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Exam 5: Inventories and Cost of Sales

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Question 121

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Perfection Company had cost of goods sold of $853,000,ending inventory of $70,500,and average inventory of $71,600.Its inventory turnover equals:

A) 11.9.
B) 1.0.
C) 6.0.
D) 30.6.
E) 14.0.

F) C) and E)
G) A) and E)

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Question 122

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An error in the period-end inventory balance will cause an error in the calculation of cost of goods sold.

A) True
B) False

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Question 123

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Some companies choose to avoid assigning incidental costs of acquiring merchandise to inventory by recording them as cost of goods sold when incurred.The principle that supports this is called:

An understatement of the ending inventory balance will overstate cost of goods sold and understate net income.

Salmone Company reported the following purchases and sales of its only product.Salmone uses a periodic inventory system.Determine the cost assigned to cost of goods sold using FIFO. $\begin{array} { | c | l | l | l | } \hline \text { Date } & { \text { Activities } } & \text { Units Acquired at Cost } & \text { Units Sold at Retail } \\\hline \text { May 1}& \text { Beginning Inventory } & 150 \text { units @ } \$ 10.00 & \\\hline 5& \text { Purchase } & 220 \text { units @ } \$ 12.00 & \\\hline 10& \text { Sales } & & 140 \text { units @ \$20.00 } \\\hline 15& \text { Purchase } & 100 \text { units @ } \$ 13.00 & \\\hline 24& \text { Sales } & & 90 \text { units @ \$21.00 } \\\hline\end{array}$

The ________ method of assigning costs to inventory and cost of goods sold requires that we divide the cost of goods available for sale by the units of inventory available at the time of each sale.

Mary's Antiques does not have its own retail location,instead maintains inventory in its warehouse and sells merchandise through Oldtime Antique Mall.Oldtime does not assume responsibility for goods until they are sold to customers at which time it takes a commission for items sold and sends the sale proceeds to Mary's.Identify which company has the role of the consignor and the consignee.Which company should include any unsold goods as part of its inventory?

Match the following terms with the appropriate definition. -The principle that aims to select the less optimistic estimate when two or more estimates are about equally likely.

An overstated beginning inventory will ________ cost of goods sold and ________ net income.

A company's inventory records report the following in November of the current year: $\begin{array} { | l | l | l | } \hline \text { Beginning } & \text { November } 1 & 5 \text { units @ \$20 } \\\hline \text { Purchase } & \text { November } 2 & 10 \text { units @ \$22 } \\\hline \text { Purchase } & \text { November } 12 & 6 \text { units @ \$25 } \\\hline\end{array}$ - On November 8,it sold 12 units for $54 each.Using the LIFO perpetual inventory method,what was the amount recorded in the cost of goods sold account for the 12 units sold?

How do the consistency concept and the full disclosure principle affect inventory valuation?

The consistency concept:

A company uses the periodic inventory system and had the following activity during the current monthly period. $\begin{array} { | l | l | l | } \hline \text { November 1: } & \text { Beginning inventory } & 100 \text { units @ \$20 } \\\hline \text { November 5: } & \text { Purchased } & 100 \text { units @ \$22 } \\\hline \text { November 8: } & \text { Purchased } & 50 \text { units @ \$23 } \\\hline \text { November 16: } & \text { Sold } & \text { 200 units @\$45 } \\\hline \text { November 19: } & \text { Purchased } & 50 \text { units @ \$25 } \\\hline\end{array}$ Using the weighted-average inventory method,the company's ending inventory would be:

The conservatism constraint prescribes that:

When purchase costs regularly rise,the ________ method of inventory valuation yields the lowest gross profit and net income,providing a tax advantage.

When units are purchased at different costs over time,determining the cost per unit assigned to inventory items is simple.

A company had the following purchases and sales during its first year of operations: $\begin{array} { | l | l | l | } \hline & \text { Purchases } & \text { Sales } \\\hline \text { January: } & 10 \text { units at } \$ 120 & 6 \text { units } \\\hline \text { February: } & 20 \text { units at } \$ 125 & 5 \text { units } \\\hline \text { May: } & 15 \text { units at } \$ 130 & 9 \text { units } \\\hline \text { September: } & 12 \text { units at } \$ 135 & 8 \text { units } \\\hline \text { November: } & 10 \text { units at } \$ 140 & 13 \text { units } \\\hline\end{array}$ On December 31,there were 26 units remaining in ending inventory. -Using the Periodic FIFO inventory valuation method,what is the value of cost of goods sold? (Assume all sales were made on the last day of the month.)

A company's inventory records report the following in November of the current year: $\begin{array} { | l | l | l | } \hline \text { Beginning } & \text { November 1 } & 5 \text { units @ \$20 } \\\hline \text { Purchase } & \text { November 2 } & 10 \text { units @ \$22 } \\\hline \text { Purchase } & \text { November 12 } & 6 \text { units @ \$25 } \\\hline\end{array}$ - On November 8,it sold 12 units for $54 each.Using the LIFO perpetual inventory method,what amount of gross profit was earned from the 12 units sold?

In the retail inventory method of inventory valuation,the retail amount of inventory refers to its dollar amount measured using selling prices of inventory items.

Explain the reason a company might use the retail inventory method for valuing inventory.