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CHAPTER 8 Cost of Goods Sold and Inventory:

Identification and Valuation

MULTIPLE CHOICE QUESTIONS

Theory/Definitional Questions

1 Costs included in work in process inventory2 Definition of LIFO reserve3 LIFO conformity rule4 Interim period LIFO liquidation5 Inventory pools6 Examples of inventory 7 Goods on consignment

8 Flow of product costs through inventory accounts9 Inventory shrinkage--how it affects raw materials and cost of goods sold

10 Determination of cost of goods sold11 Goods on consignment--included in consignor's inventory12 Use of discounts lost account13 The effect of omission of purchase on inventory and cost of goods sold14 Weighted average inventory--not appropriate for perpetual system15 Goods shipped FOB destination are included in seller’s inventory16 FIFO with falling prices--gives highest cost of goods sold17 Specific identification--matches cost flow with physical flow18 Goods shipped FOB shipping point are included in buyer’s inventory19 FIFO--best approximates specific identification in manufacturing20 LIFO with rising prices gives lowest reported net income21 Journal entry when merchandise is returned under perpetual system22 Inventory valuation under LIFO versus FIFO23 Dollar-value LIFO--specific identification cannot be used for layers24 Perpetual inventory system25 Double-extension and link-chain methods--variations of dollar-value LIFO26 Goods in transit at year-end purchased FOB shipping point27 Application of double extension28 How warehouse costs and discounts affect inventory values29 Periodic inventory method--trade discounts not reported separately

267

268 Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

30 Journal entry when merchandise is defective under perpetual system31 Weighted average inventory--not appropriate for perpetual system32 LIFO--appropriate for periodic or perpetual33 FIFO--most closely reports current cost34 Effect of decreasing inventory costs under FIFO and LIFO35 FIFO with rising prices--same amount for perpetual and periodic36 Dollar value LIFO--basis for computations37 Determining the inventory method best for predicting future earnings38 Ending inventory under the dollar-value LIFO method

Computational Questions39 Purchases made net of discount40 Determination of net purchases with net and gross methods41 Computation of purchase amount under gross method42 Computation of FIFO cost of goods sold43 Computation of cost of goods sold44 Determination of accounts payable balance45 Computation of FIFO periodic inventory46 Computation of LIFO periodic inventory47 Computation of LIFO perpetual inventory48 Computation of FIFO perpetual inventory 49 Computation of weighted average periodic inventory50 Computation of moving average perpetual inventory51 Computation of number of days’ sales in average inventories52 Computation of cost of goods sold53 Computation of cost of merchandise available for sale54 Computation of dollar-value LIFO inventory55 Computation of dollar-value LIFO inventory56 Computation of dollar-value LIFO inventory57 Computation of dollar-value LIFO inventory58 Computation of freight-in59 Computation of ending inventory60 Computation of cost of goods sold61 Computation of inventory turnover62 Computation of cost of goods available for sale63 Computation of inventory turnover64 Computation of inventory cost65 Computation of value of inventory under the dollar-value LIFO method66 Computation of value of inventory under the dollar-value LIFO method67 Computation of value of inventory under the dollar-value LIFO method68 Computation of value of inventory under the dollar-value LIFO method69 Computation of ending inventory under periodic FIFO costing alternative

Test Bank, Intermediate Accounting, 14th ed. 269

70 Computation of ending inventory under periodic LIFO costing alternative71 Computation of cost of unit available for sale using the average cost

method72 Computation of cost of goods sold73 Computation of cost of goods sold74 Computation of inventory balance using the average cost method75 Computation of cost of ending inventory using periodic LIFO inventory

method76 Computation of year-end inventory balance77 Computation of accounts payable balance78 Computation of accounts payable balance79 Computation of cost of goods sold80 Computation of periodic FIFO cost of goods sold81 Computation of periodic LIFO cost of goods sold82 Computation of cost of goods sold using the average cost method83 Computation of dollar-value LIFO inventory84 Calculate inventory turn-over

PROBLEMS

1 Computation of ending inventory by subtracting items that should not be included

2 Computation of LIFO inventory for three years3 Computation of cost of goods available for sale4 Correct entries under periodic inventory system5 Computation of inventory under LIFO, FIFO, and moving average6 Computation of inventory under dollar-value LIFO7 Computation of inventory under LIFO, FIFO; give gross margin LIFO8 Computation of periodic LIFO, FIFO, weighted average9 Computation of dollar value LIFO inventory

10 Computation of ending inventory using the dollar-value LIFO method11 Computation of perpetual moving average and periodic weighted average12 Computation of dollar value LIFO for five successive years13 Computation of price index using double-extension method14 Price index with double extension, dollar-value LIFO inventory

15 Change from LIFO to FIFO 16 LIFO liquidation


MULTIPLE CHOICE QUESTIONS

c 1. Which of the following would not be included in the cost of work in process LO1 inventory?

a. Cost of electricity to operate factory equipmentb. Maintenance costs of factory equipmentc. Depreciation on office equipment in the sales manager’s officed. Depreciation on factory equipment

d 2. The term LIFO reserve refers toLO6 a. a cost flow assumption for valuing inventory.

b. a special fund set aside to cover LIFO liquidations.c. inventory pools used in the dollar-value LIFO method.d. the difference between the ending inventory amount under LIFO and the

ending inventory amount under another inventory cost flow assumption.

d 3. Which of the following statements is true?LO6 a. A company must use the FIFO cost flow assumption for taxes as

well as for financial accounting and reporting.b. A company may use FIFO for inventory valuation purposes on the

balance sheet provided that LIFO cost of goods sold is reported on the income statement.

c. Application of LIFO for financial reporting purposes must strictly follow IRS regulations relating to LIFO.

d. LIFO is the only inventory method that must be used for financial reporting purposes if used for tax purposes.

a 4. If a company experiences a liquidation of a LIFO inventory layer in the second

LO6 quarter that is expected to be restored by the end of the annual financial reporting period, the company shoulda. treat the layer as if it were liquidated and include in cost of goods sold the

expected replacement cost of the inventory sold.b. deplete the LIFO layer as if the interim period were an annual period.c. change to an alternative inventory cost method, such as FIFO, so that the

problem of LIFO liquidation is not encountered.


d. delay the recognition of both revenue and cost of goods sold on the inventory involved until a final determination of the LIFO inventory can be made at the end of the annual period.

c 5. Which one of the following statements regarding inventory pools is not correct?

LO9 a. A company is not required to use the same pools for tax and financial reporting purposes.

b. The unit cost assigned to items in a new layer may be based on the weighted average cost of acquisitions during the period.

c. The larger and more diverse the composition of a pool, the greater the likelihood of inventory liquidation under LIFO.

d. Layers of good acquired at varying price levels can exist in a single pool.

d 6. Which of the following would not be reported as inventory?LO1 a. Land acquired for resale by a real estate firm

b. Stocks and bonds held for resale by a brokerage firmc. Partially completed goods held by a manufacturing companyd. Machinery acquired by a manufacturing company for use in the

production process

b 7. Goods on consignment areLO3 a. included in the consignee’s inventory.

b. recorded in a consignment out account which is an inventory account.c. recorded in a consignment in account which is an inventory account.d. All of the above.

b 8. Which of the following describes the flow of product costs through the inventory

LO1 accounts of a manufacturer?a. Raw materials, goods in process, factory overhead, finished goodsb. Raw materials, goods in process, finished goodsc. Raw materials, direct labor, factory overhead, finished goodsd. Raw materials, direct labor, factory overhead


c 9. Western Manufacturing Company uses a perpetual inventory system for its raw

LO2 materials. The inventory records reflect a raw materials balance of $378,500 at December 31. A physical inventory taken on that date revealed raw materials of $375,750. How will the $2,750 difference affect raw materials inventory and cost of goods sold, assuming it is attributed to normal shrinkage?

Raw Materials Cost of Goods Solda. Increase Decreaseb. Decrease No effectc. Decrease Increased. No effect Increase

d 10. Cost of goods sold is equal toLO2 a. the cost of inventory on hand at the end of a period plus net purchases minus the cost of inventory on hand at the beginning of a period.

b. the cost of inventory on hand at the beginning of a period minus net purchases plus the cost of inventory on hand at the end of a period.

c. the cost of inventory on hand at the beginning of a period plus net sales minus the cost of inventory on hand at the end of a period.

d. the cost of inventory on hand at the beginning of a period plus net purchases minus the cost of inventory on hand at the end of a period.

a 11. Goods on consignment should be included in the inventory ofLO3 a. the consignor but not the consignee.

b. the consignee but not the consignor.c. both the consignor and the consignee.d. neither the consignor nor the consignee.

d 12. The use of a discounts lost account implies that the recorded cost of aLO4 purchased inventory item is its

a. invoice price.b. invoice price plus the purchase discount lost.c. invoice price less the purchase discount taken.d. invoice price less the purchase discount allowable whether taken or not.


d 13. A company using a periodic inventory system neglected to record a purchaseLO3 of merchandise on account at year-end. This merchandise was omitted from

the year-end physical count. How will these errors affect inventory at year-end and cost of goods sold for the year?

Cost of GoodsInventory Sold

a. No effect Understateb. No effect Overstatec. Understate Understated. Understate No effect

c 14. Which inventory costing method would not be appropriate for a manufacturerLO5 using a perpetual inventory system?

a. First-in, first-outb. Last-in, first-outc. Average costd. Dollar-value LIFO

a 15. If goods shipped FOB destination are in transit at the end of the year, theyLO3 should be included in the inventory balance of the

a. seller.b. common carrier.c. buyer.d. bank.

a 16. In a period of falling prices, the use of which of the following inventory cost flow

LO7 methods would typically result in the highest cost of goods sold?a. FIFOb. LIFOc. Weighted average costd. Specific identification

b 17. The specific identification method of inventory costingLO5 a. eliminates all opportunity for profit manipulation.

b. matches the flow of recorded costs with the physical flow of goods.c. can be used only with a perpetual inventory system.d. is a violation of generally accepted accounting principles.


a 18. Merchandise shipped FOB shipping point on the last day of the year shouldLO3 ordinarily be included in

a. the buyer’s inventory balance.b. the seller’s inventory balance.c. neither the buyer’s nor seller’s inventory balance.d. both the buyer’s and the seller’s inventory balances.

b 19. Which inventory pricing method best approximates specific identification in most

LO7 manufacturing situations?a. Activity-based costingb. FIFOc. Average costd. LIFO

a 20. In a period of rising prices, the inventory cost allocation method that tends toLO7 result in the lowest reported net income is

a. LIFO.b. FIFO.c. moving average.d. weighted average.

c 21. The Allen Company makes the following entry in its accounting records:LO2

Inventory....................................................................... 200Cost of Goods Sold.............................................. 200

This entry would be made whena. merchandise is sold and the periodic inventory method is used.b. merchandise is sold and the perpetual inventory method is used.c. merchandise is returned and the perpetual inventory method is used.d. merchandise is returned and the periodic inventory method is used.

b 22. For the past four years, O’Doud Corp. has used LIFO for inventory valuation.LO7 The inventory value at the end of year four was $85,000, but would have

been $60,500 if FIFO had been used throughout the four-year period. If O’Doud had used FIFO for the entire four years, income before taxes would have beena. $24,500 more over the four-year period.b. $24,500 less over the four-year period.c. $24,500 more in year four.


d. $24,500 less in year four.

d 23. In applying dollar-value LIFO, which of the following inventory cost flow methods

LO10 could not be used to value incremental inventory layers?a. Average costb. FIFOc. LIFOd. Specific identification

d 24. Which of the following is not true of the perpetual inventory method?LO2 a. Purchases are recorded as debits to the inventory account.

b. The entry to record a sale includes a debit to Cost of Goods Sold and a credit to Inventory.

c. After a physical inventory count, Inventory is credited for any missing inventory.

d. Purchase returns are recorded by debiting Accounts Payable and crediting Purchase Returns and Allowances.

c 25. The double-extension method is a variation of which of the following inventory

LO10 cost flow methods?a. Moving averageb. FIFOc. Dollar-value LIFOd. Conventional (lower-of-cost-or-market) retail

d 26. Goods in transit at year-end purchased FOB shipping point were appropriately

LO3 recorded in the purchases account but were incorrectly excluded from the ending inventory. What effect will this omission have on the company's assets, liabilities, and retained earnings at year-end?a. No effect, no effect, overstatedb. No effect, no effect, understatedc. Understated, no effect, overstatedd. Understated, no effect, understated

a 27. When the double-extension approach to the dollar-value LIFO inventory cost


LO10 flow method is used, the inventory layer added in the current year is multiplied by an index number. How would the following be used in the calculation of this index number?

Ending Inventory Ending Inventoryat Current-Year Cost at Base-Year Cost

a. Numerator Denominatorb. Numerator Not Usedc. Denominator Numeratord. Not Used Denominator

a 28. A company records inventory at the gross invoice price. Theoretically, howLO4 should the following affect the costs in inventory?

Warehousing Cash Discounts Costs Available

a. Increase Decreaseb. No effect Decreasec. No effect No effectd. Increase No effect

a 29. When using the periodic inventory method, which of the following generallyLO4 would not be separately accounted for in the computation of cost of goods

sold?a. Trade discounts applicable to purchases during the periodb. Cash (purchase) discounts taken during the periodc. Purchase returns and allowances of merchandise during the periodd. Cost of transportation-in for merchandise purchases during the period

d 30. A firm using the perpetual inventory method returned defective merchandiseLO4 costing $2,000 to one of its suppliers. The entry to record this transaction will

include a debit toa. Accounts Receivable.b. Inventory.c. Purchase Returns and Allowances.d. Accounts Payable.

b 31. The average cost method is applicable to which of the following inventoryLO5 systems?


Periodic Perpetuala. Yes Yesb. Yes Noc. No Yesd. No No

c 32. The LIFO inventory cost flow method may be applied to which of the followingLO5 inventory systems?

Periodic Perpetuala. No No b. No Yesc. Yes Yesd. Yes No

a 33. Which of the following inventory costing methods reports most closely theLO5 current cost of inventory on the balance sheet?

a. FIFOb. Specific identificationc. Weighted averaged. LIFO

b 34. Which of the following will occur when inventory costs are decreasing?LO7 a. LIFO will result in lower net income and lower ending inventory than will FIFO.

b. FIFO will result in lower net income and lower ending inventory than will LIFO.

c. LIFO will result in a lower net income, but a higher ending inventory, than will FIFO.

d. FIFO will result in a lower net income, but a higher ending inventory, than will LIFO.

c 35. During periods of rising prices, when the FIFO inventory cost flow method isLO7 used, a perpetual inventory system would

a. not be permitted.b. result in a higher ending inventory than a periodic inventory system.c. result in the same ending inventory as a periodic inventory system.d. result in a lower ending inventory than a periodic inventory system.

d 36. The dollar-value LIFO inventory cost flow method involves computations based


LO10 onInventory Pools A Specific Priceof Similar Items Index for Each Year

a. No Yesb. No Noc. Yes Nod. Yes Yes

c 37. Which of the inventory cost flow assumptions provides the best measure ofLO7 earnings, where “best” means most appropriate for predicting future

earnings, when prices have been declining?a. FIFOb. Specific identificationc. LIFOd. Average cost

c 38. In the dollar-value LIFO method, what does the ending inventory for any period

LO10 represent?a. The ending inventory at current costb. The ending inventory at base-year dollarsc. The sum of inventory layers each costed at the current cost index in effect

the year the layer was addedd. The sum of inventory layers each costed at historical cost

a 39. Assume that a company records purchases net of discount. If the companyLO4 bought merchandise valued at $10,000 on credit terms 3/15, net 30, the entry

to record a payment for half of the purchase within the discount period would include a debit toa. Accounts Payable for $4,850 and a credit to Cash for $4,850.b. Accounts Payable for $5,000 and a credit to Cash for $5,000.c. Accounts Payable for $4,850 and to Interest Expense for $150, and a

credit to Cash for $5,000.


d. Accounts Payable for $5,000 and to Interest Revenue for $150 and to Cash for $5,000.

c 40. On August 1, Stephan Company recorded purchases of inventory of $80,000LO4 and $100,000 under credit terms of 2/15, net 30. The payment due on the

$80,000 purchase was remitted on August 14. The payment due on the $100,000 purchase was remitted on August 29. Under the net method and the gross method, these purchases should be included at what respective net amounts in the determination of cost of goods available for sale?

Net Method Gross Methoda. $178,400 $176,400b. $176,400 $176,400c. $176,400 $178,400d. $180,000 $176,400

b 41. Ami Retailers purchased merchandise with a list price of $100,000, subject toLO4 a trade discount of 20 percent and credit terms of 2/10, n/30. At what

amount should Ami record the cost of this merchandise if the gross method is used?a. $100,000b. $80,000c. $98,000d. $78,400

c 42. With LIFO, cost of goods sold is $195,000, and ending inventory is $45,000. If

LO6 FIFO ending inventory is $65,000, how much is FIFO cost of goods sold?a. $215,000b. $195,000c. $175,000d. $65,000


b 43. Holdaway Co., a manufacturer, had inventories at the beginning and end of its

LO4 current year as follows:Beginning End

Raw materials......................................................... $11,000 $15,000Work in process...................................................... 20,000 24,000Finished goods........................................................ 12,500 9,000

During the year the following costs and expenses were incurred:Raw materials purchased........................................................ $150,000Direct labor cost...................................................................... 60,000Indirect factory labor................................................................ 30,000Taxes and depreciation on factory building............................. 10,000Taxes and depreciation on sales room and office.................. 7,500Sales salaries.......................................................................... 20,000Office salaries......................................................................... 12,000Utilities (60% applicable to factory, 20% to sales room,

and 20% to office).............................................................. 25,000

Holdaway’s cost of goods sold for the year isa. $257,000.b. $260,500.c. $261,000.d. $269,500.

a 44. Barlow Company’s Accounts Payable balance at December 31, 2002, wasLO3 $1,800,000 before considering the following transactions:

Goods were in transit from a vendor to Barlow on December 31, 2002. The invoice price was $100,000, and the goods were shipped FOB shipping point on December 29, 2002. The goods were received on January 4, 2003.

Goods shipped to Barlow FOB shipping point on December 20, 2002, from a vendor were lost in transit. The invoice price was $50,000. On January 5, 2003, Barlow filed a $50,000 claim against the common carrier.

In its December 31, 2002, balance sheet, Barlow should report Accounts Payable ofa. $1,950,000.b. $1,900,000.c. $1,850,000.


d. $1,800,000.

d 45. Miller Inc. is a wholesaler of office supplies. The activity for Model III calculators

LO5 during August is shown below:

Balance/ Date Transaction Units Cost

August 1 Inventory 2,000 $36.007 Purchase 3,000 37.20

12 Sales 3,60021 Purchase 4,800 38.0022 Sales 3,80029 Purchase 1,600 38.60

If Miller Inc. uses a FIFO periodic inventory system, the ending inventory of Model III calculators at August 31 is reported asa. $150,080.b. $150,160.c. $152,288.d. $152,960.


a 46. Miller Inc. is a wholesaler of office supplies. The activity for Model III calculators





If Miller Inc. uses a LIFO periodic inventory system, the ending inventory of Model III calculators at August 31 is reported asa. $146,400.b. $150,080.c. $150,160.d. $152,960.

c 47. Miller Inc. is a wholesaler of office supplies. The activity for Model III calculators





If Miller Inc. uses a LIFO cost perpetual inventory system, the ending inventory of Model III calculators at August 31 is reported asa. $146,400.b. $150,080.c. $150,160.d. $152,960.


d 48. Miller Inc. is a wholesaler of office supplies. The activity for Model III calculators





If Miller Inc. uses a FIFO cost perpetual inventory system, the ending inventory of Model III calculators at August 31 is reported asa. $150,080.b. $150,160.c. $152,232.d. $152,960.

b 49. Stephens Inc. is a wholesaler of photography equipment. The activity for theLO5 VTC cameras during July is shown below:


July 1 Inventory 2,000 $36.007 Purchase 3,000 37.00


If Stephens Inc. uses the average cost method to account for inventory, the ending inventory of VTC cameras at July 31 is reported asa. $153,400.b. $156,912.c. $158,736.


d. $159,464.

c 50. Stephens Inc. is a wholesaler of photography equipment. The activity for theLO5 VTC cameras during July is shown below:


July 1 Inventory 2,000 $36.007 Purchase 3,000 37.00


If Stephens Inc. uses a moving average perpetual inventory system, the ending inventory of the VTC cameras at July 31 is reported asa. $153,400.b. $156,912.c. $158,736.d. $159,464.

c 51. The following information is available for Lyman Company:LO8

Cost of goods sold for 2002............................................... $1,200,000Inventories at December 31, 2001..................................... 350,000Inventories at December 31, 2002..................................... 310,000

Assuming that a business year consists of 360 days, the number of days’ sales in average inventories for 2002 wasa. 49.5.b. 93.c. 99.d. 105.

a 52. Following are the account balances from Fulton Company’s income statement:

LO4Inventory, January 1, 2002................................................ $30,000Purchases.......................................................................... 40,000Purchase Returns and Allowances.................................... 5,000Purchase Discounts........................................................... 4,000Freight-In........................................................................... 5,000Inventory, December 31, 2002.......................................... 15,000Freight-Out......................................................................... 6,000

Given this information, the cost of goods sold during 2002 isa. $51,000.b. $46,000.c. $56,000.d. $66,000.

c 53. Following are the account balances from Jackson Company’s income statement:

LO4Inventory, January 1, 2002................................................ $35,000Purchases.......................................................................... 35,000Purchase Returns and Allowances.................................... 2,000Purchase Discounts........................................................... 4,000Freight-In........................................................................... 5,000Inventory, December 31, 2002.......................................... 10,000Freight-Out......................................................................... 6,000

Given this information, the cost of merchandise available for sale during 2002 isa. $65,000.b. $59,000.c. $69,000.d. $61,000.

b 54. Cannon Company adopted the dollar-value LIFO inventory method on December

LO7 31, 2001. Cannon’s entire inventory constitutes a single pool. On December 31, 2002, the inventory was $300,000 under the dollar-value LIFO method. Inventory data for 2002 are as follows:

December 31, 2002, inventory at year-end prices.......................$390,000Relevant price index at year-end (base = 1.00 for 2001).................... 1.20

Using dollar-value LIFO, Cannon’s inventory at December 31, 2002, isa. $325,000.b. $330,000.c. $360,000.d. $468,000.

c 55. Young Corporation adopted the dollar-value LIFO method of inventory valuation

LO10 on December 31, 2001. Information concerning that inventory is presented below:

Inventory at Current Price Date Current Prices Index December 31, 2001 $600,000 1.00December 31, 2002 759,000 1.15December 31, 2003 864,000 1.20December 31, 2004 787,500 1.25

What is the cost of the ending inventory to be reported by Young Corporation at December 31, 2002, under dollar-value LIFO?a. $600,000b. $660,000c. $669,000d. $690,000

b 56. Young Corporation adopted the dollar-value LIFO method of inventory valuation




b 57. Young Corporation adopted the dollar-value LIFO method of inventory valuation




d 58. From the following information, determine the amount of freight-in.LO4

Beginning Inventory.............................................................. $20,000Purchases............................................................................. 41,000Purchase Returns and Allowances....................................... 3,000Purchase Discounts.............................................................. 4,000Freight-In.............................................................................. ? Cost of Goods Available for Sale.......................................... 55,000Ending Inventory................................................................... ? Cost of Goods Sold.............................................................. 22,000

a. $3,000b. $4,000c. $2,000d. $1,000

c 59. From the following information, determine the amount of ending inventory.LO4

Beginning Inventory.............................................................. $20,000Purchases............................................................................. 41,000Purchase Returns and Allowances....................................... 3,000Purchase Discounts.............................................................. 4,000Freight-In.............................................................................. ? Cost of Goods Available for Sale.......................................... 55,000Ending Inventory................................................................... ? Cost of Goods Sold.............................................................. 22,000

a. $23,000b. $32,000c. $33,000d. $22,000

c 60. The following information was obtained from the accounts of McKay Company:LO4

Inventory, January 1............................................................. $ 30,000Purchases............................................................................. 45,000Purchase Returns and Allowances....................................... 5,000Purchase Discounts.............................................................. 4,000Freight-In.............................................................................. 5,000Inventory, December 31....................................................... 20,000Freight-Out........................................................................... 6,000

Given this information, the cost of goods sold during the year isa. $46,000.b. $41,000.c. $51,000.d. $61,000.

c 61. During the year, The Hill Company purchased $1,920,000 of inventory. The cost

LO8 of goods sold for the year was $1,800,000 and the ending inventory at December 31 was $360,000. What was the inventory turnover for the year?a. 5.0b. 5.3c. 6.0d. 6.4

b 62. The following information was obtained from the accounts of Cox Company:LO4

Beginning Inventory.............................................................. $ 20,000Purchases............................................................................. 40,000Purchase Returns and Allowances....................................... 2,000Purchase Discounts.............................................................. 4,000Freight-In.............................................................................. 5,000Ending Inventory................................................................... 10,000Freight-Out........................................................................... 6,000

Given this information, the cost of goods available for sale isa. $65,000.b. $59,000.c. $69,000.d. $61,000.

d 63. Selected information from the accounting records of Thayer Company is as follows:

LO8Net sales for 2002................................................................... $900,000Cost of goods sold for 2002.................................................... 600,000Inventory at December 31, 2001............................................. 180,000Inventory at December 31, 2002............................................. 156,000

Thayer's inventory turnover for 2002 isa. 5.36 times.b. 3.85 times.c. 3.67 times.d. 3.57 times.

c 64. The following information applied to Landon Company for 2002:LO4

Merchandise purchased for resale.......................................... $300,000Freight-in................................................................................. 7,500Interest on notes payable to vendors...................................... 3,000Purchase returns..................................................................... 1,500

Landon’s inventoriable cost for 2002 wasa. $309,000.b. $307,500.c. $306,000.d. $301,500.

c 65. At the end of year 1, Clinton Company adopted the dollar-value LIFO method,

LO10 and the end-of-year 1 inventory cost was calculated to be $20,000.

Ending Inventory Price IndexYear at End - of - Year Prices (Year 1 = 1.00)

2 $38,400 1.23 $45,500 1.34 $35,000 1.45 $51,000 1.5

Under the dollar-value LIFO inventory method, what would be the value of the inventory at the end of year 2?a. $46,080b. $38,400c. $34,400d. $32,000

b 66. At the end of year 1, Clinton Company adopted the dollar-value LIFO method,



2 $38,400 1.23 $45,500 1.34 $35,000 1.45 $51,000 1.5

Under the dollar-value LIFO method, what would be the value of the inventory at the end of year 3?a. $35,000b. $38,300c. $45,500d. None of the above

b 67. At the end of year 1, Clinton Company adopted the dollar-value LIFO method,



2 $38,400 1.23 $45,500 1.34 $35,000 1.45 $51,000 1.5

Under the dollar-value LIFO method, what would be the value of the inventory at the end of year 4?a. $25,000b. $26,000c. $30,000d. None of the above

c 68. At the end of year 1, Clinton Company adopted the dollar-value LIFO method,

LO10 and the end-of-year 1 inventory cost was calculated to be $20,000.Ending Inventory Price Index

Year at End - of - Year Prices (Year 1 = 1.00)2 $38,400 1.23 $45,500 1.34 $35,000 1.45 $51,000 1.5

Under the dollar-value LIFO method, what would be the value of the inventory at the end of year 5?a. $34,000b. $37,400c. $39,500d. $51,000

c 69. Purchases and sales during a recent period for Coleman, Inc. were:LO5

Purchases During the Period Sales During the Period1st Purchase 500 units @ $2 1st Sale 600 units @ $72nd Purchase 1,000 units @ $3 2nd Sale 750 units @ $83rd Purchase 500 units @ $4 3rd Sale 500 units @ $94th Purchase 500 units @ $5 4th Sale 500 units @ $10

2,500 units 2,350 units

Beginning inventory was 100 units at $1 each. Given this information, what is the ending inventory if the periodic FIFO costing alternative is used?a. $400b. $500c. $1,250d. $3,100

a 70. Purchases and sales during a recent period for Coleman, Inc. were:LO5



Beginning inventory was 100 units at $1 each. Given this information, what is the ending inventory if the periodic LIFO costing alternative is used?

a. $400b. $500c. $1,250d. $3,100

c 71. Purchases and sales during a recent period for Coleman, Inc. wereLO5



Beginning inventory was 100 units at $1 each. Given this information, what is the cost per unit available for sale during the year when using the average cost method (rounded to the nearest cent)?a. $2.61b. $3.10c. $3.31d. $3.53

d 72. The following information was taken from Frandsen Company’s accountingLO4 records:

Increase in raw materials inventory...................................$ 7,500Decrease in finished goods inventory................................ 17,500Raw materials purchase.................................................... 215,000Direct-labor payroll............................................................. 100,000Factory overhead............................................................... 150,000Freight-out......................................................................... 22,500

There was no work-in-process inventory at the beginning or end of the year. Frandsen’s cost of goods sold isa. $497,500.b. $487,500.c. $482,500.d. $475,000.

a 73. The following information is available for Hudson Company:LO4

Disbursements for purchases............................................ $290,000Increase in trade accounts payable................................... 25,000Decrease in merchandise inventory.................................. 10,000

Cost of goods sold wasa. $325,000.b. $305,000.c. $275,000.d. $255,000.

a 74. The following information is available for Carter Corporation for the month ofLO4 June:

Beginning Inventory 8 units @ $20.00 = $160Purchased, June 3 5 units @ $22.00 = $110Purchased, June 5 7 units @ $24.00 = $168Sold, June 9 9 unitsPurchased, June 15 8 units @ $26.00 = $208Sold, June 19 7 units

Given this information, the ending inventory balance using the average cost method isa. $276.b. $302.c. $368.d. $386.

d 75. Janice’s Sporting Goods had the following inventory records for one line of skis

LO4 for the month of January:

Beginning Inventory..................... 70 pairs @ $100 per pair = $7,000Sales (Jan. 1 – Jan. 7)................. 50 pairsPurchase (Jan. 8)......................... 46 pairs @ $104 per pair = $4,784Sales (Jan. 9 – Jan. 16)............... 49 pairsPurchase (Jan. 17)....................... 62 pairs @ $110 per pair = $6,820Sales (Jan. 18 – Jan. 29)............. 56 pairsPurchase (Jan. 30)....................... 18 pairs @ $112 per pair = $2,016

Assuming the periodic LIFO inventory method is used, what is the cost of Janice’s ending inventory?a. $4,124b. $4,268c. $4,376d. $4,100

c 76. Gordon Company’s inventory at June 30, 2002, was $75,000 based on aLO3 physical count of goods priced at cost, and before any necessary year-end

adjustment relating to the following:

Included in the physical count were goods billed to a customer FOBshipping point on June 30, 2002. These goods had a cost of $1,500 and were picked up by the carrier on July 10, 2002.

Goods shipped FOB destination on June 28, 2002, from a vendor toGordon were received on July 3, 2002. The invoice cost was $2,500.

What amount should Gordon report as inventory on its June 30, 2002, balance sheet?a. $73,500b. $74,000c. $75,000d. $76,500

c 77. The balance in Master Company’s accounts payable account at December 31,

LO3 2002, was $1,100,000 before considering the following information:

Goods shipped FOB shipping point on December 20, 2002, from a vendor

to Master were lost in transit. The invoice cost of $20,000 was not recorded by Master. On January 6, 2003, Master filed a $20,000 claim against the common carrier.

On December 27, 2002, a vendor authorized Master to return, for fullcredit, goods shipped and billed at $35,000 on December 2, 2002. The returned goods were shipped by Master on December 27, 2002. A $35,000 credit memo was received and recorded by Master on January 6, 2003.

What amount should Master report as accounts payable in its December 31, 2002, balance sheet?a. $1,120,000b. $1,115,000c. $1,085,000d. $1,065,000

b 78. The balance in Stockwell Company’s accounts payable account on December

LO3 31, 2002, was $1,225,000 before the following information was considered:

Goods shipped FOB destination on December 21, 2002, from a vendor to Stockwell were lost in transit. The invoice cost of $45,000 was not recorded by Stockwell. On December 28, 2002, Stockwell notified the vendor of the lost shipment.

Goods were in transit from a vendor to Stockwell on December 31, 2002. The invoice cost was $60,000, and the goods were shipped FOB shipping point on December 28, 2002. Stockwell received the goods on January 6, 2003.

What amount should Stockwell report as accounts payable in its December 31, 2002, balance sheet?a. $1,330,000b. $1,285,000c. $1,270,000d. $1,225,000

a 79. The following information is available from Preston Company’s 2002 accounting

LO4 records:Purchases.................................................................................... $530,000Purchase discounts..................................................................... 10,000Beginning inventory..................................................................... 160,000Ending inventory.......................................................................... 215,000Freight-out................................................................................... 40,000

Preston’s 2002 cost of goods sold isa. $465,000.b. $475,000.c. $505,000.d. $585,000.

b 80. Campbell’s Clothing Store sells jeans. During January 2002, its inventoryLO4 records for one brand of designer jeans were as follows:

Beginning Inventory................................... 10 pairs@ $ 20 =$ 200January 6 Purchase................................... 4 pairs@ 25 = 100January 10 Sale......................................... 5 pairsJanuary 15 Purchase................................. 7 pairs@ 30 = 210January 20 Sale......................................... 10 pairsJanuary 25 Purchase................................. 4 pairs@ 30 = 120

Using this information, periodic FIFO cost of goods sold isa. $330.b. $300.c. $430.d. $250.

d 81. Campbell’s Clothing Store sells jeans. During January 2002, its inventoryLO4 records for one brand of designer jeans were as follows:


Using this information, periodic LIFO cost of goods sold isa. $360.b. $300.c. $330.d. $430.

a 82. Campbell’s Clothing Store sells jeans. During January 2002, its inventoryLO4 records for one brand of designer jeans were as follows:


Using this information, the cost of goods sold using the average cost method isa. $378.b. $358.c. $265.d. $236.

b 83. Henry Company adopted the dollar-value LIFO inventory method on January 1,

LO10 2002. In applying the LIFO method, Henry uses internal price indexes and the multiple-pools approach. The following data were available for inventory Pool No. 1 for the two years following the adoption of LIFO:

Current Inventory InternalAt Current- At Base- Price Year Cost Year Cost Index

01/01/01 $300,000 $300,000 1.0012/31/02 378,000 360,000 1.0512/31/03 422,400 384,000 1.10

Under the dollar-value LIFO method, the inventory at December 31, 2003, should bea. $384,000.b. $389,400.c. $392,400.d. $422,400.

c 84. Selected information from the 2002 and 2001 financial statements of BN LO8 Company is presented below:

(in thousands)As of December 312002 2001

Cash $ 21 $ 35Accounts receivable (net) 27 22Inventory 60 98Prepaid expenses 105 142

Cash sales 750 675Credit sales (percent of cash sales) 82% 85%Cost of goods sold (percent of total sales 60% 58%Net income 30 38

BN Company’s merchandise inventory turnover for 2002 isa. 3.43.b. 5.68.c. 6.63.d. 6.79.

PROBLEMS

Problem 1The inventory account of Duke Company at December 31, 2002, included the following items:

Inventory AmountMerchandise out on consignment at sales price (including

markup of 35% on selling price)............................................................ $15,000Goods purchased, in transit (shipped FOB shipping point)...................... 6,000Goods held by Duke on consignment............................................. 4,500Goods out on approval (sales price $6,000, cost $4,000)......................... 6,000

Based on this information, the inventory account at December 31, 2002, should be reduced by what amount?

Solution 1LO1

Amounts that should not be included in the inventory are:Markup on goods out on consignment (35% of $15,000)..................... $ 5,250Goods held by Duke on consignment............................................. 4,500Markup on goods out on approval................................................... 2,000Reduction of inventory account....................................................... $11,750

Problem 2The following data relate to the first three years of operation for the Lewis Company:

2002 2003 2004Net income under FIFO........................ $30,000 $45,000 $16,000Net income under LIFO........................ 12,000 32,000 12,000Ending inventory under FIFO............... 55,000 67,000 71,000

Compute the ending inventory under LIFO for each year. (Ignore income taxes.)

Solution 2LO5

2002 2003 2004Net income under FIFO........................ $30,000 $45,000 $16,000Net income under LIFO........................ 12,000 32,000 12,000Decrease under LIFO........................... $18,000 $13,000 $ 4,000Ending inventory under FIFO............... $55,000 $67,000 $71,000Change in year-end inventory based

on change in net income under LIFOas compared with FIFO:

Increase in cost of sales............ $18,000 $13,000 $ 4,000Decrease in beginning

inventory under LIFO........... 0 18,000 31,000Decrease in ending

inventory............................... $18,000 $31,000 $35,000Ending inventory under LIFO.. . . $37,000 $36,000 $36,000

Problem 3The following information is available for the Fister Company for 2002:

Freight-in.................................................................................. $ 50,000Purchase returns....................................................................... 185,000Selling expenses........................................................................ 357,000Ending inventory........................................................................ 117,000

The cost of goods sold is equal to 400% of selling expenses. Compute the cost of goods available for sale.

Solution 3LO4

Cost of goods sold (400% x $357,000)............................................ $1,428,000Add: Ending inventory............................................................... 117,000Cost of goods available for sale................................................. $1,545,000

Problem 4

At the close of its fiscal year on March 31, 2002, Gren Industries, Inc. was in the process of relocating its plant. This resulted in some confusion relating to the inventory cutoff, as indicated by the following:(1) Merchandise on hand costing $1,794 was included in the inventory although

the purchase invoice was not recorded until April 12, 2002.(2) Merchandise shipped on April 1, 1999, was included in inventory--the cost of

this merchandise was $2,219, and the sale was recorded as $3,138 on March 31, 2002.

(3) Merchandise costing $12,150 was included in the inventory although it was shipped to a customer on March 31, 2002, FOB shipping point; the company recorded the sale of $19,246 on that date.

(4) Merchandise costing $1,820 was not counted.(5) Merchandise in transit (shipped to the company FOB destination) was

recorded as a purchase as of April 2, 2002, and its cost of $17,287 was not included in the March 31, 2002, inventory.

Assuming that the company does not maintain a perpetual inventory system and that the books for the fiscal year have been closed, provide the necessary correcting entries. (Ignore income taxes.)

Solution 4LO3

(1) Retained Earnings....................................................... 1,794Purchases............................................................ 1,794

(2) Retained Earnings....................................................... 3,138Sales.................................................................... 3,138

(3) Retained Earnings....................................................... 12,150Inventory............................................................... 12,150

(4) Inventory..................................................................... 1,820Retained Earnings................................................ 1,820

(5) No entry required. Transaction handled correctly.

Problem 5The data below relate to Raw Material F, which is stocked by Dixon Inc. in its warehousing operation:

Raw Material F Units Dollars

Date Received Issued Balance Price Received Issued BalanceJan. 1 1,600 $16 $25,600Jan. 11 2,000 14 $28,000Feb. 16 960Mar. 20 680June 22 580 15 8,700Aug. 18 950Sept. 10 810Oct. 8 1,510 17 25,670Dec. 9 930Dec. 21 400 18 7,200From these data, provide answers for the following [show computations for (1)]:(1) Assuming a perpetual inventory system is used, compute the ending inventory

under (a) FIFO and (b) LIFO.(2) If a perpetual inventory of Raw Material F is kept on a moving average basis,

the ending inventory will be:(a) lower than the LIFO basis.(b) higher than the FIFO basis.(c) lower than the FIFO basis.(d) impossible to determine.

Solution 5LO5

(1) (a) FIFO: 400 units @ $18 = $ 7,2001,360 units @ $17 = 23,1201,760 units $30,320

(b) LIFO: 780 units @ $16 = $12,480 580 units @ $17 = 9,860 400 units @ $18 = 7,2001,760 units $29,540

(2) (c) Lower than the FIFO basis.

Problem 6On December 31, 2000, The Davis Company adopted the dollar-value LIFO inventory method. The inventory on that date using the dollar-value LIFO inventory method was determined to be $500,000. Inventory data for following years are listed below:

Inventory at Year-EndYear Ended Respective Price Index

December 31 Year-End Prices (Base Year 2000)2000 $500,000 1.002001 572,000 1.102002 603,750 1.152003 756,250 1.202004 702,000 1.302005 612,000 1.20

Compute the inventory amounts for Davis at December 31, 2000, 2001, 2002, 2003, 2004, and 2005, using the dollar-value LIFO inventory method for each year. Use the year-end price index as the incremental layer index.

Solution 6LO10

Inventory at Inventory at Layers inEnd-of-Year Year-End Base Year Base Year Price Dollar-Value

Date Prices Index Prices Prices Index LIFO Cost 12/31/00 $500,000 1.00 = $500,000 $500,000 1.00 $ 500,000

12/31/01 $572,000 1.10 = $520,000 $500,000 1.00 $ 500,00020,000 1.10 22,000

$ 522,000

12/31/02 $603,750 1.15 = $525,000 $500,000 1.00 $ 500,00020,000 1.10 22,000 5,000 1.15 5,750

$ 527,750

12/31/03 $756,250 1.25 = $605,000 $500,000 1.00 $ 500,00020,000 1.10 22,000 5,000 1.15 5,75080,000 1.20 96,000

$ 623,750

12/31/04 $702,000 1.30 = $540,000 $500,000 1.00 $ 500,00020,000 1.10 22,000 5,000 1.15 5,75015,000 1.20 18,000

$ 545,750

12/31/05 $612,000 1.20 = $510,000 $500,000 1.00 $ 500,00010,000 1.10 11,000

$ 511,000

Problem 7Edwards Sporting Goods began operations February 1, 2002. Edwards sells footballs to high schools and colleges throughout the country. The company uses a periodic system. A summary of inventory records for the month of February appears below:

Inventory Records--FootballsTerms of Units Gross Price

Date Purchase Received on Invoice February 2 3/10, net 30 800 $30,000February 17 net 30 600 22,560February 26 2/10, net 45 550 20,490

All footballs are sold for $47.50. Edwards takes all discounts that are offered and uses the net method for recording purchases. On February 28, 470 footballs were on hand.

(1) Compute the ending inventory cost under FIFO.(2) Compute the gross margin on sales under LIFO.(3) Compute the ending inventory cost under LIFO.(4) Give the journal entry to record the February 2 purchase.

Solution 7LO5

Units Cost Beginning Inventory.................... 0 0Purchases: February 2............ 800 @ $36.375 = $29,100 ($30,000 - $900)

February 17.......... 600 @ 37.600 = 22,560February 26.......... 550 @ 36.510 = 20,080 ($20,490 - $410)

Goods available.......................... 1,950 $71,740Less ending inventory................. 470

Sales........................................... 1,480

(1) Ending Inventory--FIFO(470 @ $36.51)............................ $17,160

(2) Sales (1,480 @ $47.50).......................................... $70,300Cost of goods sold:

(550 @ $36.51).................................................. $20,080(600 @ $37.60).................................................. 22,560(330 @ $36.375)................................................ 12,004 54,644

Gross margin on sales--LIFO.................................. $15,656

(3) Ending inventory--LIFO(470 @ $36.375).......................... $17,096

(4) Feb. 2 Purchases (Inventory)............ 29,100Accounts Payable.............. 29,100

Problem 8The Clayton Music Company was formed on December 1, 2001. The following information is available from Clayton’s inventory records:

Units Unit CostBalance at January 1, 2002............................................ 4,800 $14.25Purchases:

January 17, 2002....................................................... 9,000 15.00March 12, 2002.......................................................... 7,200 16.50June 23, 2002............................................................ 3,600 15.75November 15, 2002................................................... 5,400 17.25

The company uses a periodic inventory system, and a physical inventory on November 30, 2002, shows 9,600 units on hand. Prepare schedules to compute the ending inventory at November 30, 2002, under each of the following inventory methods:

(1) FIFO.(2) LIFO.(3) Average cost.

Solution 8LO5

(1) Computation of inventory under FIFO methodUnits Unit Cost Total Cost

November 15, 2002........................ 5,400 $17.25 $ 93,150June 23, 2002................................. 3,600 15.75 56,700March 12, 2002............................... 600 16.50 9,900

9,600 $ 159,750

(2) Computation of inventory under LIFO methodUnits Unit Cost Total Cost

January 1, 2002.............................. 4,800 $14.25 $ 68,400January 17, 2002............................ 4,800 15.00 72,000

9,600 $ 140,400

(3) Computation of inventory under the average cost methodUnits Unit Cost Total Cost

January 1, 2002.............................. 4,800 $14.25 $ 68,400January 17, 2002............................ 9,000 15.00 135,000March 12, 2002............................... 7,200 16.50 118,800June 23, 2002................................. 3,600 15.75 56,700November 15, 2002........................ 5,400 17.25 93,150

30,000 $ 472,050

Average Cost: $472,050/30,000 = $15.735

November 30, 2002, inventory: 9,600 units @ $15.735 = $151,056

Problem 9The following data are from the inventory records of the Dennis Corporation, which adopted LIFO effective January 1, 2002:

Jan. 1, 2002 Dec. 31, 2002Inventory at base prices............................ $320,000Inventory at current prices......................... $436,800Inventory at base prices............................ 420,000

(1) Using the dollar-value LIFO procedures, compute the inventory on December 31, 2002, from the above data.

(2) Prepare a schedule showing the inventory layers included in ending inventory at December 31, 2002.

Solution 9LO10

(1) December 31, 2002:Inventory at current prices......................................................... $436,800Inventory at base prices............................................................. 420,000

January 1, 2002, inventory at base prices...................................... 320,000Inventory increase at base prices ($420,000 - $320,000)...................... 100,000Price index applying to increase ($436,800/$420,000).......................... 104%Layer increase ($100,000 x 1.04)......................................................... 104,000December 31, 2002, inventory at dollar-value LIFO

($320,000 + $104,000)...................................................................... 424,000

(2) Inventory layers at December 31:

Base Price InventoryPrice Index Balance

Base-year layer........................... $320,000 100 $320,000Current layer............................... 100,000 104 104,000

$420,000 $424,000

Problem 10Shown below are the inventory records for the Sundance Camera Store for 2002, the first year in which dollar-value LIFO was used:

January 1 December 31Inventory at base-year price $108,000Inventory at year-end prices $141,900 External price index 100.0 110.0

Inventory records contained the following data for 2003 and 2004:

December 312003 2004

Inventory at year-end prices $147,736 $159,505External price index 118.0 115.0

Using the dollar-value LIFO method, calculate the ending inventory for each of the following dates:

(1) December 31, 2002.(2) December 31, 2003.(3) December 31, 2004.

Solution 10LO10

Inventory at Inventory at Layers inEnd-of-Year Year-End Base-Year Base-Year Price Dollar-Value


(1) 12/31/02 $141,900 1.10 = $129,000 $108,000 1.00 $ 108,00021,000 1.10 23,100

$ 131,100

(2) 12/31/03 $147,736 1.18 = $125,200 $108,000 1.00 $ 108,00017,200 1.10 18,920

$ 126,920

(3) 12/31/04 $159,505 1.15 = $138,700 $108,000 1.00 $ 108,00017,200 1.10 18,92013,500 1.15 15,525

$ 142,445

Problem 11The following information was available from the inventory records of the Brooks Company for January 2002:

Units Unit Cost Total CostBalance at January 1, 2002................... 3,000 $19.55 $ 58,650Purchases:

January 6, 2002.............................. 2,250 20.60 46,350January 26, 2002............................ 10,200 21.50 219,300

Sales:January 7, 2002.............................. 2,700January 31, 2002............................ 7,200

Balance at January 31, 2002................. 5,550

(1) Assuming that Brooks maintains perpetual inventory records, what should be the inventory at January 31, 2002, using the FIFO inventory method, rounded to the nearest dollar?

(2) Assuming that Brooks maintains perpetual inventory records, what should be the inventory at January 31, 2002, using the LIFO inventory method, rounded to the nearest dollar?

(3) Assuming that Brooks does not maintain perpetual inventory records, what should be the inventory at January 31, 2002, using the average cost inventory method, rounded to the nearest dollar?

Solution 11LO5(1) Computation of ending inventory using perpetual FIFO method:

Units Unit Cost Total Cost January 26, 2002............................ 5,550 $21.50 $ 119,325.00

(2) Computation of ending inventory using perpetual LIFO method:

Units Unit Cost Total CostBeginning Inventory........................ 2,550 $19.55 $ 59,852.50January 26, 2002............................ 3,000 21.50 64,500.00

5,550 $ 114,352.50

(3) Computation of inventory under the average cost method:

Units Unit Cost Total Cost3,000 @ $19.55 = $ 58,6502,250 @ 20.60 = 46,350

10,200 @ 21.50 = 219,300 15,450 $ 324,300

$324,300/15,450 = $ 20.995,550 x $20.99 = $116,495 (rounded)

Problem 12The Murphy Company manufactures a single product. On December 31, 2001, Murphy adopted the dollar-value LIFO inventory method. The inventory on that date using the dollar-value LIFO inventory method was determined to be $325,000. Inventory data for succeeding years are as follows:

Inventory at RelevantYear Ended Respective Price Index

December 31 Year-End Prices (Base-Year 2001)2002 $363,000 1.102003 420,000 1.202004 430,000 1.252005 480,000 1.202006 348,000 1.16

Compute the inventory amounts at December 31, 2002, 2003, 2004, 2005, and 2006, using the dollar-value LIFO inventory method for each year.

Solution 12LO10

Inventory at Inventory at Layers inEnd-of-Year Year-End Base-Year Base-Year Price Dollar-Value


12/31/02 $363,000 1.10 = $330,000 $325,000 1.00 $ 325,0005,000 1.10 5,500

$ 330,500

12/31/03 $420,000 1.20 = $350,000 $325,000 1.00 $ 325,0005,000 1.10 5,500

20,000 1.20 24,000 $ 354,500

12/31/04 $430,000 1.25 = $344,000 $325,000 1.00 $ 325,000

5,000 1.10 5,50014,000 1.20 16,800

$ 347,300


12/31/05 $480,000 1.20 = $400,000 $325,000 1.00 $ 325,0005,000 1.10 5,500

14,000 1.20 16,80056,000 1.20 67,200

$ 414,500

12/31/06 $348,000 1.16 = $300,000 $300,000 1.00 $ 300,000

Problem 13The following data are from the inventory records of the DDT Chemical Co. for the years 2001 and 2002:

Inventory Quantity (in Units) Inventory Prices

Commodity 2001 2002 2001 2002 A 200 200 $ 5.00 $ 5.40B 50 80 20.00 23.00C 300 400 15.00 17.00D 160 192 25.00 24.00

From these data, compute the price index for 2002 using the double-extension method.

Solution 13LO9

At 2001 Inventory Prices At 2002 Inventory Prices Commodity Quantity Cost Total Quantity Cost Total

A 200 $ 5.00 $ 1,000 200 $ 5.40 $ 1,080B 80 20.00 1,600 80 23.00 1,840C 400 15.00 6,000 400 17.00 6,800D 192 25.00 4,800 192 24.00 4,608

$13,400 $14,328

2002 inventory at 2002 prices = $14,328 = 106.9 price index for 20022002 inventory at 2001 prices $13,400

Problem 14On January 1, 2001, Fawcett Distributors, Inc. adopted the dollar-value LIFO inventory method for income tax and external financial reporting purposes. However, Fawcett continued to use the FIFO inventory method for internal accounting and management purposes. In applying the LIFO method, Fawcett uses the double-extension method for determining price indexes and the multiple-pools approach under which substantially identical inventory items are grouped into LIFO inventory pools. The following data were available for Inventory Pool No. 1, which is comprised of products X and Y, for the two years following the adoption of LIFO:

FIFO Basis per Records

Units Unit Cost Total CostInventory, 1/1/01

Product X................................... 20,000 $30 $ 600,000Product Y................................... 7,000 25 175,000

$ 775,000Inventory, 12/31/01


$ 945,000Inventory, 12/31/02


$ 832,000

(1) Prepare a schedule to compute the price indexes for 2001 and 2002 using the double-extension method.

(2) Prepare a schedule to compute the inventory amounts at December 31, 2001 and 2002, using the dollar-value LIFO inventory method.


Solution 14LO9, LO10

(1)Fawcett Distributors, Inc.

Computation of Internal Price Index for Inventory Pool No. 1Double-Extension Method

December 31, 2001 December 31, 2002Current inventory at current year cost:

Product X..................... 23,000 x $35 = $805,000 16,000 x $40 = $640,000Product Y..................... 5,000 x $28 = 140,000 6,000 x $32 = 192,000

$945,000 $832,000Current inventory at base cost:

Product X..................... 23,000 x $30 = $690,000 16,000 x $30 = $480,000Product Y..................... 5,000 x $25 = 125,000 6,000 x $25 = 150,000

$815,000 $630,000Conversion price index:

2001: $945,000/$815,000 = 1.162002: $832,000/$630,000 = 1.32

(2)Fawcett Distributors, Inc.

Computation of Inventory Amounts Under Dollar-Value LIFO Methodat December 31, 2001 and 2002

Current Inventory Conversion Inventory at at Base Cost Price Index LIFO Cost

December 31, 2001Base inventory................... $775,000 1.00 $775,0002001 layer.......................... 40,000 1.16 46,400

$815,000 $821,400

December 31, 2002Base inventory................... $630,000 1.00 $630,0002001 layer.......................... 0 1.16 02002 layer.......................... 0 1.32 0

$630,000 $630,000

Problem 15Two reasons often advanced for the adoption of LIFO inventory costing for financial reporting are the improved matching of current costs with current revenue during periods of rising prices and the reduction of income tax payments. Nonetheless, the number of companies using LIFO has not increased over the last several years. Some companies actually have switched from LIFO to FIFO over the last several years.

Identify reasons why a company would change from LIFO to FIFO for financial reporting purposes.

Solution 15LO7There are at least four reasons why a company might change from LIFO to FIFO for financial reporting purposes.

The first reason relates to the existence of contractual arrangements, such as debt covenants, that require that certain ratios (e.g., current ratio, debt-to-equity ratio) be maintained at specified levels. The use of FIFO during periods of rising prices increases the value of inventory and produces more favorable ratios.

A second reason is that some management compensation plans are based on some form of reported income. The use of FIFO during periods of rising prices raises reported income and thus increases management compensation.

A third reason again relates to the fact that the use of FIFO results in a higher net income. Managers may believe that this higher reported net income will result in higher prices for the company’s stock. Empirical research suggests that the choice of accounting methods for inventory costing is viewed by professional investors and analysts as nothing more than a gimmick. Unless the change results in increases in cash flows, it is likely to be disregarded by the market.

The fourth reason is that managers may be anticipating future declines or liquidations. LIFO would result in higher taxable income than FIFO in years in which inventory costs decline or older layers of inventory costed at lower prices are liquidated.

Problem 16The following data are available for Castle Gate Company:

Unit Units Cost Total Cost

Beginning inventory (base layer of LIFO inventory) 20,000 $1.00 $ 20,000Purchases 80,000 $1.50 120,000Total available for sale 100,000 $140,000Sales (88,000 units, costed on LIFO basis) from:

Purchases 80,000 $1.50 $120,000Base inventory layer 8,000 $1.00 8,000

Cost of goods sold 88,000 $128,000

Ending inventory 12,000 $1.00 $ 12,000

The company has experienced a temporary LIFO liquidation by not maintaining the base year inventory of 20,000 units. The company uses a perpetual inventory system.

Prepare the entries to account for the temporary liquidation and the replacement of the liquidated units assuming that 8,000 units will be replaced at $1.60 per unit

Solution 16LO6

Entry to record liquidation:

Cost of Goods Sold......................................................................132,800(80,000 x $1.50) + (8,000 x $1.60)

Inventory(80,000 x $1.50) + (8,000 x $1.00)....................................... 128,000Excess of Replacement Cost of LIFO Inventory Temporarily Liquidated (8,000 x $.60).................................. 4,800

Entry to record replacement:

Inventory (8,000 x $1.00)............................................................. 8,000Excess of Replacement Cost of LIFO InventoryTemporarily Liquidated (8,000 x $.60)......................................... 4,800

Accounts Payable (8,000 x $1.60)......................................... 12,800

CHAPTER 8 -- QUIZ A

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Name _________________________Section ________________________

T F 1. Activity-based cost (ABC) systems are designed to allocate direct labor costs to manufacturing activities.

T F 2. Work in process inventories include only the costs of direct materials and direct labor.

T F 3. When a perpetual inventory system is used, physical counts should be made periodically to confirm the inventory balances on the books.

T F 4. Abnormal shortages or thefts of inventory should be reported separately as operating expenses.

T F 5. Normal inventory adjustments for shrinkage and breakage are reported as adjustments to cost of goods sold.

T F 6. When the terms of a sale are FOB shipping point, goods in transit at year-end should be included in the inventory of the seller.

T F 7. Title to goods shipped FOB destination remains with the seller from the shipping point to the destination point.

T F 8. Goods held by customers on approval should be excluded from the seller’s inventory.

T F 9. Consigned goods are reported by the consignor in inventory at the sum of their cost, handling and shipping costs, and the estimated gross profit.

T F 10. The LIFO conformity rule (IRS Regulations) does not permit companies to report inventory values using any method other than LIFO in the financial statements or in the attached notes.

CHAPTER 8 -- QUIZ B

Name _________________________Section ________________________

T F 1. In a period of rising prices, the use of FIFO relates the current high costs of acquiring goods with rising sales prices. As a result, FIFO tends to have a stabilizing effect on gross profit margins.

T F 2. In dollar-value LIFO applications, when a specific layer is reduced or eliminated, it can be restored when quantities increase in future periods.

T F 3. The gross method of accounting for purchase discounts is theoretically preferable to the net method.

T F 4. The gross method of accounting for purchase discounts reflects the fact that discounts not taken are in effect credit-related expenditures incurred for failure to pay within the discount period.

T F 5. The specific identification method is a highly objective approach to matching historical costs with revenues.

T F 6. Specific identification as an inventory method matches the flow of recorded costs to the physical flow of goods.

T F 7. LIFO assumes a cost flow that closely parallels the usual physical flow of goods sold.

T F 8. With FIFO, inventories are reported on the balance sheet at or near their current value.

T F 9. Unlike other inventory cost methods, the average cost approach provides the same unit cost for items of equal utility.

T F10. FIFO provides income tax savings during periods of falling prices.

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CHAPTER 8 -- QUIZ C

A. Product costsB. Consigned goodsC. LIFO reserveD. Net methodE. Dollar-value LIFO inventory methodF. Factory overheadG. Double extensionH. Trade discountI. Perpetual inventory systemJ. FIFO

K. LIFO

Name______________________Section_____________________

L. FOB destinationM. Gross methodN. Work in processO. LIFO conformity ruleP. LIFO inventory poolsQ. Specific identificationR. Periodic inventory systemS. Raw materialsT. Period costsU. FOB shipping point

Select the term that best fits each of the following definitions and descriptions:

____ 1. Terms under which title to merchandise transfers to the purchaser when the goods are received.

____ 2. A method of inventory valuation that reports inventory after consideration of any purchase discounts.

____ 3. A discount that converts a list price to the price a purchaser is actually charged.

____ 4. A technique used with dollar-value LIFO to compute the ending inventory at base-year prices.

____ 5. The classification of inventory into items having common characteristics. The LIFO historical cost method is then applied to each grouping.

____ 6. All manufacturing costs except direct materials and direct labor.____ 7. Inventory that is partially processed and requires additional work before it can

be sold.____ 8. A cost flow assumption that normally approximates the actual physical flow of

the merchandise.____ 9. A regulation that requires the use of LIFO for financial reporting purposes if

LIFO is used for income tax purposes.____10. The inventory method that matches the cost flow to the physical flow of the

asset.____11. A valuation method that reports the inventory cost before the consideration of

purchase discounts.____12. Records that provide a continuous summary of inventory activity.____13. Costs that are recognized as expenses during the period in which they are

incurred.

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____14. The historical cost flow assumption that best matches current cost to current revenues.

____15. Inventory that is physically located at a dealer, but the title is retained by the shipper until the merchandise is sold.

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CHAPTER 8 -- QUIZ SOLUTIONS

Quiz A

1. F2. F3. T4. T5. T6. F7. T8. F9. F

10. F

Quiz B

1. F2. F3. F4. F5. T6. T7. F8. T9. T

10. T

Quiz C

1. L2. D3. H4. G5. P6. F7. N8. J9. O

10. Q11. M12. I13. T14. K15. B


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