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Exam 6: Inventory and Cost of Goods Sold

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Question 41

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When the net realizable value of inventory falls below its cost,no adjustment to the accounting records is needed.Companies are required to record an adjustment when net realizable value falls below cost.The adjustment has the effect of reducing assets and increasing expenses.

A) True
B) False

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Question 42

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Using a perpetual inventory system,the purchase of inventory on account is recorded with a:

A) Debit to Inventory.
B) Debit to Cost of Goods Sold.
C) Debit to Accounts Payable.

D) A) and B)
E) A) and C)

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Question 43

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Wildwood,an outdoors clothing store,reports the following information for June: What is Wildwood's gross profit for June? $\begin{array} { | l | r | l | r | } \hline \text { Sales revenue } & \$ 104,000 & \begin{array} { l } \text { Income tax } \\\text { expense }\end{array} & \$ 11,000 \\\hline \begin{array} { l } \text { Operating } \\\text { expenses }\end{array} & 22,000 & \begin{array} { l } \text { Cost of goods } \\\text { sold }\end{array} & 65,000 \\\hline \begin{array} { l } \text { Deferred } \\\text { revenues }\end{array} & \$ 15,000 & \begin{array} { l } \text { Nonoperating } \\\text { revenues }\end{array} & 12,000 \\\hline\end{array}$

In a periodic inventory system,the entry at the time of a sale to record the cost of inventory sold includes a:

The adjustment to write down inventory from cost to its lower net realizable value includes a debit to Cost of Goods Sold and a credit to Inventory.

If a company understates its ending balance of inventory in year 1 and it records inventory correctly in year 2,which one of the following is true?

Inventory records for Marvin Company revealed the following: Marvin sold 2,300 units of inventory during the month.Cost of goods sold assuming FIFO would be: $\begin{array} { | l | l | c | r | } \hline \text { Date } & \text { Transaction } & \text { Number of Units } & \text { Unit Cost } \\\hline \text { Mar. 1 } & \text { Beginning inventory } & 1,000 & \$ 7.20 \\\hline \text { Mar. 10 } & \text { Purchase } & 600 & 7.25 \\\hline \text { Mar. 16 } & \text { Purchase } & 800 & 7.30 \\\hline \text { Mar. 23 } & \text { Purchase } & 600 & 7.35 \\\hline\end{array}$

Consider the following information pertaining to OldWest's inventory: At what amount should OldWest report its inventory? $\begin{array} { | l | c | r | r | } \hline \text { Procuct } & \text { Quantly } & \text { Cost } & \begin{array} { r } \text { Net Realizable } \\\text { Value }\end{array} \\\hline \text { Revolvers } & 16 & \$ 120 & \$ 150 \\\hline \text { Spurs } & 23 & 27 & 22 \\\hline \text { Hats } & 12 & 56 & 40 \\\hline\end{array}$

For most companies,actual physical flow of their inventory follows LIFO.Most often,the actual physical flow of goods follows FIFO.

Freight-in is included in the cost of inventory.

Companies are free to choose FIFO,LIFO,or weighted-average cost to report inventory and cost of goods sold.

The primary difference between the periodic and perpetual inventory systems is:

The following balances come from the financial statements of Way Industries: Given this information,what is the company's inventory turnover ratio? $\begin{array} { | l | r | } \hline \text { Sales revenue } & \$ 860,000 \\\hline \text { Accounts receivable } & \$ 280,000 \\\hline \text { Beginning inventory } & \$ 50,000 \\\hline \text { Ending inventory } & \$ 30,000 \\\text { Net purchases } & \$ 460,000 \\\hline \text { Sales returns } & \$ 50,000 \\\hline \text { Sales discount } & \$ 20,000 \\\hline\end{array}$

Which inventory method is better described as having an income statement focus and why is it considered as such?

Suppose that Hastings Corporation overstates its ending inventory for 2018.What effect will this have on the reported amount of cost of goods sold for 2018?

Ravens Inc.has net sales of $200,000,cost of goods sold of $120,000,selling expenses of $6,000,and nonoperating expenses of $2,000.What is the company's gross profit?

Which inventory method is better described as having a balance sheet focus and why is it considered as such?

Consider the following year-end information for Spitzer Corporation: What amount will Spitzer report for operating income? $\begin{array} { | l | r | } \hline \text { Cost of goods sold } & \$ 420,000 \\\hline \text { Sales revenue } & 800,000 \\\hline \text { Nonoperating expenses } & 10,000 \\\hline \text { Operating expenses } & 170,000 \\\hline \text { Income tax expense } & 80,000 \\\hline\end{array}$

Generally,a lower gross profit ratio reflects positively on a company's ability to manage its inventory.A higher ratio is generally a stronger signal about the company's successful management of inventory.

For inventory that is shipped FOB shipping point,title transfers from the seller to the buyer once the seller ships the inventory.