Financial Reporting - Balance Sheet

Question 1

When computing purchasing power gain or loss on net monetary items, which of the following accounts is classified as nonmonetary?

Advances to unconsolidated subsidiaries.
Allowance for uncollectible accounts.
Unamortized premium on bonds payable.
Accumulated depreciation of equipment.

Answer 1

Non-Monetary (since it is a valuation account):
Accumulated Depreciation of Equipment

Monetary:
Advances to unconsolidated subsidiaries.
Allowance for uncollectible accounts.
Unamortized premium on bonds payable.

Question 2

The premium on a three-year insurance policy expiring on December 31, Year 3, was paid in total on January 2, Year 1. If the company has a six-month operating cycle, then on December 31, Year 1, the prepaid insurance reported as a current asset would be for

Answer 2

12 Months

Question 3

How do you calculate shipping costs in the year-end’s valuation?

Purchases during the year 12.0 million
Shipping costs from overseas 1.5 million
Shipping costs to export customers 1.0 million
Inventory at year end 3.0 million

Answer 3

Find the amount inventory remaining by taking the the year end inventory by the purchases.

0.25 = 3,000,000 / 12,000,000

Multiply it by the applicable shipping costs

375,000 = 1,500,000 X 0.25

Shipping costs to export to customers are a selling cost, not the cost of inventory (shipping costs).

Question 4

What does the moving average for inventory do with the units/selling price when calculating COGS at different interval dates for the perpetual system?

Answer 4

Takes the total units / the latest cost amount

1/1 10,000 Units @10
1/10 5,000 Units @5

Moving average = 3,000 = 15,000 / 5

Question 5

Carver Co., a retailer, uses the perpetual inventory method. Carver uses the moving average method to determine the value of its inventory. The following information relates to inventory transactions that took place during the month of March:

3/1 Beg Inv 30,000 Units @$10
3/5 Purchase 10,000 Units @6
03/21 Sale 20,000 Units @10
03/25 Purchase 20,000 Units @13

What amount should Carver report as cost of goods sold on its income statement at the end of March?

Answer 5

Calculate the moving average for the purchases then use this moving average for the sale amount

40,000 units = 30,000 + 10,000

Total Purchase Amount = 300,000 + 60,000

Moving Average = 9 = 360,000 / 40,000 units

180,000 = 20,000 X 9

Question 6

Jones Wholesalers stocks a changing variety of products. Which inventory costing method will be most likely to give Jones the lowest ending inventory when its product lines are subject to specific price increases?

Answer 6

Dollar Value LIFO or LIFO

Question 7

How do you calculate the weighted average COGS within in a periodic system?

Answer 7

Add the total units up for the whole period

Add the total cost of all the purchases

Divide the total costs by the total units

Multiply this weighted average by the amount sold

Example:

1,000 units costing 2,000
2,000 units costing 4,000
1500 units sold for $100

2 = 6,000 / 3,000 units
3,000 COGS = 1,500 X 2

Question 8

Cobb, Inc.’s inventory at May 1 consisted of 200 units at a total cost of $1,250. Cobb uses the periodic inventory method. Purchases for the month were as follows:

Date No. of Units Unit cost Total Cost
May 4 20 $5.80 $116.00
May 17 80 $5.50 $440.00

Cobb sold 10 units on May 14 for $120. What is Cobb’s weighted average cost of goods sold for May?

Answer 8

300 = 200 + 20 + 80

1,806 = 1,250 + 116 + 440

6.02 = 1,806 / 300

60.02 = 6.02 X 10

Question 9

A company that uses a periodic inventory system had inventory on January 1, year 1, of $450,000. During the first six months of year 1, the company had purchases of $500,000 and sales of $600,000. The company’s average markup on cost is 25%. No physical inventory was taken. At what amount should the company value the inventory as of June 30, year 1?

Answer 9

BE AWARE of markup which is not the same as gross profit

Take the mark up and add 100%

125% = 100% + 25%

Take the new markup and divide it by the sales

480,000 = 600,000 / 125%

Calculate COGS

470,000 = 450,000 + 500,000 - 480,000

Question 10

A company enters into a firm purchase commitment to purchase parts for its bicycle manufacturing process. 10,000 of such parts shall be purchased by the company at a value of $24.5 on 3/1 of year 2. On 12/31/year 1, it was estimated that the fair value of such parts had dropped to $23.90. The company should treat this as:

Answer 10

Recognize a loss of $6,000 on Income Statement with a note

When there is a firm commitment to purchase goods in a future period at a set price (i.e., an enforceable contract exists), any loss resulting from a drop in the market value of such goods, or cancellation of the contract by the purchaser, should be recognized in the current period. There should be a note describing the nature of the contract.

Question 11

During the current year, Kam Co. began offering its goods to selected retailers on a consignment basis. The following information was derived from Kam’s current year accounting records:

Beginning Inventory $122,000
Purchases 540,000
Freight in 10,000
Transportation to consignees 5,000
Freight out 35,000
Ending Inventory–held by Kam 145,000
Ending Inventory–held by consignees 20,000

In its current year income statement, what amount should Kam report as cost of goods sold?

Answer 11

Everything except freight out since this is a selling expense

Freight in is added to inventory

Calculate COGS

512,000 = 122,000 + 540,000 + 10,000 + 5,000 -145,000 - 20,000

Question 12

Southgate Co. paid the in-transit insurance premium for consignment goods shipped to Hendon Co., the consignee. In addition, Southgate advanced part of the commissions that will be due when Hendon sells the goods.

Should Southgate include the in-transit insurance premium and the advanced commissions in inventory costs?

Answer 12

Insurance premium yes since it is needed to receive goods

Advanced commissions no, this is a prepaid selling expense

Question 13

Walt Co. adopted the dollar-value LIFO inventory method as of January 1 of the current year, when its inventory was valued at $500,000. Walt’s entire inventory constitutes a single pool. Using a relevant price index of 1.10, Walt determined that its December 31 inventory was $577,500 at current year cost, and $525,000 at base year cost. What was Walt’s dollar-value LIFO inventory at December 31 of the current year?

Answer 13

Difference = Base year cost - Take the beginning value

25,000 = 500,000 - 525,000

Take the difference and multiply it by the price index

27,500 = 25,000 X 1.1

Add this to the beginning value to get the LIFO inventory at year end currently

527,500 = 500,000 + 27,500

Question 14

Garcel, Inc. held unfinished inventory at a cost of $85,000 with a sales value of $125,000. The inventory will cost $10,500 to complete. The normal profit margin is 30% of sales. The replacement cost of the inventory was $75,000. What amount should Garcel report as inventory as per retail inventory method on the balance sheet?

Answer 14

Cost = 85,000

Market (Middle) = 77,500

Ceiling = 114,500 = 125,000 - 10,500

Floor = 77,500 = 114,500 - 37,500 = 37,500 = 125,000 X 0.3

Replacement Cost = 75,000

Market would be the lower @77500

Question 15

During periods of inflation, a perpetual inventory system would result in the same dollar amount of ending inventory as a periodic inventory system under which of the following inventory valuation methods?

Answer 15

FIFO but not LIFO

Question 16

In a ________________, a customer agrees to purchase the goods, but the seller retains physical possession until the customer requests shipment to designated locations.

Answer 16

Bill and Hold

Question 17

If the lower of cost or market rule is disregarded, what would be the estimated cost of the ending inventory? Given the following:

Cost:
Beg Inv 12K
Purchases = 60k

Retail:
Beg Inv 30K
Purchases 110K
Mark ups 10k
Markdown 20K
Sales Revenue 90k

Answer 17

Find the cost to retail amount

Find Retail Side (purchase amount +or - mark ups/downs):

100,000 = 110,000 + 10,000 - 20,000

Divide the cost purchase by the retail cost to get Percentage:

60% = 60,000 / 100,000

Find the COGS

130,000 = 30,000 + 100,000

Subtract the Sales Revenue

40,000 = 130,000 - 90,000

Take the Purchase cost to retail percentage to ending number

24,000 = 40,000 X 60%

Question 18

What are the COGS, average inventory, and inventory turnover ratio formulas when given the following?

Production costs
Beginning inventory
Ending inventory

Answer 18

COGS = Beg Inv + Production Costs - End Inv

Avg Inv = (Beg Inv + End Inv) / 2

Inventory Turnover Ratio = COGS / Avg Inv

Question 19

Stone Co. had the following consignment transactions during December year 1:

Inventory shipped on consignment to Omega Co. $36,000
Freight paid by Stone $1,800
Inventory received on consignment from Gamma Co. $24,000
Freight paid by Gamma $1,000

No sales of consigned goods were made through December 31, year 1. What amount of consigned inventory should be included in Stone’s December 31, year 1, balance sheet?

Answer 19

All inventory on consignment by stone out to omega:

37,8000 = 36,000 + 1,800

Question 20

Estimates of price-level changes for specific inventories are required for which of the following inventory methods?

Answer 20

Dollar-value LIFO

Goods are combined into pools and are traced by their dollar value, corrected for inflation

Question 21

The retail inventory method includes which of the following in the calculation of both cost and retail amounts of goods available for sale?

Answer 21

Purchase returns

When the retail method is employed, purchase returns is included in the calculation of both cost and retail amounts of goods available for sale (AFS)

Question 22

According to the FASB conceptual framework, which of the following attributes would not be used to measure inventory?

Answer 22

Present value of future cash flows

The present value of future cash flows (which would include profits not yet earned) pertains to the time value of money and is not appropriate for measuring inventory

Question 23

On December 31 of the previous year, Jason Company adopted the dollar-value LIFO retail inventory method. Inventory data are as follows:

LIFO Cost:
PY Inv 12/31 360,000
CY Inv 12/31
Increase in price level for the year
Cost to retail for CY

Retail Cost:
PY Inv 12/31 500,000
CY Inv 12/31 660,000
Increase in price level for the year 10%
Cost to retail for CY 70%

Under the LIFO retail method, Jason’s inventory at December 31 of the current year should be

Answer 23

Add 100% to the price level for the year percentage then change it to a decimal

110 = 100 + 10

1.10

Divide the retail CY inv by the price level decimal

600,000 = 660,000 / 1.10

Take this number from the PY Inv

600,000 - 500,000 = 100,000

Take this number and multiply it by price level index

110,000 = 100,000 X 1.10

Multiply it by the cost to retail for CY

77,000 = 110,000 X 0.70

Add this to the LIFO Cost of the PY Inv

437,000 = 360,000 + 77,000

Question 24

Which of the following would not be included in the cost of the finished goods inventory of a manufacturer?

Answer 24

Freight-out expenses as it is selling expense

Question 25

Assuming constant inventory quantities, which of the following inventory-costing methods will produce a lower inventory turnover ratio in an inflationary economy?

Answer 25

FIFO Inventory turnover ratio = COGS/Average inventory In an inflationary economy, COGS reported using FIFO is low, leading to higher net profits. Inventory would be higher since it is reported at current prices. Therefore, higher Inventories and lower COGS will result in a lower inventory turnover ratio. In turnover ratios, turn-it-over to the denominator. So, higher inventory and lower COGS would lead to lower inventory ratio.

Question 26

In January, Stitch, Inc. adopted the dollar-value LIFO method of inventory valuation. At adoption, inventory was valued at $50,000. During the year, inventory increased $30,000 using base-year prices, and prices increased 10%. The designated market value of Stitch's inventory exceeded its cost at year end. What amount of inventory should Stitch report in its year-end balance sheet?

Answer 26

Take the current year by the price increase percentage + 100% 33,000 = 1.1 X 30,000 83,000 = 50,000 + 33,000

Question 27

A company manufactured 1,000 units of product during the year and sold 800 units. Costs incurred during the current year are as follows: Direct materials and direct labor $7,000 Indirect materials and indirect labor $2,000 Insurance on manufacturing equipment $3,000 Advertising $1,000 What amount should be reported as inventory in the company's year-end balance sheet?

Answer 27

Everything except advertising 12,000 = 7,000 + 3,000 + 2,000 800 / 1,000 = 80% 20% = 100% - 80% 2,400 = 12,000 X 20%

Question 28

Hutch Inc. uses the conventional retail inventory method to account for inventory. The following information relates to current year operations: Average Cost: Beg Inv/Purchases 12/31 600,000 Retail Cost: Beg Inv/Purchases 12/31 920,000 Net Markups 40,000 Net Markdowns 60,000 Sales 780,000 What amount should be reported as cost of sales for the current year?

Answer 28

DO NOT USE MARKDOWNS IN COST TO RETAIL PERCENTAGE PORTION FOR COS Find the cost to retail beg inv/purchases percentage Beg Inv/Purchases + Markups 960,000 = 920,000 + 40,000 Divide the Average Cost Beg Inv/Purchases by the new retail Beg Inv/Purchases 0.625 = 600,000 / 960,000 Take the markdowns and sales from the new retail Beg Inv/Purchases 120,000 = 960,000 - 60,000 - 780,000 75.000 = 120,000 X 0.625 Then subtract this from the Average Cost beg inv/purchases 525,000 = 600,000 - 75,000

Question 29

Rose Co. sells one product and uses the last-in, first-out method to determine inventory cost. Information for the month of January follows: Beg Inv 1/1: Total Units 8,000 Unit Costs 8.20 Purchases 1/5: Total Units 12,000 Unit Costs 7.90 Sales: Total Units 10,000 Rose has determined that at January 31, the replacement cost of its inventory was $8 per unit and the net realizable value was $8.80 per unit. Rose's normal profit margin is $1 per unit. Rose applies the lower of cost or market rule to total inventory and records any resulting loss. At January 31, what should be the net carrying amount of Rose's inventory?

Answer 29

Calculate COST AND MARKET to see which is lower Cost = 80,000 = 10,000 X 8 Market = 81,400 Latest Purchases units - Sales units 2,000 = 10,000 - 8,000 15,800 = 2,000 X 7.90 Beg Inv 1/1: 65,600 = 8,000 X 8.20 Add the two together for market 81,400 = 65,000 + 15,800 COST IS LOWER = 81,000

Question 30

Garson Co. recorded goods in transit purchased F.O.B. shipping point at year end as purchases. The goods were excluded from ending inventory. What effect does the omission have on Garson’s assets and retained earnings at year end?

Answer 30

Understated assets and retained earnings

Question 31

Fireworks, Inc. had an explosion in its plant that destroyed most of its inventory. Its records show that beginning inventory was $40,000. Fireworks made purchases of $480,000 and sales of $620,000 during the year. Its normal gross profit percentage is 25%. It can sell some of its damaged inventory for $5,000. The insurance company will reimburse Fireworks for 70% of its loss. What amount should Fireworks report as loss from the explosion?

Answer 31

Calculate ending inv: Sales X Gross profit % 465,000 = 620,000 X 25% Calculate COGS 55,000 = 40,000 + 480,000 - 465,000 Subtract the 5,000 that can still be sold 50,000 = 55,000 - 5,000 Take out the insured reimbursement since it is insured 15,000 = 50,000 X .30