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Exam 6: Inventories

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Question 21

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If merchandise inventory is being valued at cost and the purchase price is steadily falling, which method of costing will yield the largest net income?

A) average cost
B) LIFO
C) FIFO
D) weighted average

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Question 22

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Use the following information to answer the following questions. The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records during May. The company had no beginning inventory on May 1. $\begin{array}{|l|l|l|l|}\hline \text { Date } & \text { Product Z } & \text { Units } & \text { Cost } \\\hline \text { May 3 } & \text { Purchase } & 5 & \$ 20 \\\hline \text { May 10 } & \text { Sale } & 3 & \\\hline \text { May 17 } & \text { Purchase } & 10 & \$ 24 \\\hline \text { May 20 } & \text { Sale } & 6 & \\\hline \text { May 23 } & \text { Sale } & 3 & \\\hline \text { May 30 } & \text { Purchase } & 10 & \$ 30 \\\hline\end{array}$ Assuming that the company uses the perpetual inventory system, determine the Gross Profit for the month of May using the LIFO cost method.

A) $348
B) $452
C) $444
D) $356

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Question 23

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The units of an item available for sale during the year were as follows: There are 30 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the ending inventory cost using FIFO.

Three identical units of Item Magnesium XP are purchased during May, as shown below. $\begin{array} { | l | l | l | l | } \hline & \text { Item Magnesium XP } & \text { Units } & \text { Cost } \\\hline \text { May 3 } & \text { Purchase } & 1 & \$ 130 \\\hline \text { May 10 } & \text { Purchase } & 1 & 136 \\\hline \text { May 19 } & \text { Purchase } & 1 & 142 \\\hline \text { Total } & & 3 & \$ 408 \\\hline\end{array}$ Assume that two units are sold on May 23 for $313. Determine the gross profit for May and ending inventory on May 31 using (a) FIFO, (b) LIFO, and (c) average cost methods.

Which of the following methods is appropriate for a business whose inventory consists of a relatively small number of unique, high-cost items?

The average cost method will always yield results between FIFO and LIFO.

Merchandise inventory at the end of the year was inadvertently overstated. Which of the following statements correctly states the effect of the error on net income, assets, and owner's equity?

The specific identification inventory method should be used when the inventory consists of identical, low cost units that are purchased and sold frequently.

During periods of decreasing costs the use of the LIFO method of costing inventory will result in a lower amount of net income than would result from the use of the FIFO method.

The units of Manganese Plus available for sale during the year were as follows: There are 15 units of the product in the physical inventory at November 30. The periodic inventory system is used. Determine the difference in gross profit between the LIFO and FIFO inventory cost systems.

Garrison Company uses the retail method of inventory costing. They started the year with an inventory that had a retail cost of $45,000. During the year they purchased an inventory with a retail cost of $300,000. After performing a physical inventory, they calculated their inventory cost at retail to be $80,000. The mark up is 100% of cost. Determine the ending inventory at its estimated cost.

During times of rising prices, which of the following is not an accurate statement?

If a company mistakenly counts less items during a physical inventory than actually exist, how will the error affect the cost of merchandise sold?

Safeguarding inventory from damage or theft is a primary objective for the control of inventory. If you were running a clothing store, name three specific controls you would implement to guard inventory from theft.

The inventory costing method that reports the most current prices in ending inventory is

If a fire destroys the merchandise inventory, the gross profit method can be used to estimate the cost of merchandise destroyed.

Under the periodic inventory system, the merchandise inventory account continuously discloses the amount of inventory on hand.

The average cost inventory method is the rarely used with a perpetual inventory system.

Using the lower of cost or market, what should the total inventory value be for the following items: $\begin{array} { | l | l | l | l | l | c | } \hline \text { Item } & \text { Quantity } & \text { Unit cost price } & \text { Unit market price } & \text { Total cost price } & \begin{array} { l } \text { Total market } \\\text { price }\end{array} \\\hline \text { A } & 300 & \$ 15.00 & \$ 14.50 & \$ 4,500 & \$ 4,350 \\\hline \text { B } & 200 & \$ 14.00 & \$ 15.00 & \$ 2,800 & \$ 3,000 \\\hline \text { C } & 100 & \$ 17.00 & \$ 17.50 & \$ 1,700 & \$ 1,750 \\\hline\end{array}$ Apply the lower-of-cost-or-market method to inventory as a whole.

The following lots of a particular commodity were available for sale during the year: $\begin{array}{lc}\text { Beginning invent ory } & 5 \text { units at } \$ 61 \\\text { First purchase } & 15 \text { units at } \$ 63 \\\text { Second purchase } & 10 \text { units at } \$ 74 \\\text { Third purchase } & 10 \text { units at } \$ 77\end{array}$ The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year. What is the amount of cost of goods sold for the year according to the FIFO method?