Inventory

Medium Test

Key Things to Know

j

Practice as You Learn

Self Test

b

Easy Test

h

Medium Test

i

Hard Test

Medium Test

Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. When purchase prices are falling

a. LIFO results in a lower income than FIFO
b. LIFO results in a higher income than FIFO
c. FIFO results in a lower inventory valuation than LIFO
d. Weighted average gives the highest inventory valuation

Answer
B. Falling prices mean the last items purchased have the lowest cost. LIFO means those sold have the lowest cost which gives the highest net income.
2. Which inventory method will result in inventory valued at the closest to fair market value?

a. FIFO
b. LIFO
c. Weighted average
d. all methods value inventory the same amount

Answer
A. Inventory valued at the latest cost will be closest to fair market value. The method which records last purchases as still in inventory is FIFO. The first ones purchased are sold first leaving the last ones purchased still on the shelf.
3. The company reported the value of inventory too high on the balance sheet. As a result of this

a. cost of goods sold is reported too high
b. net income is reported too low
c. gross profit is reported too low
d. none of the above

Answer
D. Ending inventory is subtracted to get cost of goods sold. When you subtract a higher amount you get a lower cost of goods sold. Lower cost of goods sold is higher gross profit and higher net income.
4. The company purchased two identical items, the first at a cost of $4 and the second at a cost of $3.75. As a result of this

a. FIFO will give a higher net income
b. LIFO will give a higher net income
c. FIFO will give a higher gross profit
d. FIFO will give a higher ending inventory value

Answer
B. This situation is deflation, prices falling. With LIFO, last purchases become cost of goods sold, which is a lower cost in this situation. A lower cost of goods sold gives a higher gross profit and a higher net income. FIFO gives higher cost of goods sold and lowers net income in times of deflation.
5. Beginning inventory was $29,000. Gross profit is $52,000 for the period. Ending inventory was $36,000. Sales totaled $100,000. Purchases were
Answer
A. Sales – CGS = GP so CGS must be $48,000.
Beg Inv + Pur – End inv = CGS 100,000 – ? = 52,000
29,000 + ? – 36,000 = 48,000
Purchases must equal 55,000 for CGS to be 48,000
6. A company that uses the net method to record inventory purchases and does not pay in time to take the discount will record

a. accounts payable at the gross amount
b. interest expense
c. purchase discounts
d. cash at the net amount

Answer
B. A company will use the net amount when they are expecting to take the discount and normally pay in time to take the discount. When the company has to pay more because it failed to take the discount it is considered an additional expense that is not part of day to day operations. The additional amount paid is recorded as interest expense. Under the net method, accounts payable is always debited and credited for the net amount.
7. A purchase return

a. increases cost of goods sold
b. increases ending inventory
c. decreases net income
d. decreases cost of goods sold

Answer
D. Purchase returns decrease purchases. Purchases are added to get to cost of goods sold. Adding less decreases cost of goods sold. Lower cost of goods sold increases net income (c).
8. Using the LIFO perpetual method requires the company to

a. determine the ending inventory value the same as under LIFO periodic
b. use the last purchase cost for all units sold
c. use the last purchase cost for each of the units available before the sale
d. compute the average last cost and use it for the cost of the sale

Answer
C. A company using LIFO perpetual determines the cost of the units sold as the last ones available just before the sale. The units sold may be from more than one purchase date and have more than one purchase price. Units previously sold are not available to sell again.
9. When using the perpetual inventory, net method, inventory is debited when

a. inventory is sold for the gross amount
b. inventory is purchased for the gross amount less the discount
c. inventory is returned to the supplier for the gross amount
d. only at the end of the period for the net amount

Answer
B. The perpetual method records all changes to inventory when it occurs in the inventory account. A debit is an increase. Inventory increases when it is purchased. (a. & c.) decrease inventory recorded with a credit. (d) is the periodic method.
10. Ending inventory is equal to the cost of inventory owned in the warehouse plus

a. in transit items shipped F.O.B. destination to customers
b. in transit items shipped F.O.B. shipping to customers
c. items held on consignment
d. all of the above

Answer
A. The company must add all inventory it has title to. Inventory in the warehouse is owned and inventory that is shipped F.O.B destination is owned by the company until it is received by the customer. Items held on consignment are not owned by the company. Items held on consignment are not owned by the company (c.)
11. The Company had the following transactions during the first quarter of the current year

                                                                                     Units       Cost-per-unit  
January 1 Beginning Balance 900 $11
January 15 Purchased 500 $10
February 5 Purchased 400 $12
March 15 Purchased 600 $11
January 29 Sold 600
February 2 Sold 400
March 19 Sold 1,000

Units are sold for $15 each. Compute gross profit reported on the income statement and ending inventory reported on the balance sheet for the quarter using periodic
A. FIFO
B. LIFO
C. Average cost

Answer
 First: Reformat the information to list the inventory in order and determine the quantity and dollar amount that is available. The date of the sale does not matter for periodic.

Inventory on 1/1 900 x $11    = $   9,900
Purchase 1/15 500 x $10    = $   5,000
Purchase 2/5 400 x $12    = $   4,800
Purchase 3/15 600 x $11    = $   6,600
Available 2,400 $26,300
– Sales during quarter (2,000) ??
= Ending Inventory 3/31 400 ??

11.A. FIFO
First ones purchased are the first ones sold.
Start from the first purchases (top) and go down until the total is 2,000 units sold.

Inventory on 1/1      900 x $11      = $   9,900
Purchase 1/15    500 x $10      = $   5,000
Purchase 2/5      400 x $12      = $   4,800
Purchase 3/15    200 x $11      = $   2,200
Total sold CGS         2,000                = $21,900

You only use 200 of the 3/15 purchase because that is all you need to get to 2,000 sold.

Sales ($15 x 2,000)   30,000
Cost of goods sold (21,900)
= Gross Profit   8,100

Ending inventory is always

Available $26,300
– Cost of goods sold ($21,900)
= Ending inventory $   4,400

11.B. LIFO
Last ones purchased are the first ones sold.
Start with the last purchase (bottom) and go up until units sold equals 2,000.

Purchase 3/15 600 x $11 = $   6,600
Purchase 2/5 400 x $12 = $   4,800
Purchase 1/15 500 x $10 = $   5,000
Beginning Inv 1/1   500 x $11 = $   5,500
Total sold (CGS)   2,000 = $21,900

Use only 500 of the beginning inventory because the total cannot be higher than the 2,000 units sold.

Sales   30,000
– Cost of goods sold (21,900)
= Gross Profit   8,100

Ending inventory is always

Available   $26,300
– Cost of goods sold ($21,900)
= Ending inventory   $ 4,400

11.C. Weighted Average method: Use “Available” to get the average cost per unit

      Total $ Available            $26,300 =
Total Quantity Available        2,400

$10.9583 average cost per unit

   Units sold                               2,000
x Average cost per unit       $ 10.9583
= Cost of goods sold              $21,917

   Sales                                  30,000
– Cost of goods sold            (21,917)
= Gross Profit                        8,083

Ending inventory is always

   Available                         $26,300
– Cost of goods sold         ($21,917)
= Ending inventory             $ 4,383

12. The Company had the following transactions during the first quarter of the current year.

                                Units       Cost-per-unit  
January 1 Beginning Balance 900 $11
January 15 Purchased 500 $10
February 5 Purchased 400 $12
March 15 Purchased 600 $11
January 29 Sold 600
February 2 Sold 400
March 19 Sold 1,000

Compute cost of goods sold reported on the income statement and ending inventory reported on the balance sheet for the quarter using the perpetual method and
A. FIFO
B. LIFO
C. Average cost

Answer
Cost of Goods Sold is determined when the sale occurs.
Only inventory available just before the sale is used to determine which units were sold.

12.A) Perpetual FIFO
FIFO is the same for periodic and perpetual.
Do the easier periodic computation.

Inventory on 1/1 900 x $11 = $   9,900
Purchase 1/15 500 x $10 = $   5,000
Purchase 2/5 400 x $12 = $   4,800
Purchase 3/15 600 x $11 = $   6,600
Available 2,400 $26,300
– Sales during quarter (2,000) ??
= Ending Inventory 3/31 400 ??

First ones purchased are the first ones sold.

Inventory on 1/1    900 x $11 = $  9,900
Purchase 1/15    500 x $10 = $  5,000
Purchase 2/5    400 x $12 = $  4,800
Purchase 3/15    200 x $11 = $  2,200
          Total Sold   2,000 $21,900

Ending inventory is always

   Available                      $26,300
– Cost of goods sold       ($21,900)
= Ending inventory          $ 4,400

12.B) Perpetual LIFO

1st Set up purchases and sales in date order.
Only units on hand before the sale are included in units sold
Start with the last one purchased just before the sale.

                                                                               Purchases               Sales

                                                                                   Cost                       Cost
                                                                    Units     per-unit        Sold  per unit     CGS

January 1        Beginning Balance                 900       $11
January 15      Purchased                              500       $10

January 29      Sold                                        (600)                      500        $10       $5,000 from 1/15
                                                                                                     100         $11       $1,100 from BI

February 2      Sold                                        (400)                      400         $11       $4,400 from BI
                                                                                                                               the 1/15 pur is sold
February 5      Purchased                               400      $12
March 15        Purchased                                600     $11

March 19        Sold                                       (1,000)                    600        $11        $6,600 from 3/15
                                                                                                     400        $12       $4,800 from 2/5
                                                                                                                                _______
                                                                                           Total CGS:                    $21,900

January 29 sales:
The last ones purchased before the sale are the 500 units.
Sell those units first and then sell the other 100 (total of 600) from the purchase made just before.

Beginning inventory now has only 800 units left to sell.

February 2 sales:
The last ones purchased before the sale are the 800 units left in BI.
Sell 400 of the BI units.
400 units from BI are available to sell.

March 19 sales:
The last ones purchased before the sale are the 600 from 3/15.
Sell the 600 purchased on 3/15 and the need 400 from the purchase just before.

Ending Inventory:
From Beginning Inventory row only
400 x $11 = $4,400

Double check your work. The total available (beginning inventory + all purchases less cost of goods sold must equal ending inventory.

  Total Available               $26,300
– Cost of Goods Sold      ($21,900)
Ending Inventory              $ 4,400

12.C) Perpetual Moving Average:

A new moving average is computed after each purchase. The cost of the sale is recorded at the most recent moving average cost per unit after the latest purchase. Sales do not change the moving average.

                                                                               Purchases                                      Sales

                                                                             Cost                        Moving                  Cost
                                                                Units x per-unit = Total        Average      Sold x per unit  =  CGS

January 1        Beginning                          900         $11    $9,900
January 15      Purchased                         500        $10     $5,000
              Moving Average                        1,400                  $14,900      $10.64

January 29       Sold                                (600)                   $(6,384)                        600    $10.64     $6,384

February 2       Sold                                (400)                   $(4,256)                        400     $10.64     $4,256
              Inventory Balance                      400                      $ 4,260

February 5       Purchased                       400         $12       $ 4,800
              Moving Average                         800                      $ 9,060     $11.33

March 15         Purchased                        600        $11        $ 6,600
              Moving Average                      1,400                      $15,660    $ 11.19

March 19        Sold                              (1,000)                    ($11,190)                   1,000      $11.19 $11,190

              Ending Inventory                      400                         $4,470
                                                                                                                                                       _______
                                                                                                              Total CGS:                        $21,830

Double check your computations.
The total available from the periodic method less cost of goods sold must equal ending inventory.

Total Available                   $26,300
– Cost of Goods Sold       ($21,830)
Ending Inventory               $ 4,470

Quantity on hand                 400
x last average of               $11.19
= Inventory                       $4,476

small difference because the moving average cost per unit is rounded to dollars and cents.

13. The company purchased inventory on account for a cost of $60,000 on June 1st of the current year with terms of 1/10, n30. On June 14, goods with a cost of $20,000 were sold for a price of $33,000. On June 18th, $1,000 of goods was returned to the supplier. On June 26th, a customer paid cash of $39,000 for goods that cost the company $26,000. Inventory actually counted at the end of June was valued at a cost of $45,000. Beginning inventory on June 1st was $29,000. The company paid for the June 1st purchase on June 19th. The company uses the net method to record inventory purchases. All amounts are stated gross.

Make the appropriate journal entries for inventory during the month of June using
A. The periodic method
B. The perpetual method

Answer
The company uses the net method. All gross amounts need to be converted to net amounts.

Purchase 60,000 net of 1% 600 = 59,400 net
Cost of Sales 20,000 net of 1% 200 = 19,800 net
Return 1,000 net of 1% 10 = 990 net
Cost of Sales 26,000 net of 1% 260 = 25,740 net
Ending Inventory 45,000 net of 1% 450 = 44,550 net
Beginning Inventory 29,000 net of 1% 290 = 28,710 net
Payment 60,000 – 1,000 = 59,000 net of 1% of 590 = 58,410

Payment was not made in time to take the discount.

Periodic:

Purchases 6/1:
Purchases                            59,400
            Accounts Payable              59,400

Sales 6/14:
Accounts receivable (cash)      33,000
           Sales                                     33,000

(cost of inventory sold is not recorded)

Return 6/18:
Accounts Payable               990
           Purchase Returns              990

Payment 6/19
Accounts Payable            58,410
Interest Expense                   590
         Cash                                 59,000

Sales 6/26:
Cash                39,000
      Sales                    39,000

(cost of inventory sold is not recorded)

Adjustment at end of period:

Cost of Goods sold             42,570
Purchase Returns                    990
Inventory                             15,840
            Purchases                       59,400

1st: Transfer purchases and purchase returns to CGS. Balance = 0.
2nd: Make ending inventory equal to the actual value counted.
(Beginning 28,710 – Ending 44,550 = 15,840 increase)
3rd: Cost of goods sold is debited for the amount to balance the entry

Perpetual:

Purchases 6/1:
Inventory                              59,400
           Accounts Payable                 59,400

Sales 6/14:
Accounts receivable (cash)   33,000
           Sales                                  33,000

Cost of Goods Sold           19,800
          Inventory                            19,800

Returns 6/18:
Accounts Payable          990
          Inventory                        990

Payment 6/19
Accounts Payable         58,410
Interest Expense                590
         Cash                                59,000

Sales 6/26:
Cash                39,000
         Sales                39,000

Cost of Goods Sold       25,740
           Inventory                     25,740

Adjustment at end of period:

Inventory                            2,970
          Cost of Goods Sold         2,970

Beginning inventory                                  28,710
+ purchases                                              59,400
– purchase returns                                   (   990)
– sales (cost)                                        (  19,800)
– sales (cost)                                        (  25,740)
= Ending inventory per account              41,580
Compared to ending inventory counted (44,550)
= Adjustment to inventory                         2,970  more

Inventory must increase by 2,970 to equal the quantity actually on hand

Important:
Total Cost of Goods Sold will be the same for both the periodic and the perpetual method.
Periodic = 42,570
Perpetual = 19,800 +25,740 – 2,970 = 42,570

The perpetual method identifies shrink with the adjusting entry and the periodic method does not identify shrink.

14. The company uses a periodic inventory method. The following information has been gathered to prepare financial statements:

Sales during the period $ 1,000,000
Freight In $      51,000
Accounting Salaries $    109,000
Purchase Discounts $        7,000
Beginning Inventory $    200,000
Ending inventory $    225,000
Freight Out $      62,000
Purchases $    765,000
Sales Discounts $      12,000
Purchase Returns $      80,000
Administrative Expense $      00,000
Advertising Expense $      50,000

Using the information provided, determine

A. Goods available for sale
B. Cost of goods sold
C. Gross profit %

Answer
Ignore operating expenses when computing inventory costs and cost of goods sold.
Freight out, administrative expense and advertising expense are operating expenses.

A. Goods available for sale:

Beginning inventory             200,000
+ Purchases                         765,000
+ Freight In                             51,000
– Purchase Discounts             ( 7,000)
– Purchase Returns               (80,000)
= Goods Available for sale    929,000

B. Cost of Goods sold:

Beginning inventory                     200,000
+ Purchases                                 765,000
+ Freight In                                    51,000
– Purchase Discounts                    ( 7,000)
– Purchase Returns                      (80,000)
= Goods Available for sale           929,000
– Ending inventory                       (225,000)
= Cost of Goods sold                    704,000

C. Gross Profit %:

Sales                                  1,000,000
– Sales Discounts                 ( 12,000)
Net Sales                              988,000
– Cost of Goods Sold           (704,000)
= Gross Profit                        284,000

Gross Profit               284,000  = 28.4% Gross profit
      Sales                  1,000,000