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Exam 5: Inventories and Cost of Sales

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Question 51

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An understatement of the ending inventory balance will overstate cost of goods sold and understate net income.

A) True
B) False

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Question 52

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The reasoning behind the retail inventory method is that if we can get a good estimate of the cost-to-retail ratio, we can multiply ending inventory at retail by this ratio to estimate ending inventory at cost.

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B) False

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Question 53

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Determining the unit costs assigned to inventory items is one of the most important decisions in accounting for inventory.

The LIFO method of inventory valuation can result in a company's ending inventory being valued at less than the inventory's replacement cost because LIFO inventory leaves the oldest costs in inventory.

A company must disclose any change in its inventory costing method in its financial statements.

The assignment of costs to cost of goods sold and inventory using weighted average usually yields different results depending on whether a perpetual or periodic system is used.

The cost of an inventory item includes its invoice cost plus any added or incidental costs necessary to put it in a place and condition for sale, and minus any discount.

Acceptable methods of assigning specific costs to inventory and cost of goods sold include all of the following except:

Net realizable value for damaged or obsolete goods is sales price less the cost of making the sale.

The FIFO inventory method assumes that costs for the latest units purchased are the first to be charged to the cost of goods sold.

Which of the following inventory costing methods will always result in the same values for ending inventory and cost of goods sold regardless of whether a perpetual or periodic inventory system is used?

On December 31 of the current year, Plunkett Company reported an ending inventory balance of $215,000. The following additional information is also available: • Plunkett sold and shipped goods costing $38,000 to Savannah Enterprises on December 28 with shipping terms of FOB shipping point. The goods were not included in the ending inventory amount of $215,000. • Plunkett purchased goods costing $44,000 on December 29. The goods were shipped FOB destination and were received by Plunkett on January 2 of the following year. The shipment was a rush order that was supposed to arrive by December 31. These goods were included in the ending inventory balance of $215,000. • Plunkett's ending inventory balance of $215,000 included $15,000 of goods being held on consignment from Carole Company. (Plunkett Company is the consignee.) • Plunkett's ending inventory balance of $215,000 did not include goods costing $95,000 that were shipped to Plunkett on December 27 with shipping terms of FOB destination and were still in transit at year-end. Based on the above information, the amount that Plunkett should report in ending inventory on December 31 is:

The matching principle is used to determine how much of the cost of goods available for sale is deducted from sales and how much is carried forward as inventory.

The simple rule for inventory turnover is that a low ratio is preferable.

Oxford Packing Company reported net sales in November of the current year of $1,000,000. At the beginning of November, the company reported beginning inventory of $368,000. Cost of goods purchased during November amounted to $217,500. The company reported ending inventory at the end of November of $226,750. The company's gross profit rate for November of the current year was:

An advantage of the weighted average inventory method is that it tends to smooth out erratic changes in costs.

Explain the reason a company might use gross profit inventory method for valuing inventory.

Since an error in the period-end inventory causes an offsetting error in the next period:

To avoid the time-consuming process of taking an inventory each year, most companies use the gross profit method to estimate ending inventory.

A company normally sells its product for $20 per unit. However, the selling price has fallen to $15 per unit. This company's current inventory consists of 200 units purchased at $16 per unit. Replacement cost has now fallen to $13 per unit. What is the amount of the lower cost of market adjustment the company must make as a result of this decline in value?