 more units of B!inkC. 9ingman then sold % units at a sellingprice of G1 each6 resulting in a gross profit of G261. The cost flo" assumption used y9ingmana. is F$F&.

. is *$F&.c. is "eighted average.d. cannot e determined from the information given.

(3. ?ro"n ,orporation uses the F$F& method for internal reporting purposes and *$F& for e8ternal reporting purposes. The alance in the *$F& )eserve account at the end of 2'"as G%6. The alance in the same account at the end of 2( is G+6. ?ro"nKs,ost of :oods 0old account has a alance of G#6 from sales transactions recordedduring the year. What amount should ?ro"n report as ,ost of :oods 0old in the 2(income statementE

8 - 8


19/39


a. G26.. G#6.c. G(6.d. G#6.

(. :reen ,orporation uses the F$F& method for internal reporting purposes and *$F& for e8ternal reporting purposes. The alance in the *$F& )eserve account at the end of 2'"as G(6. The alance in the same account at the end of 2( is G126. :reenKs,ost of :oods 0old account has a alance of G%6 from sales transactions recordedduring the year. What amount should :reen report as ,ost of :oods 0old in the 2(income statementEa. G#%6.. G%6.c. G%6.d. G'26.

(#. ohnson ,ompany had units of BTankC in its inventory at a cost of G each. $tpurchased % more units of BTankC at a cost of G% each. ohnson then sold ' units at aselling price of G1 each. The *$F& li/uidation overstated normal gross profit ya. G --. G2.c. G.d. G%.

(%. 9ingman ,ompany had units of B!inkC in its inventory at a cost of G% each. $tpurchased % more units of B!inkC at a cost of G+ each. 9ingman then sold ' units at aselling price of G1# each. The *$F& li/uidation overstated normal gross profit ya. G --. G3.c. G%.

d. G+.

se the follo"ing information for (' and ((

,ompany had anuary 1 inventory of G16 "hen it adopted dollar-value *$F&. !uring theyear6 purchases "ere G%6 and sales "ere G166. !ecemer 31 inventory at year-endprices "as G1363%6 and the price inde8 "as 112.

('. What is ,ompanyKs ending inventoryEa. G16.. G12(6.c. G13163%.

d. G1363%.

((. What is ,ompanyKs gross profitEa. G2(6.. G3163%.c. G36%.d. G(%(6%.

8 - >


20/39


se the follo"ing information for (+ and +

ly ,ompany had anuary 1 inventory of G16 "hen it adopted dollar-value *$F&. !uring theyear6 purchases "ere G%6 and sales "ere G166. !ecemer 31 inventory at year-endprices "as G12%6#6 and the price inde8 "as 11.

(+. What is ly ,ompanyKs ending inventoryEa. G116.. G11#6.c. G11%6#.d. G12%6#.

+. What is ly ,ompanyKs gross profitEa. G1#6.. G1%6#.c. G2%6#.d. G((36#.

se the follo"ing information for /uestions +1 through +3.

!olan ,orporation adopted the dollar-value *$F& method of inventory valuation on !ecemer 3162#. $ts inventory at that date "as G226 and the relevant price inde8 "as 1. $nformationregarding inventory for suse/uent years is as follo"s>

$nventory at ,urrent !ate ,urrent Prices Price $nde8!ecemer 316 2% G2#%6( 1'!ecemer 316 2' 2+6 12#!ecemer 316 2( 32#6 13

+1. What is the cost of the ending inventory at !ecemer 316 2% under dollar-value *$F&E

a. G26.. G2#%6(.c. G216.d. G23#6.

+2. What is the cost of the ending inventory at !ecemer 316 2' under dollar-value *$F&Ea. G2326.. G2316.c. G2326(.d. G26.

+3. What is the cost of the ending inventory at !ecemer 316 2( under dollar-value *$F&E

a. G2#%62.. G2#6(.c. G2#6.d. G2%36.

+. Tate ,ompany adopted the dollar-value *$F& method on anuary 16 2'6 at "hich timeits inventory consisted of %6 units of $tem N G#. each and 36 units of $tem ? NG1%. each. The inventory at !ecemer 316 2' consisted of 126 units of $tem and'6 units of $tem ?. The most recent actual purchases related to these items "ere asfollo"s>

8 - /?


21/39


Juantity$tems Purchase !ate Purchased ,ost Per nit 12H'H' 26 G %. 12H11H' 16 #.'#? 12H1#H' 16 1'.

sing the doule-e8tension method6 "hat is the price inde8 for 2' that should ecomputed y Tate ,ompanyEa. 1(.33. 1+.#+c. 111.#d. 22.#1

%ult$ple C,o$ce Anse!s—Co(putat$onal


%2. c %'. a '2. ''. a (2. ('. c +2. c

%3. c %(. a '3. d '(. c (3. c ((. +3. a%. d %+. d '. '+. d (. c (+. c +.

%#. d '. d '#. d (. (#. +.

%%. d '1. d '%. a (1. c (%. +1. c

%ULTIPLE CHOICE—CPA A)apte)

+#. Lo" should the follo"ing costs affect a retailerDs inventory valuationE

Freight-in $nterest on $nventory *oana. $ncrease 7o effect. $ncrease $ncreasec. 7o effect $ncreased. 7o effect 7o effect

+%. The follo"ing information applied to :rey6 $nc. for 2'>

Merchandise purchased for resale G36Freight-in (6

Freight-out #6Purchase returns 26

:reyDs 2' inventoriale cost "asa. G36.. G336.c. G3%6.d. G3116.

8 - /


22/39


+'. The follo"ing information "as derived from the 2' accounting records of *ogan ,o.>

*ogan Ds :oods*ogan Ds ,entral Warehouse Leld y ,onsignees

?eginning inventory G136 G 16Purchases #'#6 '6

Freight-in 16Transportation to consignees #6Freight-out 36 (6nding inventory 1#6 26

*ogan Ds 2' cost of sales "asa. G#'6.. G%6.c. G%36.d. G%3+6.

+(. ,ole ,orp.Ds accounts payale at !ecemer 316 2'6 totaled G(6 efore anynecessary year-end ad=ustments relating to the follo"ing transactions>

• &n !ecemer 2'6 2'6 ,ole "rote and recorded checks to creditors totalingG3#6 causing an overdraft of G16 in ,ole Ds ank account at !ecemer 3162'. The checks "ere mailed out on anuary 16 2(.

• &n !ecemer 2(6 2'6 ,ole purchased and received goods for G1#66 terms2H16 nH3. ,ole records purchases and accounts payale at net amounts. The invoice"as recorded and paid anuary 36 2(.

• :oods shipped f.o.. destination on !ecemer 26 2' from a vendor to ,ole "erereceived anuary 26 2(. The invoice cost "as G%#6.

t !ecemer 316 2'6 "hat amount should ,ole report as total accounts payaleEa. G163%26.

. G162+'6.c. G16#6.d. G+#6.

++. The alance in Lill ,o.Ds accounts payale account at !ecemer 316 2' "as G'6efore any necessary year-end ad=ustments relating to the follo"ing>

• :oods "ere in transit to Lill from a vendor on !ecemer 316 2'. The invoice cost"as G6. The goods "ere shipped f.o.. shipping point on !ecemer 2+6 2'and "ere received on anuary 6 2(.

• :oods shipped f.o.. destination on !ecemer 216 2' from a vendor to Lill "erereceived on anuary %6 2(. The invoice cost "as G2#6.

• &n !ecemer 2'6 2'6 Lill "rote and recorded checks to creditors totaling G36that "ere mailed on anuary 16 2(.

$n LillDs !ecemer 316 2' alance sheet6 the accounts payale should ea. G'36. G'6.c. G'%#6.d. G''6.

8 - //


23/39


1. :ear ,o.Ds accounts payale alance at !ecemer 316 2' "as G16#6 eforeconsidering the follo"ing transactions>

• :oods "ere in transit from a vendor to :ear on !ecemer 316 2'. The invoice price"as G'66 and the goods "ere shipped f.o.. shipping point on !ecemer 2+62'. The goods "ere received on anuary 6 2(.

• :oods shipped to :ear6 f.o.. shipping point on !ecemer 26 2'6 from a vendor "ere lost in transit. The invoice price "as G#6. &n anuary #6 2(6 :ear filed aG#6 claim against the common carrier.

$n its !ecemer 316 2' alance sheet6 :ear should report accounts payale of a. G16%26.. G16#'6.c. G16##6.d. G16#6.

11. Tysen )etailers purchased merchandise "ith a list price of G#66 su=ect to tradediscounts of 2 and 16 "ith no cash discounts allo"ale. Tysen should record the

cost of this merchandise asa. G3#6.. G3%6.c. G3+6.d. G#6.

12. &n une 16 2'6 Mills ,orp. sold merchandise "ith a list price of G26 to *inn onaccount. Mills allo"ed trade discounts of 3 and 2. ,redit terms "ere 2H1#6 nH andthe sale "as made f.o.. shipping point. Mills prepaid G of delivery costs for *inn as anaccommodation. &n une 126 2'6 Mills received from *inn a remittance in full paymentamounting toa. G16+'%.

. G1163%(.c. G1163'%.d. G1161+%.

13. !ark ,o. recorded the follo"ing data pertaining to ra" material O during anuary 2'>

nits!ate )eceived ,ost $ssued &n Land1H1H' $nventory G(. 3621H11H' $ssue 16% 16%1H22H' Purchase 6 G+. #6%

The moving-average unit cost of O inventory at anuary 316 2' isa. G(.'.. G(.(#.c. G+..d. G+..

8 - /1


24/39


1. !uring periods of rising prices6 a perpetual inventory system "ould result in the samedollar amount of ending inventory as a periodic inventory system under "hich of thefollo"ing inventory cost flo" methodsE

F$F& *$F&a. es 7o

. es esc. 7o esd. 7o 7o

1#. arl ,o. "as formed on anuary 26 2'6 to sell a single product. &ver a t"o-year period6arlDs ac/uisition costs have increased steadily. Physical /uantities held in inventory "eree/ual to three monthsD sales at !ecemer 316 2'6 and 5ero at !ecemer 316 2(.

ssuming the periodic inventory system6 the inventory cost method "hich reports thehighest amount of each of the follo"ing is

$nventory ,ost of 0ales!ecemer 316 2' 2(

a. *$F& F$F&

. *$F& *$F&c. F$F& F$F&d. F$F& *$F&

1%. 7oll ,o. had # units of product on hand at anuary 16 2'6 costing G2 each.Purchases of product during anuary "ere as follo"s>

!ate nits nit ,ostan. 1 % G

1( '# %2( 3 (

physical count on anuary 316 2' sho"s % units of product on hand. The cost of the inventory at anuary 316 2' under the *$F& method isa. G2(62.. G2%6'.c. G2#6#.d. G26%.

1'. When the doule e8tension approach to the dollar-value *$F& inventory cost flo" methodis used6 the inventory layer added in the current year is multiplied y an inde8 numer.Lo" "ould the follo"ing e used in the calculation of this inde8 numerE

nding inventory nding inventoryat current year cost at ase year cost

a. 7umerator !enominator

. 7umerator 7ot usedc. !enominator 7umerator d. 7ot used !enominator

8 - /4


25/39


1(. ,arr ,o. adopted the dollar-value *$F& inventory method on !ecemer 316 2'. ,arrDsentire inventory constitutes a single pool. &n !ecemer 316 2'6 the inventory "asG326 under the dollar-value *$F& method. $nventory data for 2( are as follo"s>

12H31H( inventory at year-end prices G6)elevant price inde8 at year end ;ase year 2'< 11

sing dollar value *$F&6 ,arrDs inventory at !ecemer 316 2( isa. G3#26.. G(6.c. G6.d. G6.

%ult$ple C,o$ce Anse!s—CPA A)apte)


+#. a +'. d ++. d 11. 13. c 1#. c 1'. a

+%. c +(. 1. a 12. c 1. a 1%. c 1(.

#ERIVATIONS — Co(putat$onal

No" Anse! #e!$9at$on%2. c G2'6 Q G#+6 Q G'26 A G1#(6.

%3. c G2'6 Q G#+6 Q G+26 A G1'(6.

%. d R;G16 S G16< .2U A G1(.

%#. d R;G36 S G36< .2U A G#.

%%. d G36 Q G26 A G#6.

%'. a G%6 S ;G36 Q G26< A G16.

%(. a The effect of the errors in ending inventories reverse themselves in thefollo"ing year.

%+. d G2%6 Q ; G1#6< A G(%6.

'. d G162 S ;G162 .2< A G161'%.

'1. d ;G1%6 S G162< .2 A G2+%.

'2. ;G2+631 Q G26% Q G2(6+1'< V ;36 Q 26 Q 26'< A G1.23'HunitG1.23' 162 A G1262(.

8 - /;


26/39


No" Anse! #e!$9at$on

'3. d vg. on 1H% G+6+1 V #6 A G+.+(2Hunit1H2% G#36('2 V #62 A G1.3%Hunit

G1.3% 162 A G12632.

'. ;1 G.2< Q ;3 G.< A G##2.

'#. d 1 Q 3# Q ' S 13 A 3+ units;1 G.2< Q ;2+ G.< A G16%+%.

'%. a ;G%6 S G6< A G26.

''. a vailale ;purchases< A %6# units0ales A #62 units$ A %6# S #62 A 163 units;( G3.2< Q ;# G3.1< A G611.

'(. c ;2 G3.2< Q ; G3.1< Q ; G3.< Q ;3 G3.#< A G62+.

!ate Purchase 0old ?alance%H1 ;( N 3.2< 26#% ;( N 3.2< 26#%%H2 ;% N 3.2< 16+2 ;2 N 3.2< %%H3 ;262 N 3.1< %6(2 ;2 N 3.2<

;262 N 3.1< '6%%H% ;16% N 3.1< 6+% ;2 N 3.2<

;% N 3.1< 26#%H' ;162 N 3.3< 36+% ;2 N 3.2<

;% N 3.1< %6%;162 N 3.3<

%H+ ;16 N 3.3< 363 ;2 N 3.2


27/39


No" Anse! #e!$9at$on(1. c ; G1< S G16% A G26 ,&:0

R;# G< Q G26(U S G26 A G26 .$.;G6( V (< units A G26 .$. under "eighted avg.

(2. ;% G1< S G261 A G36+ ,&:0R;# G#< Q G26U S G36+ A G16 .$.2 G# A G16 .$. under *$F&.

(3. c G#6 Q ;G+6 S G%6< A G(6.

(. c G%6 Q ;G126 S G(6< A G%6.

(#. R;' S %< ;G% S G


28/39


No" Anse! #e!$9at$on+(. G(6 Q G3#6 Q G1'6 A G162+'6.

++. d G'6 Q G6 Q G36 A G''6.

1. a G16#6 Q G'6 Q G#6 A G16%26.

11. G#6 .( .+ A G3%6.

12. c G26 .' .( A G1162;G1162 .+(< Q A G1163'%.

13. c R;16% G(.< Q ;6 G+.


29/39


E@" 8-?@)ecording purchases at net amounts.

lco ,o. records purchases at net amounts and uses periodic inventories. Prepare entries for thefollo"ing>

une 11 Purchased merchandise on account6 G#66 terms 2H16 nH3.1# )eturned part of une 11 purchase6 G(6 and received credit on account.

3 Prepared the ad=usting entry re/uired for financial statements.

Solut$on 8-?

une 11 Purchases ;.+( G#6


30/39


Solut$on 8-/

;a< ' N G3 A G2163 N G3% A 16(

G316(

;< ( N G3% A G2(6(2 N G3 A %6

G36(

E@" 8-1@F$F& and *$F& periodic inventory methods.

The Pine 0hop sho"s the follo"ing data related to an item of inventory>

$nventory6 anuary 1 1 units N G#.Purchase6 anuary + 3 units N G#.Purchase6 anuary 1+ ' units N G%.$nventory6 anuary 31 12 units

Inst!uct$ons;a< What value should e assigned to the ending inventory using F$F&E

;< What value should e assigned to cost of goods sold using *$F&E

Solut$on 8-1

;a< ' N G%. A G2# N G#. A 2'

G%+

;< ' N G%. A G 22( N G#. A 16#12

G16+32

E@" 8-4@Perpetual *$F&.

record of transactions for the month of May "as as follo"s>

Purchases 0alesMay 1 ;alance< N G.2 May 3 3 N G'.

163 N G.1 % 16 N '.( ( N G.3 12 + N '.#

1 ' N G. 1( N '.#22 162 N G.# 2# 16 N (.2+ # N G.##

ssuming that perpetual inventory records are kept in dollars6 determine the inventory using*$F&.

8 - 1?


31/39


Solut$on 8-4

1 N G.2 A G 22 N G.1 A (21 N G. A # N G.## A 262'#

G36+##

E@" 8-;@Perpetual *$F& and Periodic F$F&.

0eit5er ,orporation sells item as part of its product line. $nformation as to alances on hand6purchases6 and sales of item are given in the follo"ing tale for the first si8 months of 2'.

Juantitiesnit Price

!ate Purchased 0old ?alance of Purchaseanuary 11 @ @ G2.#

anuary 2 163 @ 16' G2.%Feruary ( @ 3 16 @March 1% @ #% ( @une 11 % @ 16 G2.'#

Inst!uct$ons;a< ,ompute the ending inventory at une 3 under the perpetual *$F& inventory pricing

method.

;< ,ompute the cost of goods sold for the first si8 months under the periodic F$F& inventorypricing method.

Solut$on 8-;

;a< N G2.# A G16 N G2.% A 161

% N G2.'# A 16%#16 G36'+

;< N G2.# A G16% N G2.% A 161+%(% G261+%

E@" 8-


32/39


Solut$on 8-<

Five thousand more units "ere sold than "ere purchased. This has resulted in the partialli/uidation of the eginning *$F& inventory layers. ssuming rising prices6 the increased rate of gross profit is most likely due to the matching of old6 lo"er inventory costs against current sales.

,omputationsnits sold> G16(6 V G A #6nits purchased> G+%6 V G2 A 6

E@" 8-=@!ollar-value *$F& method.

Part . :ant ,ompany has a eginning inventory in year one of G36 and an endinginventory of G3%36. The price level has increased from 1 at the eginning of theyear to 11 at the end of year one. ,alculate the ending inventory under the dollar-value *$F& method.

Part ?. t the end of year t"o6 :antDs inventory is G3'6 in terms of a price level of 11#"hich e8ists at the end of year t"o. ,alculate the inventory at the end of year t"ocontinuing the use of the dollar-value *$F& method.

Solut$on 8-=

Part .,omputation of nding $nventory6 ear &ne

nding $nventory *ayers at nding $nventoryat ?ase-ear Price ?ase-ear Prices Price $nde8 at !ollar-4alue *$F&G3%36 V 1.1 A G336 G36 1. A G36

G36 1.1 A 336G3336

Part ?.,omputation of nding $nventory6 ear T"o

nding $nventory *ayers at nding $nventoryat ?ase-ear Price ?ase-ear Prices Price $nde8 at !ollar-4alue *$F&G3'6 V 1.1# A G3(6 G36 1. A G36

G36 1.1 A 336G#6 1.1# A #'6#

G3+6#

8 - 1/


33/39


PROBLE%S

P!" 8-8@$nventory cut-off.

0lone ,ompany sells T4s. The perpetual inventory "as stated as G2(6# on the ooks at!ecemer 316 2%. t the close of the year6 a ne" approach for compiling inventory "as usedand apparently a satisfactory cut-off for preparation of financial statements "as not made. 0omeevents that occurred are as follo"s.

1. T4s shipped to a customer anuary 26 2'6 costing G#6 "ere included in inventory at!ecemer 316 2%. The sale "as recorded in 2'.

2. T4s costing G126 received !ecemer 36 2%6 "ere recorded as received on anuary 262'.

3. T4s received during 2% costing G6% "ere recorded t"ice in the inventory account.

. T4s shipped to a customer !ecemer 2(6 2%6 f.o.. shipping point6 "hich cost G166"ere not received y the customer until anuary6 2'. The T4s "ere included in the ending

inventory.#. T4s on hand that cost G%61 "ere never recorded on the ooks.

Inst!uct$ons,ompute the correct inventory at !ecemer 316 2%.

Solut$on 8-8

$nventory per ooks G2(6# dd> 0hipment received 12H3H% G126

T4s on hand %61 1(61%6%

!educt> T4s recorded t"ice 6%T4s shipped 12H2(H% 16 16%

,orrect inventory 12H31H% G326

8 - 11


34/39


P!" 8->@nalysis of errors.

;ll sales and purchases are on credit.<$ndicate in each of the spaces provided the effect of the descried errors on the various elementsof a companyDs financial statements. se the follo"ing codes> & A amount is overstated Aamount is understated 7 A no effect. ssume a periodic inventory system.

ccounts ccounts ,ost of )eceivale $nventory Payale 0ales :oods 0old

OMP*> 8cluded goods in rented"arehouse from inventory 7 7 7 &count.

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

1. :oods in transit shipped If.o..destinationI y supplier "ererecorded as a purchase ut "eree8cluded from ending inventory.


2. :oods held on consignment "ereincluded in inventory count andrecorded as a purchase.


3. :oods in transit shipped If.o..shipping pointI "ere not recordedas a sale and "ere included in

ending inventory.


. :oods "ere shipped and appro-priately e8cluded from endinginventory ut sale "as notrecorded.


Solut$on 8->

1. 7 7 & 7 &2. 7 & & 7 73. & 7 . 7 7 7

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35/39


P!" 8-/?@ccounting for purchase discounts.

7eer ,orp. purchased merchandise during 2' on credit for G36 terms 2H16 nH3. ll of the gross liaility e8cept G%6 "as paid "ithin the discount period. The remainder "as paid"ithin the 3-day term. t the end of the annual accounting period6 !ecemer 316 2'6 + of the merchandise had een sold and 1 remained in inventory. The company uses a periodic

system.

Inst!uct$ons;a< ssuming that the net method is used for recording purchases6 prepare the entries for the

purchase and t"o suse/uent payments.

;< What dollar amounts should e reported for the final inventory and cost of goods sold underthe ;1< net method ;2< gross methodE ssume that there "as no eginning inventory.

Solut$on 8-/?

;a< Purchases............................................................................................. 2+6 ccounts Payale...................................................................... 2+6;To record the purchase at net amount>.+( G36 A G2+6.<

ccounts Payale................................................................................. 23#62,ash.......................................................................................... 23#62

;To record payment "ithin the discount period>G36 S G%6 A G26 .+( G26 A G23#62.<

ccounts Payale................................................................................. #(6(Purchase !iscounts *ost....................................................................... 162

,ash.......................................................................................... %6;To record the final payment.<

;< ;1< 7et method>Purchases> G2+6Final inventory> 1 G2+6 A 2+6,ost of goods sold> + G2+6 A G2%6%

;The G162 discount lost is reported in the other e8pense section of the income statement.<

;2< :ross method>Purchases> G36 Purchases> G36*ess purchase discounts> *ess purchase discounts>

.2 G26 A 6( .2 G26 A 6(:oods availale 2+#62 &) :oods availale 2+#62Final inventory> Final inventory>

1 G2+#62 A 2+6#2 1 G36 A 36,ost of goods sold> ,ost of goods sold>

+ G2+#62 A G2%#6%( G2+#62 S G36 A G2%#62

;ssuming that the G6( discount is ;ssuming that the G6( discount is usedprorated et"een the cost of goods sold6 to reduce cost of goods sold. Final inventory+6 and the final inventory6 1.< is carried at the gross amount.<

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36/39


P!" 8-/@$nventory methods.

Flynt ,ompany "as formed on !ecemer 16 2%. The follo"ing information is availale fromFlynt Ds inventory record for Product O.

nits nit ,ostanuary 16 2' ;eginning inventory< 16% G1(.

Purchases>anuary #6 2' 26% G2.anuary 2#6 2' 26 G21.Feruary 1%6 2' 16 G22.March 1#6 2' 16( G23.

physical inventory on March 316 2'6 sho"s 26# units on hand.

Inst!uct$onsPrepare schedules to compute the ending inventory at March 316 2'6 under each of thefollo"ing inventory methods>

;a< F$F&.

;< *$F&.;c< Weighted-average.

0ho" supporting computations in good form.

Solut$on 8-/

;a< Flynt ,ompany,&MPTT$&7 &F $747T&) F&) P)&!,T O

7!) F$F& $747T&) MTL&!March 316 2'

nits nit ,ost Total ,ostMarch 1#6 2' 16( G23. G16Feruary 1%6 2' ' 22. 1#6March 316 2'6 inventory 26# G#%6(

;< Flynt ,ompany,&MPTT$&7 &F $747T&) F&) P)&!,T O

7!) *$F& $747T&) MTL&!March 316 2'

nits nit ,ost Total ,ost?eginning inventory 16% G1(. G2(6(anuary #6 2' ;portion< + 2. 1(6March 316 2'6 inventory 26# G%6(

8 - 1


37/39


Solut$on 8-/ ;cont.<

;c< Flynt ,ompany,&MPTT$&7 &F $747T&) F&) P)&!,T O

7!) W$:LT!-4): $747T&) MTL&!March 316 2'

nits nit ,ost Total ,ost?eginning inventory 16% G1(. G 2(6(anuary #6 2' 26% 2. #26anuary 2#6 2' 26 21. #6Feruary 1%6 2' 16 22. 226March 1#6 2' 16( 23. 16

+6 G1+6%Weighted average cost ;G1+6% V +6< G2.'

March 316 2'6 inventory 26# G2.' G#16'#

P!" 8-//@!ollar-value *$F&.

!ent ,ompany manufactures one product. &n !ecemer 316 2#6 !ent adopted the dollar-value*$F& inventory method. The inventory on that date using the dollar-value *$F& inventory method"as G1(6. $nventory data are as follo"s>

$nventory at Price inde8ear year-end prices ;ase year 2#<2% G2#26 1.#2' 3%(6 1.1#2( 3('6# 1.2#

Inst!uct$ons,ompute the inventory at December 31, 2006, 2007, and 2008, using the dollar-value *$F&method for each year.

Solut$on 8-//

!ent ,ompany!ollar-4alue *$F& ,omputations

t !ecemer 316 2%6 2'6 and 2(

nding *ayers at

$nventory at ?ase-ear nding $nventory?ase-ear Price Prices Price $nde8 !ollar-4alue *$F& t 12H316 G2#26 V 1.# G1(6 1. A G1(6

2%> A G26 G%6 1.# A %36G236

t 12H316 G3%(6 V 1.1# G1(6 1. A G1(62'> A G326 G%6 1.# A %36

G(6 1.1# A +26G33#6

8 - 1=


38/39


Solut$on 8-// ;cont.<

t 12H316 G3('6# V 1.2# G1(6 1. A G1(62(> A G316 G%6 1.# A %36

G'6 1.1# A (6#G3236#

P!" 8-/1@!ollar-value *$F&.

!ay ,ompany adopted the dollar-value *$F& inventory method on 12H31H%. &n this date6 itsinventory consisted of the follo"ing items.

$tem 7umer of nits ,ost Per nit Total ,ostO 2 G2. G % .# 26'

G361

dditional information> !ecemer 312' 2(1. nits of O in inventory 3 2. ,ost of each O unit G3. G3.2#3. nits of in inventory ( 162. ,ost of each unit G#.# G%.

Inst!uct$ons;a< ,ompute the price inde8 for 2'. )ound to 2 decimal places.;< ,alculate the 12H31H' inventory. *ael all numers.;c< ,ompute the price inde8 for 2(. )ound to 2 decimal places.;d< ,alculate the 12H31H( inventory. *ael all numers.

Solut$on 8-/1

;a< nding $nventory nding $nventory$n nd of ear !ollars> $n ?ase !ollarsO 3 G3. A G + O 3 G2. A G % ( G#.# A 6 ( G.# A 36%

G#63 G62

$nde8 A G#63 V G62 A 1.2%2 or 1.2%

;< ?ase *ayer G361 1. A G361$ncremental *ayer 161 1.2% A 163(%2' nding $nventory G62 G6(%

;c< nding $nventory nding $nventory$n nd of ear !ollars> $n ?ase !ollarsO G3.2# A G163 O G2. A G ( 162 G%. A '62 162 G.# A #6

G(6# G%62

$nde8 A G(6# V G%62 A 1.3'1 or 1.3'

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Solut$on 8-/1 ;cont.<

;d< ?ase *ayer G361 1. A G361$ncremental *ayer 161 1.2% A 163(%

26 1.3' A 26'2( nding $nventory G%62 G'622%

8 - 1>

ch08 valuation of inventories 2

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