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Exam 6: Inventories and Cost of Sales

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Question 101

True/False

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An advantage of LIFO is that it assigns the most recent costs to cost of goods sold, and does a better job of matching current costs with revenues on the income statement.

A) True
B) False

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Question 102

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A company's warehouse was destroyed by a tornado on March 15. The following information was the only information that was salvaged: The company's average gross profit ratio is 35%. What is the estimated cost of the lost inventory?

A) $9,705.
B) $25,995.
C) $29,250.
D) $44,000.
E) $45,000.

F) A) and B)
G) None of the above

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Question 103

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Flaxco purchases inventory from overseas and incurs the following costs: the cost of the merchandise is $50,000, credit terms are 2/10, n/30 that apply only to the $50,000; FOB shipping point freight charges are $1,500; insurance during transit is $500; and import duties are $1,000. Flaxco paid within the discount period and incurred additional costs of $1,200 for advertising and $5,000 for sales commissions. Compute the cost that should be assigned to the inventory.

Acceptable methods of assigning specific costs to inventory and cost of goods sold include all of the following except:

The days' sales in inventory ratio is computed by dividing ending inventory by cost of goods sold and multiplying the result by 365.

Monitor Company uses the LIFO method for valuing its ending inventory. The following financial statement information is available for its first year of operation: Monitor's ending inventory using the LIFO method was $8,200. Monitor's accountant determined that had the company used FIFO, the ending inventory would have been $8,500. a. Determine what the income before taxes would have been, had Monitor used the FIFO method of inventory valuation instead of LIFO. b. What would be the difference in income taxes between LIFO and FIFO, assuming a 30% tax rate? c. If Monitor wanted to lower the amount of income taxes to be paid, which method would it choose?

An advantage of the weighted average inventory method is that it tends to smooth out erratic changes in costs.

A company had the following purchases during the current year: On December 31, there were 26 units remaining in ending inventory. These 26 units consisted of 2 from January, 4 from February, 6 from May, 4 from September, and 10 from November. Using the specific identification method, what is the cost of the ending inventory?

Using the information given below for a company that uses a perpetual inventory system, calculate the ending inventory using FIFO.

On July 24 of the current year, The Georgia Peach Company experienced a natural disaster that destroyed the company's entire inventory. At the beginning of July, the company reported beginning inventory of $226,750. Inventory purchased during July (until the date of the disaster) was $197,800. Sales for the month of July through July 24 were $642,500. Assuming the company's typical gross profit ratio is 50%, estimate the amount of inventory destroyed in the natural disaster.

The inventory turnover ratio is calculated as:

The inventory valuation method that has the advantages of assigning an amount to inventory on the balance sheet that approximates its current cost, and also mimics the actual flow of goods for most businesses is:

When taking a physical count of inventory, the use of prenumbered inventory tickets is an application of internal control.

The conservatism constraint: