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Exam 6: Inventories and Cost of Sales

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Question 101

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Match each of the following terms with the appropriate definition.

Premises

Responses

Net realizable value

Financial statements prepared for periods of less than one year.

Conservatism constraint

The number of times a company's average inventory is sold during a period.

Inventory turnover

An estimate of days needed to convert the inventory at the end of the period into receivables or cash.

Interim statements.

The accounting constraint that aims to select the less optimistic estimate when two or more estimates are about equally likely.

Weighted average inventory method

An inventory valuation method that assumes that inventory items are sold in the order acquired.

Days’ sales in inventory

An inventory valuation method that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold.

FIFO method

An inventory pricing method that assumes the unit prices of the beginning inventory and of each purchase are weighted by the number of units of each in inventory; the calculation occurs at the time of each sale.

Retail inventory method

An inventory valuation method where each item in inventory is identified with a specific purchase and invoice.

LIFO method

The expected sales price of an item minus the cost of making the sale.

Specific identification method

A method for estimating an ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail price.

Premises

Net realizable value

Conservatism constraint

Inventory turnover

Interim statements.

Weighted average inventory method

Days’ sales in inventory

FIFO method

Retail inventory method

LIFO method

Specific identification method

Responses

Financial statements prepared for periods of less than one year.

The number of times a company's average inventory is sold during a period.

An estimate of days needed to convert the inventory at the end of the period into receivables or cash.

The accounting constraint that aims to select the less optimistic estimate when two or more estimates are about equally likely.

An inventory valuation method that assumes that inventory items are sold in the order acquired.

An inventory valuation method that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold.

An inventory pricing method that assumes the unit prices of the beginning inventory and of each purchase are weighted by the number of units of each in inventory; the calculation occurs at the time of each sale.

An inventory valuation method where each item in inventory is identified with a specific purchase and invoice.

The expected sales price of an item minus the cost of making the sale.

A method for estimating an ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail price.

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Correct Answer

Premises

Responses

Net realizable value

Conservatism constraint

Inventory turnover

Interim statements.

Weighted average inventory method

Days’ sales in inventory

FIFO method

Retail inventory method

LIFO method

Specific identification method

Premises

Net realizable value

Conservatism constraint

Inventory turnover

Interim statements.

Weighted average inventory method

Days’ sales in inventory

FIFO method

Retail inventory method

LIFO method

Specific identification method

Responses

Question 102

Multiple Choice

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Companies can and often do use different costing methods for financial reporting and tax reporting. An exception to this is the:

A) FIFO inventory valuation method.
B) Matching principle.
C) Consistency concept.
D) LIFO conformity rule.
E) Full disclosure principle.

F) C) and D)
G) B) and E)

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Question 103

Multiple Choice

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Physical counts of inventory:

Under FIFO, the most recent costs are assigned to ending inventory.

On March 31 a company needed to estimate its ending inventory to prepare its first quarter financial statements. The following information is available: Beginning inventory, January 1: $4,000 Net sales: $80,000 Net purchases: $78,000 The company's gross margin ratio is 25%. Using the gross profit method, the estimated ending inventory value would be:

If obsolete or damaged goods can be sold, they will be included in inventory at their original cost.

The choice of an inventory valuation method has little to no impact on gross profit and cost of sales.

The understatement of the ending inventory balance causes:

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. $\begin{array} { | r | l | l | l | } \hline \text { Date } & \text { Activities } & \text { Units Acquired at Cost } & \text { Units Sold at Retail } \\\hline \text { May } 1 & \text { Beginning Inventory } & 150 \text { units } @ \$ 10.00 & \\\hline 5 & \text { Purchase } & 220 \text { units } @ \$ 12.00 & \\\hline 10 & \text { Sales } & & 140 \text { units } @ \$ 20.00 \\\hline 15 & \text { Purchase } & 100 \text { units } @ \$ 13.00 & \\\hline 24 & \text { Sales } & & 90 \text { units } @ \$ 21.00 \\\hline\end{array}$