Inventory Flashcards
(30 cards)
Main Co. began its manufacturing business last year. Main uses the dollar-value LIFO method to determine the value of its inventory. Main’s inventory was valued at $100,000 at the end of last year, and, using current costs, $132,000 at the end of the current year. The prices for Main’s inventory during the current year were 20% higher than last year’s prices. What amount should Main report as inventory on its balance sheet at the end of the current year?
A. $110,000
B. $112,000
C. $122,000
D. $132,000
B. $112,000
In this scenario, prices increased 20%, resulting in a price index of 1.20 for Year 2. Following the steps below, Main Co.’s DVL is $112,000.
Step 1 Deflate current year EI $132,000 / 1.20 = $110,000
Step 2 Determine new current year layer $110,000 − $100,000 prior year = $10,000
Step 3 Inflate layer in base year dollars to current year dollars $10,000 × 1.20 = $12,000
Step 4 New EI in DVL $100,000 prior year + $12,000 = $112,000
Note: Inventory increased in real terms by $10,000; the remaining $22,000 increase ($132,000 – $110,000) was the result of inflation.
What are the four steps to dollar value LIFO
1) Convert (deflate) current EI to base year dollars - Current year EI/Current year price index
2) Determine new LIFO layer - Step 1 - Prior year inventory in base year dollars
3) Restate (inflate) new layer from base year dollars to current year dollars - Step 2 * Current price index
4) Determine new DVL ending inventory - Prior DVL layers + Step 3
Price index is calculated as Current EI/Current EI in base year dollars
The original cost of an item of FIFO inventory is above its replacement cost. The item’s replacement cost is above its sales price less disposal costs and is higher than its net realizable value minus a normal profit. The inventory item should be valued at
A. Net realizable value.
B. Original cost.
C. Replacement cost.
D. Net realizable value less normal profit margin.
A. Net realizable value.
LCNRV is use which is just lower of cost or net realizable value
If FIFO is used is LCM or LCNRV used?
If LIFO is used is LCM or LCNRV used?
FIFO = LCNRV
LIFO = LCM
How is unit cost determined in a periodic system and a perpetual system?
Perpetual - A new unit cost is calculated each time goods are purchased
Periodic - At the end of the period, once average cost is calculated and used to value the units sold
Williams Co. has the following inventory transactions for the month of March:
Units Unit cost Total cost Units on hand 3/1 Beginning inventory 4,000 $2 $8,000 4,000 3/7 Purchase 6,000 $3 18,000 10,000 3/16 Sale 5,500 4,500 3/26 Purchase 2,000 $5 $10,000 6,500 Williams uses the average pricing method to determine the value of its inventory. What amount should Williams report as cost of goods sold on the income statement for the month of March under the perpetual and periodic inventory systems?
Perpetual Periodic
A. $16,500 $14,300
B. $14,300 $16,500
C. $19,500 $21,700
D. $21,700 $19,500
B. $14,300 $16,500
This is the average pricing method
Perpetual
Beg Inventory - 40002 = 8000
3/7 Purchase - 60003 = 18000
Total - 10000 and 26000
New avg unit cost at sales date - 26000/10000 = 2.60
COGS = 5500 units sold * 2.60 = 14,300
Periodic
Beg Inventory - 40002 = 8000
3/7 purchase - 60003 = 18000
3/26 purchase - 2000*5 = 10000
Total 12000 and 36000
Avg unit cost = 36000/12000 = 3
COGS = 5500 units sold * 3 = 16500
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. If Garcel uses the last-in, first-out method to determine inventory cost, what amount should Garcel report as inventory on its balance sheet?
A. $75,000
B. $77,000
C. $85,000
D. $114,500
B. $77,000
Although market value is usually replacement cost, it is subject to a ceiling and floor limitation.
The ceiling is NRV (sales price − costs required to complete the inventory and any disposal costs), which is the maximum amount that may be reported as market.
The floor (NRV − Profit margin) is the lowest amount that may be reported as market.
Note: A shortcut to determine market value is to arrange the replacement cost, ceiling, and floor in numerical order and select the value in the middle.
In this scenario, Garcel, Inc. will apply the LCM because it uses the LIFO method. Because replacement cost is given, the ceiling and floor limitations must be calculated to determine the market value of $77,000, which is also the LCM.
Replacement cost - 75000
Ceiling limitation (NRV) - 125000-10500 = 114500
Floor limitation (NRV-profit) = 77000
Market (limited by ceiling and floor) = 114500 - (30%*125000) = 77000
Malloy Enterprises’ inventory at December 31, Year 2, was $1,900,000 based on a physical count priced at cost, and before any necessary adjustment for the following:
Returned merchandise, from a customer, costing $45,000 was received on January 2, Year 3. The goods were shipped FOB shipping point on December 30, Year 2.
Merchandise costing $65,000 had been shipped to a customer FOB destination on December 31, Year 2, and was excluded in inventory count above. The company was notified that the customer received the order on January 3, Year 3.
Merchandise costing $30,000 was shipped FOB shipping point from a vendor on December 31, Year 2, and was received and recorded on January 5, Year 3.
What amount should Malloy report as inventory in its December 31, Year 2, balance sheet?
A. $1,945,000
B. $1,975,000
C. $2,010,000
D. $2,040,000
D. $2,040,000
The 65,000 was shipped FOB destination so it should have been included in inventory until the customer received it.
Trebel Inc., has ending inventory with a cost of $415,000 as determined under the last-in, first-out inventory costing method. The sales value of the inventory is $460,000 and typically Trebel has a profit margin of 20% of sales. The company estimates $50,000 as disposal costs and a replacement value for the inventory of $440,000. What entry, if any, should Trebel record to adjust the inventory at yea
Debit Credit
A Inventory 25,000 Gain on inventory due to market increase 25,000
B Loss on inventory due market decline 5,000 Inventory 5,000
C Loss on Inventory due to market decline 25,000 Inventory 25,000
D No entry required.
B Loss on inventory due market decline 5,000 Inventory 5,000
Replacement cost - 440,000
Ceiling limitation (NRV) - 460,000-50,000 = 410,000
Floor limitation (NRV-profit) - 410,000-(20%*460,000) = 318,000
410,000-415,000 = 5,000
Beck Co.’s inventory of trees is as follows:
Beginning Inventory
10 trees at $50
March 4 Purchased 6 trees at 55
March 12 Sold 8 trees at 100
March 20 Purchased 9 trees at 60
March 27 Sold 7 trees at 105
March 30 Purchased 4 trees at 105
What was Beck’s cost of goods sold using the last in, first out (LIFO) perpetual method?
A. $775
B. $808
C. $850
D. $910
C. $850
LIFO perpetual, that is why you are only using the amount of units sold.
March 12
655 = 330
250 = 100
330+100 = 430
March 27
7*60 = 420
430*420 = 850
Loft Co. reviewed its LIFO inventory values for proper pricing at year end. The following summarizes two inventory items examined for the lower of cost or market:
Inventory item #1 Inventory item #2
Original cost $210,000 $400,000
Replacement cost $250,000 $370,000
Net realizable value $240,000 $410,000
Net realizable value less profit margin $208,000 $405,000
What amount should Loft include in inventory at year end, if it uses the total of the inventory to apply the lower of cost or market?
A. $520,000
B. $610,000
C. $613,000
D. $650,000
B. $610,000
The middle value that is calculated is the market value. Once it is calculated then you take the lower of cost or the middle number (market value). That is why 610,000 is the answer.
Lyon Co. estimated its ending inventory using a method based on the financial statements of prior periods in order to prepare its quarterly interim financial statements. What type of inventory system and method of estimating ending inventory is Lyon using?
Inventory Method of estimating
system ending inventory
A. Perpetual Retail method
B. Perpetual Gross profit method
C. Periodic Sales method
D. Periodic Gross profit method
Companies with inventory adopt either a perpetual or periodic inventory system. Under a perpetual system, the inventory is updated continuously (ie, after every purchase, sale, and return). This allows the company to know how much inventory is on hand at any given time.
In contrast, a periodic system makes no adjustment to inventory until the end of the period, when a physical inventory count is performed. Consequently, a company must estimate its inventory during the year (for interim statements) if a periodic system is used (Choices A and B).
There are two costing methods used to estimate ending inventory: retail inventory and gross profit(Choice C).
The retail inventory method uses the current cost of inventory and revenue (ie, sales) to estimate ending inventory.
The gross profit method uses the company’s historicalgross profit percentage (derived from prior periods financial data) to determine COGS and estimate ending inventory.
If Lyon Co. used a perpetual system, it would have no need to estimate its inventory. Therefore, the company is using a periodic system. Because the method used is based on prior periods financial statements, Lyon must be using the gross profit method.
Bach Co. adopted the dollar value LIFO inventory method as of January 1, Year 1. A single inventory pool and an internally computed price index are used to compute Bach’s LIFO inventory layers. Information about Bach’s dollar value inventory follows:
Date At base
year cost At dollar-value
LIFO cost
1/1/YR1 $90,000 $90,000
Year 1 layer $20,000 $30,000
Year 2 layer $40,000 $80,000
What was the price index used to compute Bach’s Year 2 dollar value LIFO inventory layer?
A. 1.09
B. 1.25
C. 1.33
D. 2.00
D. 2.00
40,000 * index = 80,000
80,000/40000 = index
Hutch, Inc. uses the conventional retail inventory method to account for inventory. The following information relates to the third quarter operations:
Average cost Retail
Beginning inventory and purchases $672,000 $920,000
Net markups
$40,000
Net markdowns
$64,000
Sales
$780,000
What amount should be reported as the estimated ending inventory on Hutch’s balance sheet for the third quarter?
A. $81,200
B. $87,000
C. $87,925
D. $116,000
A. $81,200
1) Find percentage
Retail plus net markups = 960,000
take the cost divided by retail plus net markups - 672000/960000 = 70%
2) Retail plus markups and less markdowns - 920000+40000-64000 = 896000
Subtract from sales - 896000-780000 = 116000
3) Apply percentage to final number - 116,000*.70 = 81,200
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?
A. $80,000
B. $83,000
C. $85,000
D. $88,000
B. $83,000
In this scenario, the starting point for DVL is restating (inflating) the $30,000 layer given in base-year dollars to current-year dollars (step 3). If prices increased 10%, then the index is 1.10, resulting in EI of $83,000 for Stitch, Inc.
DVL layer at beginning of base year ($50,000 × 1.00) $50,000
Current layer in base-year dollars restated to current-year dollars ($30,000 × 1.10) 33,000
Current-year EI reported $83,000
Landry Co. purchased $15,000 in inventory on April 1 under terms of 1/10, net 30. Landry missed the prompt payment deadline and still holds all the inventory. Under the gross method and the net method, at what amount is the inventory carried on Landry’s balance sheet?
Gross Method Net Method
A.$15,000 $15,000
B. $15,150 $15,150
C. $15,000 $14,850
D. $14,850 $15,000
C. $15,000 $14,850
In this scenario, Landry Co. may record the transaction using either the net or gross method. Under the net method the inventory is reduced by $150 ($15,000 × 1%), resulting in inventory of $14,850 ($15,000 − 150). Under the gross method the inventory is recorded at the invoice price of $15,000.
During January Year 3, Metro Co., which maintains a perpetual inventory system, recorded the following information pertaining to its inventory:
Units Unit cost Total cost Units on hand
Balance on 1/1/Y3 1,000 $1 $1,000 1,000
Purchased on 1/7/Y3 600 3 1,800 1,600
Sold on 1/20/Y3 900
700
Purchased on 1/25/Y3 400 5 2,000 1,100
Under the moving average method, what amount should Metro report as inventory at January 31, Year 3?
A. $2,640
B. $3,225
C. $3,300
D. $3,900
B. $3,225
Take the average of the units before the sale
2800 total unit cost / 1600 Total units = 1.75
multiply by sales - 900 * 1.75 = -1575
Take the purchases after of 400*5 = 2000
Sum the total - 2800-1575+2000 = 3,225
Wash Company’s inventory at December 31, Year 1, was $1,500,000, based on a physical count priced at cost and before any necessary adjustments for the following:
Merchandise costing $90,000 was shipped FOB shipping point from a vendor on December 30, Year 1. The merchandise was received by Wash and recorded on the books on January 5, Year 2.
Some goods in the shipping area were excluded from inventory, although the shipment was not made by Wash until January 3, Year 2. The goods, billed to the customer FOB shipping point on December 30, Year 1, had a cost of $120,000.
What amount should Wash Company report as inventory in its December 31, Year 1, balance sheet?
A. $1,500,000
B. $1,590,000
C. $1,620,000
D. $1,710,000
D. $1,710,000
The 120,000 was excluded from inventory and since it wasn’t shipped until January 3 it should be included.
On June 1, year 2, Pitt Corp. sold merchandise with a list price of $5,000 to Burr on account. Pitt allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the sale was made FOB shipping point. Pitt prepaid $200 of delivery costs for Burr as an accommodation. On June 12, year 2, Pitt received from Burr a remittance in full payment amounting to
A. $2,744
B. $2,940
C. $2,944
D. $3,140
C. $2,944
Purchases are always recorded net of trade discounts. When more than one trade discount is applied to a list price, it is called a chain discount. Chain discounts are applied in steps; each discount applies to the previously discounted price. The cost, net of trade discounts, is $2,800 [$5,000 − (30% × $5,000) = $3,500; and $3,500 − (20% × $3,500) = $2,800]. Payment was made within the discount period, so the net purchase price is $2,744 [$2,800 − (2% × $2,800)]. The remittance from Burr would also include reimbursement of the $200 of delivery costs. Since the terms were FOB shipping point, Burr is responsible for paying this amount, and must reimburse Pitt, who prepaid the freight. Thus, the total remittance is $2,944 ($2,744 + $200).
The following information is available for Cooke Company for year 2:
Net sales $1,800,000
Freight-in 45,000
Purchase discounts 25,000
Ending inventory 120,000
The gross margin is 40% of net sales. What is the cost of goods available for sale?
A. $ 840,000
B. $ 960,000
C. $1,200,000
D. $1,220,000
C. $1,200,000
This answeris correct. Gross margin is 40% of net sales ($1,800,000), or $720,000. Therefore, cost of goods sold is $1,080,000 ($1,800,000 net sales less $720,000 gross margin). Finally, cost of goods available for sale is $1,200,000 ($1,080,000 cost of goods sold plus $120,000 ending inventory). The amounts for freight-in ($45,000) and purchase discounts ($25,000) are not necessary for the computation.
On December 28, Year 2, Kerr Manufacturing Co. purchased goods costing $50,000. The terms were FOB destination. These goods were received on December 31, Year 2. Costs incurred in connection with the sale and delivery of the goods were as follows:
Packaging for shipment $ 1,000
Shipping 1,500
Special handling charges 2,000
In Kerr’s December 31, Year 2 balance sheet, what amount of cost for these goods should be included in inventory?
A. $50,000
B. $51,000
C. $51,500
D. $52,000
A. $50,000
When goods are shipped FOB destination, the seller owns the goods in transit and therefore typically pays the shipping cost. Conversely, when goods are shipped FOB shipping point, the buyer owns the goods in transit and therefore typically pays the shipping costs.
In this scenario, the goods are shipped FOB destination. Because the question does not explicitly state otherwise, we should assume that the seller will pay the cost of shipping and other costs related to the goods’ transfer. The seller is responsible for packaging costs ($1,000), shipping costs ($1,500), and the special handling charges ($2,000). The only amount included as the buyer’s cost of the purchased inventory is the purchase price ($50,000) (Choices B, C, and D).
On December 31, year 1, Kern Company adopted the dollar-value LIFO inventory method. All of Kern’s inventories constitute a single pool. The inventory on December 31, year 1, using the dollar-value LIFO inventory method was $600,000. Inventory data for year 2 are as follows:
12/31/Y2 inventory at year-end prices $780,000
Relevant price index at year-end (base year 1) 1.20
Under the dollar-value LIFO inventory method, Kern’s inventory at December 31, year 2, would be
A. $650,000
B. $655,000
C. $660,000
D. $720,000
C. $660,000
This answeris correct. The dollar-value LIFO method accounts for inventory by layers. Each layer is valued using the price index for the year the inventory was purchased. To begin, the December 31, year 2 inventory at year-end prices ($780,000) must be restated back to base-year prices ($780,000/1.20 = $650,000). Thus, the ending inventory consists of the base-year layer of $600,000 (December 31, year 1 inventory) and an incremental layer of $50,000 (quantity change holding prices constant) added in year 2 ($650,000 − $600,000). The base-year layer is left at base-year prices, but the year 2 layer must be expressed in terms of year 2 prices.
\Base-year layer $600,000
year 2 layer ($50,000 × 1.20) 60,000
12/31/Y2 inventory $660,000
The retail inventory method includes which of the following in the calculation of both cost and retail amounts of goods available for sale?
A. Purchase returns.
B. Sales returns.
C. Net markups.
D. Freight in.
A. Purchase returns.
The retail method measures beginning inventory and net purchases at both cost and retail. It then applies the average relationship between cost and retail (based on beginning inventory and purchases) to ending inventory at retail to determine ending inventory at cost.
The following items were included in Venicio Corporation’s inventory account at December 31, year 1:
- Merchandise out on consignment, at sales price, including 40% margin on sales $14,000
- Goods purchased, in transit, shipped FOB shipping point 12,000
- Goods held on consignment by Venicio 9,000
Venicio’s inventory account at December 31, year 1, should be reduced by
A. $14,600
B. $17,400
C. $23,000
D. $35,000
A. $14,600
This answeris correct. The inventory account should be reduced by two amounts. The merchandise out on consignment should be priced at cost, not retail. Inventory should be reduced by the $5,600 margin on sales ($14,000 × 40%). The goods purchased FOB shipping point are appropriately included in the inventory account as the title has transferred to Venicio; no adjustment is necessary. Finally, the inventory account should be reduced for the goods held on consignment by Venicio. These goods are owned by the consignor, not Venicio.
Consignment inventory margin on sales $ (5,600)
Goods held on consignment (9,000)
$(14,600)
