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Exam 7: Inventory and Cost of Goods Sold

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Question 21

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If ABC's statement of earnings showed cost of goods sold at $78,000, purchases of $80,000, freight-in at $300, purchases returns of $500 and end-of-the period inventory at $11,900, its beginning-of-the- period-inventory must have been:

A) $10,400
B) $10,100
C) $9,900
D) $9,200

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Question 22

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

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Question 23

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$\begin{array}{l}\text { Shillings had the following inventory activity during April: }\\\\\begin{array} { | l | r | r | r | } \hline & \text { Units } & \text { Unit cost } & \text { Total cost } \\\hline \text { Beginning inventory } & 800 & \$ 10.00 & \$ 8,000 \\\hline \text { Purchase: April 4 } & 1,400 & 11.00 & 15,400 \\\hline \text { Sale: April 8 } & ( 1,500 ) & & \\\hline \text { Purchase: April 12 } & 900 & 10.50 & 9,450 \\\hline \text { Sales: April 24 } & ( 900 ) & & \\\hline\end{array}\end{array}$ -If Shillings is using a perpetual system and the FIFO costing assumption, what is the cost of goods sold closest to?

In periods of falling prices, FIFO will result in a higher cost of goods sold than the average cost formula.

In order to determine cost of goods sold in a periodic inventory system we

When a company uses the periodic inventory system in accounting for its merchandise inventory, which of the following is true?

Match the inventory system with the statement by entering the appropriate letters to the left: A. Perpetual inventory system. B. Periodic inventory system. C. Neither of the above is correct. D. Both A and B are correct. $\begin{array} { | r | l | } \hline 1 . & \text { The inventory system that provides more control features. } \\\hline 2 . & \begin{array} { l } \text { The inventory system that requires adjusting (or closing) entries for the beginning and } \\\text { ending inventories. }\end{array} \\\hline3 . & \text { A purchase requires two journal entries. } \\\hline4 . & \text { A sale requires one journal entry. } \\\hline5 . & \text { Merchandise inventory is debited when goods are purchased. } \\\hline \text { 6. } & \text { A return of a purchase requires two journal entries. } \\\hline \text { 7. } & \text { A physical inventory count is never taken. } \\\hline \text { 8. } & \text { A sale requires two journal entries. } \\\hline \text {9. } & \text { Cost of goods sold is computed as a residual amount after an inventory count. }\\\hline \end{array}$

In order to determine cost of goods sold in a periodic inventory system we

IFRS standards require that a firm select the cost flow assumption that:

If a company were using a periodic inventory system, which of the following entries is the correct journal entry to record the purchase of $20,000 of merchandise on account? a) $\begin{array}{|c|c|c|}\hline \text { Dr. Inventory } & 20,000 & \\\hline \text { Cr. Accounts payable } & & 20,000\\ \hline\end{array}$ b) $\begin{array}{|c|c|c|}\hline \text { Dr. Inventory } & 20,000 & \\\hline \text { Cr. Purchases } & & 20,000 \\\hline\end{array}$ c) $\begin{array}{|c|c|c|}\hline \text { Dr. Purchases } & 20,000 & \\\hline \mathrm{Cr} \text {. Inventory } & & 20,000\\ \hline\end{array}$ d) $\begin{array}{|c|c|c|}\hline \text { Dr. Purchases } & 20,000 & \\\hline \text { Cr. Accounts payable }& & 20,000 \\\hline\end{array}$

Webber Company prepared income statements that reflected pretax profit of $21,000 for 20X1 and $30,000 for 20X2. An audit has determined that there were two errors in the inventory amounts as follows $\begin{array} { | l | r | r | } \hline & \text { Amount Reported } & \text { Correct Amount } \\\hline \text { Ending inventory, 20X1 } & \$ 15,000 & \$ 14,000 \\\hline \text { Ending inventory, 20X2 } & 18,000 & 16,000 \\\hline\end{array}$ The correct pretax profit amount for each year is (show computations assuming the errors were not corrected): 20X1: $__________________ 20X2: $__________________

At the end of 20X1, a $2,500 understatement was discovered in the amount of the 20X1 ending inventory as reflected in the perpetual inventory records. What were the 20X1 effects of the $2,500 inventory error (before correction) ?

If a company were using a perpetual inventory system, which of the following entries is the correct journal entry to record the purchase of $20,000 of merchandise on account? a) $\begin{array}{|c|c|c|}\hline \text { Dr. Inventory } & 20,000 & \\\hline \text { Cr. Accounts payable } & & 20,000 \\\hline\end{array}$ b) $\begin{array}{|c|c|c|}\hline \text { Dr. Inventory } & 20,000 & \\\hline \text { Cr. Purchases } & & 20,000 \\\hline\end{array}$ d) $\begin{array}{|c|c|c|}\hline \text { Dr. Purchases } & 20,000 & \\\hline \text { Cr. Inventory } & & 20,000 \\\hline\end{array}$ d) $\begin{array}{|c|c|c|}\hline \text { Dr. Purchases } & 20,000 & \\\hline \text { Cr. Accounts payable } & & 20,00 \\\hline\end{array}$

The lower of cost and net realizable value basis of valuing inventories ensures that inventories are

If transportation costs are the responsibility of the buyer, they should be added to the cost of purchases for the period.

$\begin{array}{l}\text { Shillings had the following inventory activity during April: }\\\\\begin{array} { | l | r | r | r | } \hline & \text { Units } & \text { Unit cost } & \text { Total cost } \\\hline \text { Beginning inventory } & 800 & \$ 10.00 & \$ 8,000 \\\hline \text { Purchase: April 4 } & 1,400 & 11.00 & 15,400 \\\hline \text { Sale: April 8 } & ( 1,500 ) & & \\\hline \text { Purchase: April 12 } & 900 & 10.50 & 9,450 \\\hline \text { Sales: April 24 } & ( 900 ) & & \\\hline\end{array}\end{array}$ -If Shillings is using a perpetual system and the weighted average costing assumption, what is the cost of goods sold closest to?

The records of Tea Time Company show 20X2 purchases of $9,000. An actual count revealed a 20X2 ending inventory of $4,000. The 20X2 beginning inventory was $5,000. What was the cost of goods sold for 20X2?

The following information was taken from the 20X2 income statement of Milburn Company: Pretax profit, $12,000; Total operating expenses (not including income taxes) , $20,000; Sales revenue, $120,000; Beginning inventory, $8,000; and Purchases, $90,000. Compute the amount of the ending inventory.

An error that understates the ending inventory will cause the cost of goods sold for the period to be understated.

A low inventory turnover ratio could mean a company is at risk of experiencing inventory shortages.