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Exam 5: Accounting for Inventories

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Question 1

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At the end of the 2013 accounting period DeFazio Company determined that the market value of its inventory was $39,900. The historical cost of this inventory was $40,700. DeFazio uses the perpetual inventory method. The entry necessary to reduce the inventory to the lower of cost or market will

A) increase assets and increase liabilities.
B) decrease assets and decrease liabilities.
C) increase assets and increase net income.
D) decrease assets and decrease net income.

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

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Question 2

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A company's gross margin reported on the income statement is not affected by the inventory cost flow method it uses.

A) True
B) False

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Question 3

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Ireland Corporation's ending inventory as of December 31, 2013, was overstated by $14,000. Indicate whether each of the following statements relating to the above error is true or false. _____ a) Cost of goods sold is overstated in 2013 by $14,000. _____ b) Net Income is overstated in 2013 by $14,000. _____ c) Retained Earnings is understated at 12/31/13 by $28,000. _____ d) Beginning inventory will be understated in 2014 by $14,000. _____ e) Retained Earnings will not be affected by this error at the end of 2014.

The specific identification inventory method is not practical for companies that sell many low-priced, high turnover items.

The following information is for Pelham Company for 2013 Required: a) Assuming that Pelham uses the LIFO cost flow method, determine how much product cost would be allocated to Cost of Goods Sold, and how much to Merchandise Inventory at the end of the year. b) Based on your results from part a, calculate inventory turnover and average number of days to sell inventory. c) Assuming that Pelham uses the FIFO cost flow method, determine how much product cost would be allocated to Cost of Goods sold, and how much to Merchandise Inventory at the end of the year. d) Based on your results from part c, calculate inventory turnover and average number of days to sell inventory. e) Compare your results from parts b and d. Do LIFO and FIFO give the same results for inventory turnover? Which is higher, and why?

Phillips Corporation overstated its ending inventory on December 31, 2013. Which of the following answers correctly identifies the effect of the error on 2014 financial statements?

Pinkston Company purchased two identical inventory items. One of the items, purchased in January, cost $18.00. The other, purchased in February, cost $19.00. One of the items was sold in March at a selling price of $30.00. Select the correct answer assuming that Pinkston uses a LIFO cost flow.

In most businesses, the physical flow of goods occurs on a FIFO basis, but a different cost flow method is allowed under generally accepted accounting principles.

If Beamon Company is using FIFO, how would the accountant compute cost of goods sold when recording a sale under the perpetual inventory system?

Explain the computation of the inventory amount if the lower-of-cost-or-market rule is applied using the individual inventory item approach.

Maddox Company uses the perpetual inventory method. Maddox purchased 500 units of inventory that cost $2.00 each. At a later date the company purchased an additional 600 units of inventory that cost $2.50 each. If Maddox uses a LIFO cost flow method, and sells 800 units of inventory, the amount of ending inventory appearing on the balance sheet will be:

If a company applies the lower-of-cost-or-market rule on an aggregate basis, its write-down of inventory is likely to be lower than if it applies the rule to individual items of inventory.

The lower-of-cost-or-market rule can be applied to

If a firm is using the lower-of-cost-or-market rule and if a write-down entry is required, which of the following effects will apply?

Kent Company has an inventory turnover of 12.75, and its inventory amounts to $3,400,000. What is the amount of cost of goods sold?

International Financial Reporting Standards (IFRS) do not permit the use of the LIFO cost flow assumption.

The Darden Company had its entire inventory destroyed when a tornado destroyed the company's warehouse on April 30, 2013. The following information for the period up to the date of the tornado was taken from the accounting records Required: Assuming that the gross margin has averaged 25 percent of selling price, what is the estimated value of the inventory destroyed in the fire? Show all calculations in good form.

Duffy Company's first year in operation was 2013. For 2013, its cost of goods sold using FIFO was $60,000, and its ending inventory was $14,600. If Duffy had used the LIFO cost flow method, its ending inventory would have been $14,000. Required: a) What would the cost of goods sold have been with LIFO? b) Based on this information, was 2013 a period of rising prices or falling prices?

Which of the following circumstances is not a reason to compute an estimate of the amount of inventory?

Sandridge Company uses the weighted average inventory cost flow method. How would Sandridge's accountant compute cost of goods sold when recording a sale under the perpetual inventory system?