CH 08

CHAPTER 8
VALUATION OF INVENTORIES:
A COST-BASIS APPROACH
CHAPTER LEARNING OBJECTIVES
1.
Identify major classifications of inventory.
2.
Distinguish between perpetual and periodic inventory systems.
3.
Determine the goods included in inventory and the effects of inventory errors on the
financial statements.
4.
Understand the items to include as inventory cost.
5.
Describe and compare the methods used to price inventories.
*6.
Describe the LIFO cost flow assumption.
8-2
Test Bank for Intermediate Accounting: IFRS Edition, 2e
TRUE FALSEConceptual
1.
A manufacturing concern would report the cost of units only partially processed as
inventory in the statement of financial position.
2.
Both merchandising and manufacturing companies normally have multiple inventory

accounts.
3.
IFRS requires manufacturers to disclose their inventory components on the statement of

financial position or in related notes.
4.
Goods in transit, shipped FOB shipping point, are included in the buyers statement of
financial position at the time of delivery to the common carrier.
5.
Tang, Inc. sells collectible jewelry on consignment from various manufacturers and should
include this consigned inventory on its statement of financial position.
6.
Companies must allocate the cost of all the goods available for sale (or use) between the
income statement and the statement of financial position.
7.
When using a perpetual inventory system, freight charges on goods purchased are
debited to Freight-In.
8.
If a supplier ships goods f.o.b. destination, title passes to the buyer when the supplier
delivers the goods to the common carrier.
9.
If both purchases and ending inventory are overstated by the same amount, net income is
not affected.
10.
Freight charges on goods purchased are considered a period cost and therefore are not
part of the cost of the inventory.
11.
Purchase Discounts Lost is a financial expense and is reported in the other income and
expense section of the income statement.
12.
Interest costs incurred to manufacture large quantities of inventory that are produced
routinely should be capitalized.
13.
A trade discount that is granted as an incentive for a first-time customer or as a reward for
large order should be accounted for by the purchaser as revenue.
14.
Freight costs incurred by the seller to ship merchandise to the purchaser are accounted
for by the seller as part of inventory on the statement of financial position.
15.
Abnormal freight costs are not included on the statement of financial position as part of
the cost of inventory.
16.
Under IFRS, agricultural inventories, such as wheat, oranges, etc., are recorded at their
fair value less estimated selling costs at the point of harvest.
Valuation of Inventories: A Cost-Basis Approach
8-3
17.
The International Accounting Standards Board (IASB) requires the specific identification
method of inventory costing where individual items of inventory can be identified and
costed.
18.
The International Accounting Standards Board requires the specific identification method
when unit price is low, inventory turnover is high, and inventory quantities are large.
19.
The cost flow assumption adopted must be consistent with the physical movement of the
goods.
*20.
The LIFO perpetual method results in the same ending inventory and cost of goods sold
amounts as under the LIFO periodic method.
True False AnswersConceptual

Item
1.
2.
3.
4.
Ans.
T
F
T
T
Item
5.
6.
7.
8.
Ans.
F
T
F
F
Item
9.
10.
11.
12.
Ans.
T
F
T
F
Item
13.
14.
15.
16.
Ans.
F
F
T
T
Item
17.
18.
19.
*20.
Ans.
T
F
F
F
Item
Ans.
MULTIPLE CHOICEConceptual
21.
Which of the following inventories carried by a manufacturer is similar to the merchandise

inventory of a retailer?
a. Raw materials.
b. Work-in-process.
c. Finished goods.
d. Supplies.
22.
Where should raw materials be classified on the statement of financial position?

a. Prepaid expenses.
b. Inventory.
c. Equipment.
d. Not on the statement of financial position.
23.
Which of the following accounts is not reported in inventory?

a. Raw materials.
b. Equipment.
c. Finished goods.
d. Supplies.
24.
Computers For You is a retailer specializing in selling computers and related equipment.
Which of the following would not be reported in the merchandise inventory account
reported on the statement of financial position for Computers For You at December 31,
2015?
a. Computer purchased for resale during November 2015.
b. Shelving materials purchased during December 2015.
c. Freight costs related to the computers purchased in November.
d. All of the choices are included in the merchandise inventory account at December 31,
2015.
8-4
25.
Culver Company purchases the majority of its inventory from three primary suppliers for
re-sale to customers around the world. Culver Companys statement of financial position
will include
a. Finished goods inventory.
b. Work-in-process inventory.
c. Merchandise inventory.
d. All of the choices are correct.
26.
Companies must allocate the cost of all the goods available for sale (or use) between
a. The cost goods on hands at the beginning of the period as reported on the statement
of financial position and the cost of goods acquired or produced during the period.
b. The cost of goods on hand at the end of the period as reported on the statement of
financial position and the cost of goods acquired or produced during the period.
c. The income statement and the statement of financial position.
27.
Mineral Makers (MM) Company keeps its inventory records using a perpetual system. At
December 31, 2015, the unadjusted balance in the inventory account is $64,000. Through
a physical count on December 31, 2015, MM determines that its actual merchandise
inventory at year-end is $62,500. Which of the following is true regarding the statement of
financial position and the income statement of MM at December 31, 2015?
a. Inventory is increased and cost of goods sold is decreased by $1,500.
b. Inventory is decreased and cost of goods sold is increased by $1,500.
c. Inventory is increased and cost of goods sold is increased by $1,500.
d. Inventory is decreased and cost of goods sold is decreased by $1,500.
28.
Tang, Inc. sells collectible jewelry on consignment from various manufacturers.

Additionally, Tang sells its own line of specialty jewelry manufactured in-house. On
December 31, 2015, during Tang, Inc 's annual inventory count, an inexperienced new
staff member included in Tangs ending inventory $350,000 worth of inventory held on
consignment from Metcalf Associates. Which of the following is correct regarding the
impact of this error on Tangs income statement and statement of financial position at
December 31, 2015?
a. Ending inventory is understated by $350,000.
b. Retained earnings is overstated by $350,000.
c. Cost of goods sold is overstated by $350,000.
d. The financial statements are correctly stated.
29.
Why are inventories included in the computation of net income?

a. To determine cost of goods sold.
b. To determine sales revenue.
c. To determine merchandise returns.
d. Inventories are not included in the computation of net income.
30.
Which of the following is a characteristic of a perpetual inventory system?

a. Inventory purchases are debited to a Purchases account.
b. Inventory records are not kept for every item.
c. Cost of goods sold is recorded with each sale.
d. Cost of goods sold is determined as the amount of purchases less the change in
inventory.
8-5
31.
How is a significant amount of consignment inventory reported in the statement of

financial position?
a. The inventory is reported separately on the consignor's statement of financial position.
b. The inventory is combined with other inventory on the consignor's statement of
financial position.
c. The inventory is reported separately on the consignee's statement of financial position.
d. The inventory is combined with other inventory on the consignee's statement of
financial position.
32.
Where should goods in transit that were recently purchased f.o.b. destination be included
on the statement of financial position?
a. Accounts payable.
b. Inventory.
c. Equipment.
d. Not on the statement of financial position.
33.
If a company uses the periodic inventory system, what is the impact on net income of
including goods in transit f.o.b. shipping point in purchases, but not ending inventory?
a. Overstate net income.
b. Understate net income.
c. No effect on net income.
d. Not sufficient information to determine effect on net income.
34.
If a company uses the periodic inventory system, what is the impact on the current ratio of
including goods in transit f.o.b. shipping point in purchases, but not ending inventory?
a. Overstate the current ratio.
b. Understate the current ratio.
c. No effect on the current ratio.
d. Not sufficient information to determine effect on the current ratio.
35.
What is consigned inventory?

a. Goods that are shipped, but title transfers to the receiver.
b. Goods that are sold, but payment is not required until the goods are sold.
c. Goods that are shipped, but title remains with the shipper.
d. Goods that have been segregated for shipment to a customer.
36.
When using a perpetual inventory system,

a. no Purchases account is used.
b. a Cost of Goods Sold account is used.
c. two entries are required to record a sale.
d. All of these are correct.
37.
Goods in transit which are shipped f.o.b. shipping point should be

a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. None of these are correct.
38.
Goods in transit which are shipped f.o.b. destination should be

a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
8-6
39.

Which of the following items should be included in a company's inventory at the statement
of financial position date?
a. Goods in transit which were purchased f.o.b. destination.
b. Goods received from another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at his or her
convenience.
Use the following information for questions 40 and 41.

During 2015 Carne Corporation transferred inventory to Nolan Corporation and agreed to
repurchase the merchandise early in 2016. Nolan then used the inventory as collateral to borrow
from Norwalk Bank, remitting the proceeds to Carne. In 2016 when Carne repurchased the
inventory, Nolan used the proceeds to repay its bank loan.
40.
This transaction is known as a(n)

a. consignment.
b. installment sale.
c. assignment for the benefit of creditors.
d. product financing arrangement.
41.
On whose books should the cost of the inventory appear at the December 31, 2015
statement of financial position date?
a. Carne Corporation
b. Nolan Corporation
c. Norwalk Bank
d. Nolan Corporation, with Carne making appropriate note disclosure of the transaction
42.
Valuation of inventories requires the determination of all of the following except

a. the costs to be included in inventory.
b. the physical goods to be included in inventory.
c. the cost of goods held on consignment from other companies.
d. the cost flow assumption to be adopted.
43.
The accountant for the Pryor Sales Company is preparing the income statement for 2015
and the statement of financial position at December 31, 2015. Pryor uses the periodic
inventory system. The January 1, 2015 merchandise inventory balance will appear
a. only as an asset on the statement of financial position.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a
current asset on the statement of financial position.
d. as an addition in the cost of goods sold section of the income statement and as a
current asset on the statement of financial position.
44.
If the beginning inventory for 2015 is overstated, the effects of this error on cost of goods
sold for 2015, net income for 2015, and assets at December 31, 2016, respectively, are
a. overstatement, understatement, overstatement.
b. overstatement, understatement, no effect.
c. understatement, overstatement, overstatement.
d. understatement, overstatement, no effect.

S
8-7
45.
The failure to record a purchase of merchandise on account even though the goods are
properly included in the physical inventory results in
a. an overstatement of assets and net income.
b. an understatement of assets and net income.
c. an understatement of cost of goods sold and liabilities and an overstatement of
assets.
d. an understatement of liabilities and an overstatement of equity.
46.
Dolan Co. received merchandise on consignment. As of March 31, Dolan had recorded
the transaction as a purchase and included the goods in inventory. The effect of this on its
financial statements for March 31 would be
a. no effect.
b. net income was correct and current assets and current liabilities were overstated.
c. net income, current assets, and current liabilities were overstated.
d. net income and current liabilities were overstated.
47.
Green Co. received merchandise on consignment. As of January 31, Green included the
goods in inventory, but did not record the transaction. The effect of this on its financial
statements for January 31 would be
a. net income, current assets, and retained earnings were overstated.
b. net income was correct and current assets were understated.
c. net income and current assets were overstated and current liabilities were
understated.
d. net income, current assets, and retained earnings were understated.
48.
Feine Co. accepted delivery of merchandise which it purchased on account. As of

December 31, Feine had recorded the transaction, but did not include the merchandise in
its inventory. The effect of this on its financial statements for December 31 would be
a. net income, current assets, and retained earnings were understated.
b. net income was correct and current assets were understated.
c. net income was understated and current liabilities were overstated.
d. net income was overstated and current assets were understated.
49.
On June 15, 2015, Wynne Corporation accepted delivery of merchandise which it

purchased on account. As of June 30, Wynne had not recorded the transaction or
included the merchandise in its inventory. The effect of this on its statement of financial
position for June 30, 2015 would be
a. assets and equity were overstated but liabilities were not affected.
b. equity was the only item affected by the omission.
c. assets, liabilities, and equity were understated.
d. None of these answers are correct.
50.
What is the effect of a $50,000 overstatement of last year's inventory on current years
ending retained earning balance?
a. Understated by $50,000.
b. No effect.
c. Overstated by $50,000.
d. Need more information to determine.
8-8
51.
When inventory is misstated, its presentation lacks?

a. Relevance.
b. Faithful representation.
c. Comparability.
52.
Which of the following costs should not be included on the statement of financial position
as part of the cost of inventory?
a. Abnormal freight.
b. Import duties.
c. Conversion costs.
d. All of the choices are included on the statement of financial position as part of the cost
of inventory.
53.
Jarvis, Inc. manufactures cruise ships for sale. Each ship costs approximately
$25,000,000 to build and takes 3 years to fully construct. During the time it takes to
construct one cruise ship, Jarvis incurs $2,400,000 in interest cost related to the
construction. The interest cost is incurred evenly throughout the construction period.
During the first year of construction, Jarvis builds a shell that can be customized for any
purchaser according to specifications; construction during the final 2 years is all based on
client specification. The International Accounting Standards Board requires that Jarvis
account for this interest cost as
a. $2,400,000 is recorded as interest expense as incurred.
b. $2,400,000 is capitalized to the cruise ship.
c. $800,000 incurred in 1st year is expensed as incurred; the remaining amount is
capitalized to the cruise ship.
d. $800,000 is capitalized to the cruise ship; the remaining amount is expensed as
incurred.
54.
Oats Company offers a trade discount to its customers as a reward for large orders.
According to the International Accounting Standards Board (IASB) how should the
customers of Oats Company account for these trade discounts?
a. As an expense.
b. As a revenue.
c. As a reduction in the cost of inventory.
d. The IASB allows any of these treatments so long as the company applies it
consistently.
55.
Margo, Inc. purchased goods from Fairlane Industries. If Margos accounts show a
Purchase Discount account related to this purchase, which of the following is true?
a. Margo considers purchase discounts lost as a financial expense.
b. Margo uses the gross method and a periodic inventory system.
c. Margos management can measure inefficiency by holding management responsible
for discounts not taken.
d. All of these are correct regarding Margo, Inc.
8-9
56.
Computers For You is a retailer specializing in selling computers and related equipment.
During 2015, Computers For You sells $200,000 of merchandise to Sandcastles, Inc.
Computers For You incurs $24,000 of freight costs associated with these sales. Which of
the following is true regarding how this $24,000 is treated on the financial statements?
a. Computers For You will report the $24,000 as part of merchandise inventory on the
statement of financial position.
b. Sandcastles, Inc. will report the $24,000 as part of merchandise inventory on the
statement of financial position.
c. Computers For You will report the $24,000 as part of operating expenses on the
income statement.
d. Sandcastles, Inc. will report the $24,000 as an accounts receivable on the statement
of financial position.
57.
Which of the following is a product cost as it relates to inventory?

a. Selling costs.
b. Interest costs.
c. Raw materials.
d. Abnormal spoilage.
58.
Which of the following is a period cost?

a. Labor costs.
b. Freight in.
c. Production costs.
d. Selling costs.
59.
Which method may be used to record cash discounts a company receives for paying
suppliers promptly?
a. Net method.
b. Gross method.
c. Average method.
d. Both the net method and the gross method.
60.
Which of the following is included in inventory costs?

a. Product costs.
b. Period costs.
c. Product and period costs.
d. Neither product or period costs.
61.
Which of the following is correct?

a. Selling costs are product costs.
b. Manufacturing overhead costs are product costs.
c. Interest costs for routine inventories are product costs.
d. All of these are correct.
62.
Costs which are inventoriable include all of the following except

a. costs that are directly connected with the bringing of goods to the place of business of
the buyer.
b. costs that are directly connected with the converting of goods to a salable condition.
c. buying costs of a purchasing department.
d. selling costs of a sales department.
8 - 10
63.
Which of the following types of interest cost incurred in connection with the purchase or
manufacture of inventory should be capitalized as a product cost?
a. Purchase discounts lost
b. Interest incurred during the production of discrete projects such as ships or real estate
projects
c. Interest incurred on notes payable to vendors for routine purchases made on a
repetitive basis
d. All of these should be capitalized.
64.
The use of a Discounts Lost account implies that the recorded cost of a purchased
inventory item is its
a. invoice price.
b. invoice price plus the purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.
65.
The use of a Purchase Discounts account implies that the recorded cost of a purchased
inventory item is its
a. invoice price.
b. invoice price plus any purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.

During 2015, which was the first year of operations, Oswald Company had merchandise
purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30.
Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods
available had been sold at year end.
66.
Which of the following recording procedures would result in the highest cost of goods sold
for 2015?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken
shown under "other income and expense" in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same cost of goods sold.
d. Cannot be determined from the information provided.
67.
Which of the following recording procedures would result in the highest net income for
2015?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken
shown under "other income and expense" in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same net income.
d. Cannot be determined from the information provided.
8 - 11
68.
When using the periodic inventory system, which of the following generally would not be
separately accounted for in the computation of cost of goods sold?
a. Trade discounts applicable to purchases during the period
b. Cash (purchase) discounts taken during the period
c. Purchase returns and allowances of merchandise during the period
d. Cost of transportation-in for merchandise purchased during the period
69.
Which inventory costing method most closely approximates current cost for ending
inventory?
a. Average
b. FIFO
c. LIFO
d. Specific identification
70.
The pricing of issues from inventory must be deferred until the end of the accounting
period under the following method of inventory valuation
a. moving average.
b. weighted-average.
c. specific identification.
d. FIFO.
71.
An inventory pricing procedure in which the oldest costs incurred rarely have an effect on
the ending inventory valuation is
a. FIFO.
b. LIFO.
d. weighted-average.
72.
Which method of inventory pricing best approximates specific identification of the actual
flow of costs and units in most manufacturing situations?
a. Average cost
b. First-in, first-out
c. Moving-average
d. Weighted-average
73.
Assuming no beginning inventory, what can be said about the trend of inventory prices if
cost of goods sold computed when inventory is valued using the FIFO method exceeds
cost of goods sold when inventory is valued using the average cost method?
a. Prices decreased.
b. Prices remained unchanged.
c. Prices increased.
d. Price trend cannot be determined from information given.
74.
In a period of rising prices, the inventory method which tends to give the highest reported
net income is
a. moving-average.
b. first-in, first-out.
8 - 12
75.
In a period of rising prices, the inventory method which tends to give the highest reported
inventory is
a. FIFO.
b. moving average.
76.
Tanner Corporation's inventory cost on its statement of financial position was lower using
first-in, first-out than it would have been using average cost. Assuming no beginning
inventory, in what direction did the cost of purchases move during the period?
a. Up
b. Down
c. Steady
d. Cannot be determined
77.
In a period of declining prices, the inventory method which tends to give the highest
reported cost of goods sold is
a. specific identification.
b. average cost.
c. FIFO.
78.
The acquisition cost of a certain raw material changes frequently. The book value of the
inventory of this material at year end will be the same if perpetual records are kept as it
would be under a periodic inventory method only if the book value is computed under the
a. weighted-average method.
b. moving average method.
c. FIFO method.
79.
Which of the following is a reason why the specific identification method may be
considered ideal for assigning costs to inventory and cost of goods sold?
a. The potential for manipulation of net income is reduced.
b. There is no arbitrary allocation of costs.
c. The cost flow matches the physical flow.
d. Able to use on all types of inventory.
80.
In a period of falling prices which inventory method generally provides the lowest reported
inventory?
a. Average cost.
b. FIFO.
c. Moving average.
d. Specific identification.
81.
In a period of falling prices, which inventory method generally provides the lowest amount
of net income?
a. Average cost.
b. Moving average.
c. FIFO.
d. Specific identification.
8 - 13
82.
The International Accounting Standards Board requires the specific identification method
in certain circumstances. Which of the following is likely to be a circumstance where the
specific identification criteria can be met?
a. Unit price is low.
b. Inventory turnover is low.
c. Inventory quantities are large.
d. All of the choices are circumstances where the criteria are likely to be met.
83.
Homes 4 You builds single-family homes throughout the United States and Europe. The
International Accounting Standards Board (IASB) Requires Homes 4 You to use which of
the following cost flow assumptions for its inventory?
a. FIFO (first-in, first-out).
b. Specific identification.
c. Weighted-average.
d. The IASB allows any of these cost flow assumptions as long as the company uses it
consistently.
*84.
Oats and Honey Company produces healthy snacks for sale throughout the United States
and Europe. The International Accounting Standards Board (IASB) prohibits Oats and
Honey from using which of the following cost flow assumptions for its inventory?
a. LIFO (last-in, first-out).
b. Specific identification.
c. Weighted-average.
d. The IASB allows any of these cost flow assumptions as long as the company uses it
consistently.
Multiple Choice AnswersConceptual

Item
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
Ans.
c
b
b
b
c
c
b
b
a
c
Item
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
Ans.
a
d
b
b
c
d
b
a
d
d
Item
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
Ans.
a
c
b
b
d
b
a
a
d
b
Item
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
Ans.
b
a
b
c
c
c
c
d
d
a
Item
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
Ans.
b
d
b
d
a
a
c
a
b
b
Item
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
Ans.
Item
a
b
a
b
a
b
c
c
c
b
81.
82.
83.
*84.
Ans
c.
b
b
a
Solutions to those Multiple Choice questions for which the answer is none of these answers is
correct.
39. Goods in transit which were purchased f.o.b. shipping point.
49. Assets and liabilities were understated but equity was not affected.
8 - 14
MULTIPLE CHOICEComputational
85.
Morgan Manufacturing Company has the following account balances at year end:
Supplies
Raw materials
Work-in-process
Finished goods
Prepaid insurance
$ 4,000
27,000
59,000
72,000
6,000
What amount should Morgan report as inventories in its statement of financial position?
a. $72,000.
b. $76,000.
c. $158,000.
d. $162,000.
86.
Lawson Manufacturing Company has the following account balances at year end:
Supplies
Raw materials
Work-in-process
Finished goods
Prepaid insurance
$ 4,000
27,000
59,000
92,000
6,000
What amount should Lawson report as inventories in its statement of financial position?
a. $92,000.
b. $96,000.
c. $178,000.
d. $182,000.
87.
Elkins Corporation uses the perpetual inventory method. On March 1, it purchased

$10,000 of inventory, terms 2/10, n/30. On March 3, Elkins returned goods that cost
$1,000. On March 9, Elkins paid the supplier. On March 9, Elkins should credit
a. purchase discounts for $200.
b. inventory for $200.
c. purchase discounts for $180.
d. inventory for $180.
88.
Malone Corporation uses the perpetual inventory method. On March 1, it purchased

$30,000 of inventory, terms 2/10, n/30. On March 3, Malone returned goods that cost
$3,000. On March 9, Malone paid the supplier. On March 9, Malone should credit
a. purchase discounts for $600.
b. inventory for $600.
c. purchase discounts for $540.
d. inventory for $540.
8 - 15
89.
Bell Inc. took a physical inventory at the end of the year and determined that $650,000 of
goods were on hand. In addition, Bell, Inc. determined that $50,000 of goods that were in
transit that were shipped f.o.b. shipping were actually received two days after the
inventory count and that the company had $75,000 of goods out on consignment. What
amount should Bell report as inventory at the end of the year?
a. $650,000.
b. $700,000.
c. $725,000.
d. $775,000.
90.
Bell Inc. took a physical inventory at the end of the year and determined that $475,000 of
goods were on hand. In addition, the following items were not included in the physical
count. Bell, Inc. determined that $60,000 of goods were in transit that were shipped f.o.b.
destination (goods were actually received by the company three days after the inventory
count). On the last day of the year, the company sold $25,000 worth of inventory f.o.b.
destination. What amount should Bell report as inventory at the end of the year?
a. $475,000.
b. $535,000.
c. $500,000.
d. $560,000.
91.
Risers Inc. reported total assets of $1,200,000 and net income of $135,000 for the current
year. Risers determined that inventory was overstated by $10,000 at the beginning of the
year (this was not corrected). What is the corrected amount for total assets and net
income for the year?
a. $1,200,000 and $135,000.
b. $1,200,000 and $145,000.
c. $1,190,000 and $125,000.
d. $1,210,000 and $145,000.
92.
Risers Inc. reported total assets of $1,600,000 and net income of $85,000 for the current
year. Risers determined that inventory was understated by $23,000 at the beginning of the
year and $10,000 at the end of the year. What is the corrected amount for total assets and
net income for the year?
a. $1,610,000 and $95,000.
b. $1,590,000 and $98,000.
c. $1,610,000 and $72,000.
d. $1,600,000 and $85,000.
Use the following information for questions 93 through 95.

Hudson, Inc. is a calendar-year corporation. Its financial statements for the years 2015 and 2014
contained errors as follows:
2015
2014
Ending inventory
$3,000 overstated
$8,000 overstated
Depreciation expense
$2,000 understated
$6,000 overstated
8 - 16
93.
Assume that the proper correcting entries were made at December 31, 2014. By how
much will 2015 income before taxes be overstated or understated?
a. $1,000 understated
b. $1,000 overstated
c. $2,000 overstated
d. $5,000 overstated
94.
Assume that no correcting entries were made at December 31, 2014. Ignoring income
taxes, by how much will retained earnings at December 31, 2015 be overstated or
understated?
a. $1,000 understated
c. $5,000 understated
d. $9,000 understated
95.
Assume that no correcting entries were made at December 31, 2014, or December 31,
2015 and that no additional errors occurred in 2016. Ignoring income taxes, by how much
will working capital at December 31, 2016 be overstated or understated?
a. $0
c. $2,000 understated
d. $5,000 understated
96.
The following information is available for Naab Company for 2015:

Freight-in
Purchase returns
Selling expenses
Ending inventory
$ 30,000
75,000
150,000
260,000
The cost of goods sold is equal to 400% of selling expenses. What is the cost of goods
available for sale?
a. $600,000.
b. $890,000.
c. $815,000.
d. $860,000.
Winsor Co. records purchases at net amounts. On May 5 Winsor purchased merchandise on
account, $16,000, terms 2/10, n/30. Winsor returned $1,200 of the May 5 purchase and received
credit on account. At May 31 the balance had not been paid.
97.
The amount to be recorded as a purchase return is

a. $1,080.
b. $1,224.
c. $1,200.
d. $1,176.

98.
8 - 17
By how much should the account payable be adjusted on May 31?

a. $0.
b. $344.
c. $320.
d. $296.

The following information was available from the inventory records of Rich Company for January:
Balance at January 1
Purchases:
January 6
January 26
Sales:
January 7
January 31
Balance at January 31
Units
3,000
Unit Cost
$9.77
2,000
2,700
10.30
10.71
Total Cost
$29,310
20,600
28,917
(2,500)
(4,000)
1,200
99.
Assuming that Rich does not maintain perpetual inventory records, what should be the
inventory at January 31, using the weighted-average inventory method, rounded to the
nearest dollar?
a. $12,606.
b. $12,284.
c. $12,312.
d. $12,432.
100.
Assuming that Rich maintains perpetual inventory records, what should be the inventory
at January 31, using the moving-average inventory method, rounded to the nearest
dollar?
a. $12,606.
b. $12,284.
c. $12,312.
d. $12,432.

Niles Co. has the following data related to an item of inventory:
Inventory, March 1
100 units @ $4.20
Purchase, March 7
350 units @ $4.40
Purchase, March 16
70 units @ $4.50
Inventory, March 31
130 units
101.
The value assigned to cost of goods sold if Niles uses FIFO is

a. $579.
b. $552.
c. $1,723.
d. $1,696.
8 - 18
*102. The value assigned to ending inventory if Niles uses LIFO is

a. $579.
b. $552.
c. $546.
d. $585.
103.
Emley Company has been using the average cost method of inventory valuation for 10
years, since it began operations. Its 2015 ending inventory was $40,000, but it would have
been $60,000 if FIFO had been used. Thus, if FIFO had been used, Emley's income
before income taxes would have been
a. $20,000 greater over the 10-year period.
b. $20,000 less over the 10-year period.
c. $20,000 greater in 2015.
d. $20,000 less in 2015.

Transactions for the month of June were:
Purchases
June 1
(balance) 800 @ $3.20
3
2,200 @ 3.10
7
1,200 @ 3.30
15
1,800 @ 3.40
22
500 @ 3.50
June 2
6
9
10
18
25
Sales
600 @ $5.50
1,600 @ 5.50
1,000 @ 5.50
400 @ 6.00
1,400 @ 6.00
200 @ 6.00
104.
Assuming that perpetual inventory records are kept in dollars, the ending inventory on a
FIFO basis is
a. $4,110.
b. $4,160.
c. $4,290.
d. $4,470.
105.
Assuming that perpetual inventory records are kept in units only, the ending inventory on
an average-cost basis, rounded to the nearest dollar, is
a. $4,096.
b. $4,238.
c. $4,290.
d. $4,322.
106.
Milford Company had 500 units of Tank in its inventory at a cost of $4 each. It
purchased, for $2,800, 300 more units of Tank. Milford then sold 400 units at a selling
price of $10 each, resulting in a gross profit of $1,600. The cost flow assumption used by
Milford
a. is FIFO.
b. is specific identification.
c. is weighted average.
d. cannot be determined from the information given.
8 - 19
107.
Nichols Company had 500 units of Dink in its inventory at a cost of $5 each. It
purchased, for $2,400, 300 more units of Dink. Nichols then sold 600 units at a selling
price of $10 each, resulting in a gross profit of $2,700. The cost flow assumption used by
Kingman
a. is FIFO.
b. is LIFO.
c. is weighted average.
d. cannot be determined from the information given.
108.
June Corp. sells one product and uses a perpetual inventory system. The beginning
inventory consisted of 10 units that cost $20 per unit. During the current month, the
company purchased 60 units at $20 each. Sales during the month totaled 45 units for $43
each. What is the number of units in the ending inventory?
a. 10 units.
b. 15 units.
c. 25 units.
d. 70 units.
109.
June Corp. sells one product and uses a perpetual inventory system. The beginning
inventory consisted of 10 units that cost $20 per unit. During the current month, the
company purchased 60 units at $20 each. Sales during the month totaled 45 units for $43
each. What is the cost of goods sold using the FIFO method?
a. $200.
b. $900.
c. $1,200.
d. $1,935.
110.
Checkers uses the periodic inventory system. For the current month, the beginning
inventory consisted of 1,200 units that cost $12 each. During the month, the company
made two purchases: 500 units at $13 each and 2,000 units at $13.50 each. Checkers
also sold 2,150 units during the month. Using the average cost method, what is the
amount of cost of goods sold for the month?
a. $27,843.
b. $28,950.
c. $26,975.
d. $27,950.
111.
Chess Top uses the periodic inventory system. For the current month, the beginning
inventory consisted of 200 units that cost $65 each. During the month, the company made
two purchases: 300 units at $68 each and 150 units at $70 each. Chess Top also sold 500
units during the month. Using the average cost method, what is the amount of ending
inventory?
a. $10,500.
b. $33,770.
c. $33,400.
d. $10,131.
8 - 20
112.
Checkers uses the periodic inventory system. For the current month, the beginning
also sold 2,150 units during the month. Using the FIFO method, what is the ending
inventory?
a. $20,073.
b. $18,600.
c. $20,925.
d. $18,950.
113.
Chess Top uses the periodic inventory system. For the current month, the beginning
units during the month. Using the FIFO method, what is the amount of cost of goods sold
for the month?
a. $33,770.
b. $32,500.
c. $34,150.
d. $33,400.
*114. Checkers uses the periodic inventory system. For the current month, the beginning
also sold 2,150 units during the month. Using the LIFO method, what is the ending
inventory?
a. $20,073.
b. $18,600.
c. $20,925.
d. $18,950.
Transactions for the month of June were:
Purchases
June 1
(balance) 800 @ $3.20
3
2,200 @ 3.10
7
1,200 @ 3.30
15
1,800 @ 3.40
22
500 @ 3.50
June 2
6
9
10
18
25
Sales
600 @ $5.50
1,600 @ 5.50
1,000 @ 5.50
400 @ 6.00
1,400 @ 6.00
200 @ 6.00
*115. Assuming that perpetual inventory records are kept in units only, the ending inventory on a
LIFO basis is
a. $4,110.
b. $4,160.
c. $4,290.
d. $4,470.
8 - 21
*116. Assuming that perpetual inventory records are kept in dollars, the ending inventory on a
LIFO basis is
a. $4,110.
b. $4,160.
c. $4,290.
d. $4,470.
*117. Chess Top uses the periodic inventory system. For the current month, the beginning
units during the month. Using the LIFO method, what is the amount of cost of goods sold
for the month?
a. $33,770.
b. $32,500.
c. $34,150.
d. $33,400.
Multiple Choice AnswersComputational

Item
Ans.
85.
86.
87.
88.
89.
c
c
d
d
d
Item
Ans.
90.
91.
92.
93.
94.
c
b
c
d
a
Item
95.
96.
97.
98.
99.
Ans
a.
d
d
d
b
Item
100.
101.
*102.
103.
104.
Ans
d.
d
b
c
d
Item
Ans.
Item
Ans.
Item
Ans.
105.
106.
107.
108.
109.
b
c
a
c
b
110.
111.
112.
113.
*114
.
a
d
c
d
d
*115.
*116.
*117.
a
c
c
MULTIPLE CHOICECPA Adapted

118.
How should the following costs affect a retailer's inventory valuation?

a.
b.
c.
d.
119.
Freight-in
Increase
Increase
No effect
No effect
Interest on Inventory Loan

No effect
Increase
Increase
No effect
The following information applied to Howe, Inc. for 2015:

Merchandise purchased for resale
$300,000
Freight-in
8,000
Freight-out
5,000
Purchase returns
2,000
Howe's 2015 inventoriable cost was
a. $300,000.
b. $303,000.
c. $306,000.
d. $311,000.
8 - 22
120.
The following information was derived from the 2015 accounting records of Perez Co.:
Perez 's Goods
Perez 's Central Warehouse
Held by Consignees
Beginning inventory
$130,000
$ 14,000
Purchases
575,000
70,000
Freight-in
10,000
Transportation to consignees
5,000
Freight-out
30,000
8,000
Ending inventory
145,000
20,000
Perez's 2015 cost of sales was
a. $570,000.
b. $600,000.
c. $634,000.
d. $639,000.
121.
Dole Corp.'s accounts payable at December 31, 2015, totaled $800,000 before any
necessary year-end adjustments relating to the following transactions:
On December 27, 2015, Dole wrote and recorded checks to creditors totaling
$350,000 causing an overdraft of $100,000 in Dole's bank account at December 31,
2015. The checks were mailed out on January 10, 2016.
On December 28, 2015, Dole purchased and received goods for $150,000, terms
2/10, n/30. Dole records purchases and accounts payable at net amounts. The invoice
was recorded and paid January 3, 2016.
Goods shipped f.o.b. destination on December 20, 2015 from a vendor to Dole were
received January 2, 2016. The invoice cost was $65,000.
At December 31, 2015, what amount should Dole report as total accounts payable?
a. $1,362,000.
b. $1,297,000.
c. $1,050,000.
d. $950,000.
122.
The balance in Moon Co.'s accounts payable account at December 31, 2015 was
$700,000 before any necessary year-end adjustments relating to the following:
Goods were in transit to Moon from a vendor on December 31, 2015. The invoice cost
was $40,000. The goods were shipped f.o.b. shipping point on December 29, 2015
and were received on January 4, 2016.
Goods shipped f.o.b. destination on December 21, 2015 from a vendor to Moon were
received on January 6, 2016. The invoice cost was $25,000.
On December 27, 2015, Moon wrote and recorded checks to creditors totaling
$30,000 that were mailed on January 10, 2016.
In Moon's December 31, 2015 statement of financial position, the accounts payable
should be
a. $730,000.
b. $740,000.
c. $765,000.
d. $770,000.

123.
8 - 23
Kerr Co.'s accounts payable balance at December 31, 2015 was $1,500,000 before
considering the following transactions:
Goods were in transit from a vendor to Kerr on December 31, 2015. The invoice price
was $70,000, and the goods were shipped f.o.b. shipping point on December 29,
2015. The goods were received on January 4, 2016.
Goods shipped to Kerr, f.o.b. shipping point on December 20, 2015, from a vendor
were lost in transit. The invoice price was $50,000. On January 5, 2016, Kerr filed a
$50,000 claim against the common carrier.
In its December 31, 2015 statement of financial position, Kerr should report accounts
payable of
a. $1,620,000.
b. $1,570,000.
c. $1,550,000.
d. $1,500,000.
124.
Walsh Retailers purchased merchandise with a list price of $50,000, subject to trade
discounts of 20% and 10%, with no cash discounts allowable. Walsh should record the
cost of this merchandise as
a. $35,000.
b. $36,000.
c. $39,000.
d. $50,000.
125.
On June 1, 2015, Penny Corp. sold merchandise with a list price of $20,000 to Linn on
account. Penny allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40
and the sale was made f.o.b. shipping point. Penny prepaid $400 of delivery costs for Linn
as an accommodation. On June 12, 2015, Penny received from Linn a remittance in full
payment amounting to
a. $10,976.
b. $11,368.
c. $11,376.
d. $11,196.
126.
Groh Co. recorded the following data pertaining to raw material X during January 2015:
Units
Date
Received
Cost
Issued
On Hand
1/1/15
Inventory
$8.00
3,200
1/11/15
Issue
1,600
1,600
1/22/15
Purchase
4,000
$9.40
5,600
The moving-average unit cost of X inventory at January 31, 2015 is
a. $8.70.
b. $8.85.
c. $9.00.
d. $9.40.
8 - 24
127.
During periods of rising prices, a perpetual inventory system would result in the same
dollar amount of ending inventory as a periodic inventory system under which of the
following inventory cost flow methods?
FIFO
Average
a.
Yes
No
b.
Yes
Yes
c.
No
Yes
d.
No
No
128.
Hite Co. was formed on January 2, 2015, to sell a single product. Over a two-year period,
Hite's acquisition costs have increased steadily. Physical quantities held in inventory were
equal to three months' sales at December 31, 2015, and zero at December 31, 2016.
Assuming the periodic inventory system, the inventory cost method which reports the
highest amount of each of the following is
Inventory
Cost of Sales
December 31, 2015
2016
a.
Average
FIFO
b.
Average
Average
c.
FIFO
FIFO
d.
FIFO
Average
129.
Keck Co. had 450 units of product A on hand at January 1, 2015, costing $42 each.
Purchases of product A during January were as follows:
Date
Units
Unit Cost
Jan. 10
600
$44
18
750
46
28
300
48
A physical count on January 31, 2015 shows 600 units of product A on hand. The cost of
the inventory at January 31, 2015 under the FIFO method is
a. $25,500.
b. $26,700.
c. $28,200.
d. $24,600.
Multiple Choice AnswersCPA Adapted

Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
118.
119.
a
c
120.
121.
c
b
122.
123.
d
a
124.
125.
b
c
126.
127.
c
a
128.
129.
c
c
8 - 25
DERIVATIONS Computational
No.
Answer
Derivation
85.
$27,000 + $59,000 + $72,000 = $158,000.
86.
$27,000 + $59,000 + $92,000 = $178,000.
87.
[($10,000 $1,000) .02] = $180.
88.
[($30,000 $3,000) .02] = $540.
89.
$650,000 + $50,000 + $75,000 = $775,000.
90.
$475,000 + $25,000 = $500,000.
91.
$1,200,000 and ($135,000 + $10,000) = $145,000.
92.
($1,600,000 + $10,000) and ($85,000 $23,000 + $10,000) = $72,000.
93.
$3,000 + $2,000 = $5,000.
94.
$6,000 ($3,000 + $2,000) = $1,000.
95.
The effect of the errors in ending inventories reverse themselves in the

following year.
96.
$260,000 + (4 $150,000) = $860,000.
97.
$1,200 ($1,200 .02) = $1,176.
98.
($16,000 $1,200) .02 = $296.
99.
($29,310 + $20,600 + $28,917) (3,000 + 2,000 + 2,700) = $10.237/unit

$10.237 1,200 = $12,284.
100.
Avg. on 1/6 $49,910 5,000 = $9.982/unit

1/26 $53,872 5,200 = $10.36/unit
$10.36 1,200 = $12,432.
101.
100 + 350 + 70 130 = 390 units

(100 $4.20) + (290 $4.40) = $1,696.
*102.
(100 $4.20) + (30 $4.40) = $552.
103.
($60,000 $40,000) = $20,000.
104.
(500 $3.5) + (800 $3.4) = $4,470.
8 - 26
No.
Answer
105.
$21,210 6,500 units = $3.26

$3.26 1,300 = $4,238.
106.
(400 $10) $1,600 = $2,400 COGS

[(500 $4) + $2,800] $2,400 = $2,400 E.I.
($4,800 800) 400 units = $2,400 E.I. under weighted avg.
107.
(600 $10) $2,700 = $3,300 COGS

[(500 $5) + $2,400] $3,300 = $1,600 E.I.
200 $8 = $1,600 E.I. under FIFO.
108.
10 + 60 45 = 25 units.
45 $20/unit = $900.
110.
[(1,200 $12) + (500 $13) + (2,000 $13.50] (1,200 + 500 + 2,000) =

$12.95; $12.95 2,150 = $27,843.
111.
[(200 $65) + (300 $68) + (150 $70)] (200 + 300 + 150) = $67.54;
$67.54 (650 500) = $10,131.
112.
(1,200 + 500 + 2,000) 2,150 = 1,550; 1,550 $13.50 = $20,925.
113.
(200 $65) + [(500 200) $68] = $33,400.
*114.
(1,200 + 500 + 2,000) 2,150 = 1,550;

(1,200 $12) + [(1,550 1,200) $13] = $18,950.
* 115.
Available (purchases) = 6,500 units

Sales = 5,200 units
EI = 6,500 5,200 = 1,300 units
(800 $3.20) + (500 $3.10) = $4,110.
*116.
(200 $3.2) + (400 $3.1) + (400 $3.4) + (300 $3.5) = $4,290.
109.
Date
6/1
6/2
6/3
Derivation
Purchase
(800 @ 3.2)
2,560
(2,200 @ 3.1)
(1,200 @ 3.3)
(600 @ 3.2)
1,920
(1,600 @ 3.1)
4,960
6,820
6/6
6/7
Sold
3,960
6/9
(1,000 @ 3.3)
6/10
(200 @ 3.3)
(200 @ 3.1)
3,300
1,280
Balance
(800 @ 3.2)
(200 @ 3.2)
(200 @ 3.2)
(2,200 @ 3.1)
(200 @ 3.2)
(600 @ 3.1)
(200 @ 3.2)
(600 @ 3.1)
(1,200 @ 3.3)
(200 @ 3.2)
(600 @ 3.1)
(200 @ 3.3)
(200 @ 3.2)
(400 @ 3.1)
2,560
640
7,460
2,500
6,460
3,160
1,880
No.
Answer
6/15 (1,800 @ 3.4)
Derivation
6,120
6/18
(1,400 @ 3.4) 4,760
6/22 (500 @ 3.5)

6/25
*117.
1,750
(200 @ 3.5)
700
(200 @ 3.2)
(400 @ 3.1)
(1,800 @ 3.4)
(200 @ 3.2)
(400 @ 3.1)
(400 @ 3.4)
(500 @ 3.5)
(200 @ 3.2)
(400 @ 3.1)
(400 @ 3.4)
(300 @ 3.5)
(150 $70) + (300 $68) + (50 $65) = $34,150.
DERIVATIONS CPA Adapted

No.
Answer
Derivation
118.
Conceptual.
119.
$300,000 + $8,000 $2,000 = $306,000.
120.
$130,000 + $14,000 + $575,000 + $70,000 + $10,000

$145,000 $20,000 = $634,000.
121.
$800,000 + $350,000 + $147,000 = $1,297,000.
122.
$700,000 + $40,000 + $30,000 = $770,000.
123.
$1,500,000 + $70,000 + $50,000 = $1,620,000.
124.
$50,000 .8 .9 = $36,000.
125.
$20,000 .7 .8 = $11,200
($11,200 .98) + 400 = $11,376.
126.
[(1,600 $8.00) + (4,000 $9.40)] 5,600 = $9.00.
127.
Conceptual.
128.
Conceptual.
129.
(300 $48) + (300 $46) = $28,200.
8,000
3,240
4,990
4,290
8 - 27
8 - 28
EXERCISES
Ex. 8-130Recording purchases at net amounts.
Flint Co. records purchase discounts lost and uses perpetual inventories. Prepare journal entries
in general journal form for the following:
(a) Purchased merchandise costing $900 with terms 2/10, n/30.
(b) Payment was made thirty days after the purchase.
Solution 8-130
(a) Inventory (.98 $900)...............................................................
Accounts Payable..........................................................
882
(b) Accounts Payable......................................................................

Purchase Discounts Lost...........................................................
Cash..............................................................................
882
18
882
900
Ex. 8-131Recording purchases at net amounts.

Dill Co. records purchases at net amounts and uses periodic inventories. Prepare entries for the
following:
June 11 Purchased merchandise on account, $5,000, terms 2/10, n/30.
15 Returned part of June 11 purchase, $800, and received credit on account.
30 Prepared the adjusting entry required for financial statements.
Solution 8-131
June 11 Purchases (.98 $5,000)...............................................
Accounts Payable...............................................
15 Accounts Payable (.98 $800)......................................
Purchase Returns and Allowances.....................
30 Purchase Discounts Lost (.02 $4,200)........................
Accounts Payable...............................................
4,900
4,900
784
784
84
84
Ex. 8-132Comparison of FIFO and Average Cost.

During periods of rising prices, the use of FIFO (as compared with average cost) will result in
what effect on the financial statements?
Solution 8-132
During periods of rising prices, the use of FIFO will result in higher inventory, lower cost of goods
sold, and higher gross profit, net income, income taxes, and retained earnings.
8 - 29
Ex. 8-133FIFO and Average Cost inventory methods.

During June, the following changes in inventory item 27 took place:
June 1
14
24
8
10
29
Balance
Purchased
Purchased
Sold
Sold
Sold
1,400 units @ $24

900 units @ $36
700 units @ $30
400 units @ $50
1,000 units @ $40
500 units @ $44
Perpetual inventories are maintained in units only.

Instructions
What is the cost of the ending inventory for item 27 under the following methods? (Show
calculations.)
(a) FIFO.
(b) Average Cost.
Solution 8-133
(a) 700 @ $30 =
400 @ $36 =
$21,000
14,400
$35,400
(b) 1,400 @ $24 = $33,600

900 @ $36 = 32,400
700 @ $30 = 21,000
3,000
$87,000
Average-cost/unit:
$87,000 =
$29/Unit
3,000
1,100 $29 = $31,900
Ex. 8-134FIFO and Average Cost periodic inventory methods.

The Rock Shop shows the following data related to an item of inventory:
Inventory, January 1
100 units @ $5.00
Purchase, January 9
300 units @ $5.40
Purchase, January 19
100 units @ $6.00
Inventory, January 31
150 units
Instructions
(a) What value should be assigned to the ending inventory using FIFO?
(b) What value should be assigned to cost of goods sold using Average Cost?
8 - 30
Solution 8-134
(a) 100 @ $6.00 =
50 @ $5.40 =
$600
270
$870
(b) 100 @ $5.00 = $ 500

300 @ $5.40 = 1,620
100 @ $6.00 =
600
500
$2,720
Average cost/unit: $2,720 500 = $5.44
Cost of goods sold: (500 150) $5.44 = $1,904
Ex. 8-135FIFO and Average Cost Mitchell Companys record of transactions for the month of
June was as follows.
Purchases
June 1 (balance on hand)
4
8
13
21
29
600 @ $3.00
1,500 @ 3.04
800 @ 3.20
1,200 @ 3.25
700 @ 3.30
500 @ 3.13
5,300
June 3
9
11
23
27
Sales
500 @ $5.00
1,300 @
600 @
1,200 @
900 @
4,500
5.00
5.50
5.50
6.00
Instructions
(a) Assuming that periodic inventory records are kept, compute the inventory at June 30 using
(1) FIFO and (2) average cost.
(b) Assuming that perpetual inventory records are kept in both units and dollars, determine the
inventory at June 30 using (1) FIFO and (2) average cost.
Solution 8-135
(a) 1.
2.
FIFO
500 @ 3.13 = $1,565

300 @ 3.30 =
990
$2,555
Average Cost
Total cost
Total units
800 @ 3.15
*Units
600
1,500
800
1,200
700
500
5,300
@
@
@
@
@
@
$16,695* = $3.15 average cost per unit

5,300
$2,520
Price
$3.00
$3.04
$3.20
$3.25
$3.30
$3.13
=
=
=
=
=
=
Total Cost
$1,800
4,560
2,560
3,900
2,310
1,565
$16,695
8 - 31
Solution 8-135 (Continued)

(b) 1.
2.
FIFO
500 @ 3.13 = $1,565

300 @ 3.30 =
990
$2,555
Average Cost
Purchase
No. of Unit
units cost
Sold
No. of Unit
units cost
Date
June 1
3
4 1,500 $3.04
8 800 3.20
9
11
13 1,200 3.25
21 700 3.30
23
27
29 500 3.13
500 $3.000
1,300
600
3.0917
3.0917
1,200
900
3.2317
3.2317
Balance
No. of
units
600
100
1,600
2,400
1,100
500
1,700
2,400
1,200
300
800
Unit
cost
$3.0000
3.0000
3.0375
3.0917
3.0917
3.0917
3.2035
3.2317
3.2317
3.2317
3.1675
Amount
$1,800
300
4,860
7,420
3,401
1,546
5,446
7,756
3,878
969
2,534
Inventory June 30 is $2,534

Ex. 8-136FIFO and LIFOPeriodic Josh Beckett shop began operations on January 2, 2015.
The following stock record card for baseballs was taken from the records at the end of the year.
Date
1/15
3/15
6/20
9/12
11/24
Terms
Net 30
1/5, net 30
1/10, net 30
1/10, net 30
1/10, net 30
Totals
Units
Received
50
65
90
84
76
365
Unit Invoice
Cost
16
13
12
10
9
Gross Invoice
Amount
$ 800
845
1,080
840
684
$4,249
A physical inventory on December 31, 2015, reveals that 110 baseballs were in stock. The
bookkeeper informs you that all the discounts were taken. Assume that Josh Beckett Shop uses
the invoice price less discount for recording purchases.
Instructions
(a)
Compute the December 31, 2015, inventory using the FIFO method.
*(b)
Compute the 2015 cost of goods sold using the LIFO method.
8 - 32
Solution 8-136
(a) FIFO Ending Inventory 12/31/15
76 @ $8.91* = $ 677.16
34 @ $9.90* = 336.60
$1,013.76
*$ 9.00 [.01 ($ 9.00)]
**$10.00 [.01 ($10.00)]
*(b) LIFO Cost of Goods Sold2015
76 @ $ 8.91 = $ 677.16
84 @ $ 9.90 = 831.60
90 @ $11.88* 1,069.20
5 @ $12.87**
64.35
$2,642.31
*$12.00 [.01 ($12)]
**$13.00 [.01 ($13)]
Ex. 8-137Periodic FIFO and Perpetual LIFO
Matlock Corporation sells item A as part of its product line. Information as to balances on hand,
purchases, and sales of item A are given in the following table for the first six months of 2015.
Quantities
Date
January 11
January 24
February 8
March 16
June 11
Purchased
1,300
600
Sold
300
560
Balance
400
1,700
1,400
840
1,440
Unit Price
of Purchase
$2.50
$2.60
$2.75
Instructions
(a) Compute the cost of goods sold for the first six months under the periodic FIFO inventory
pricing method.
*(b) Compute the ending inventory at June 30 under the perpetual LIFO inventory pricing
method.
Solution 8-137
(a)
400 @ $2.50 =
460 @ $2.60 =
860
$1,000
1,196
$2,196
*(b)
400 @ $2.50 =
440 @ $2.60 =
600 @ $2.75 =
1,440
$1,000
1,144
1,650
$3,794
8 - 33
*Ex. 8-138Perpetual LIFO.

A record of transactions for the month of May was as follows:
Purchases
May 1 (balance)
400 @ $4.20
May 3
4
1,300 @ $4.10
6
8
800 @ $4.30
12
14
700 @ $4.40
18
22
1,200 @ $4.50
25
29
500 @ $4.55
Sales
300
1,000
900
400
1,400
@ $7.00
@ 7.00
@ 7.50
@ 7.50
@ 8.00
Assuming that perpetual inventory records are kept in dollars, determine the ending inventory
using LIFO.
*Solution 8-138
100 @ $4.20 =
200 @ $4.10 =
100 @ $4.40 =
500 @ $4.55 =
$ 420
820
440
2,275
$3,955
8 - 34
PROBLEMS
Pr. 8-139Inventory cut-off.
Vogts Company sells TVs. The perpetual inventory was stated as $28,500 on the books at
December 31, 2015. At the close of the year, a new approach for compiling inventory was used
and apparently a satisfactory cut-off for preparation of financial statements was not made. Some
events that occurred are as follows.
1. TVs shipped to a customer January 2, 2016, costing $5,000 were included in inventory at
December 31, 2015. The sale was recorded in 2016.
2. TVs costing $12,000 received December 30, 2015, were recorded as received on January 2,
2016.
3. TVs received during 2015 costing $4,600 were recorded twice in the inventory account.
4. TVs shipped to a customer December 28, 2015, f.o.b. shipping point, which cost $10,000,
were not received by the customer until January, 2016. The TVs were included in the ending
inventory.
5. TVs on hand that cost $6,100 were never recorded on the books.
Instructions
Compute the correct inventory at December 31, 2015.
Solution 8-139
Inventory per books
Add: Shipment received 12/30/15
TVs on hand
Deduct:
TVs recorded twice

TVs shipped 12/28/15
Correct inventory 12/31/15
$28,500
$12,000
6,100
4,600
10,000
18,100
46,600
14,600
$32,000
8 - 35

Pr. 8-140Analysis of errors.
(All sales and purchases are on credit.)

Indicate in each of the spaces provided the effect of the described errors on the various elements
of a company's financial statements. Use the following codes: O = amount is overstated; U =
amount is understated; NE = no effect. Assume a periodic inventory system.
Accounts
Receivable
EXAMPLE: Excluded goods in rented
warehouse from inventory
count.
NE
Accounts
Inventory Payable Sales
U
NE
NE
Cost of
Goods Sold
O
_____________________________________________________________________________
1. Goods in transit shipped "f.o.b.
destination" by supplier were
recorded as a purchase but were
excluded from ending inventory.
_____________________________________________________________________________
2. Goods held on consignment were
included in inventory count and
recorded as a purchase.
_____________________________________________________________________________
3. Goods in transit shipped "f.o.b.
shipping point" were not recorded
as a sale and were included in
ending inventory.
_____________________________________________________________________________
4. Goods were shipped and appropriately excluded from ending
inventory but sale was not
recorded.
_____________________________________________________________________________
Solution 8-140
1.
2.
3.
4.
NE
NE
U
U
NE
O
O
NE
O
O
NE
NE
NE
NE
U
U
O
NE
U
NE
8 - 36
Pr. 8-141Accounting for purchase discounts.

Otto Corp. purchased merchandise during 2015 on credit for $300,000; terms 2/10, n/30. All of
the gross liability except $60,000 was paid within the discount period. The remainder was paid
within the 30-day term. At the end of the annual accounting period, December 31, 2015, 90% of
the merchandise had been sold and 10% remained in inventory. The company uses a periodic
system.
Instructions
(a) Assuming that the net method is used for recording purchases, prepare the entries for the
purchase and two subsequent payments.
(b) What dollar amounts should be reported for the final inventory and cost of goods sold under
the (1) net method; (2) gross method? Assume that there was no beginning inventory.
Solution 8-141
(a) Purchases............................................................................................. 294,000
Accounts Payable......................................................................
(To record the purchase at net amount:
.98 $300,000 = $294,000.)
Accounts Payable................................................................................. 235,200
Cash..........................................................................................
(To record payment within the discount period:
$300,000 $60,000 = $240,000; .98 $240,000 = $235,200.)
Accounts Payable.................................................................................
Purchase Discounts Lost.......................................................................
Cash..........................................................................................
(To record the final payment.)
(b) (1) Net method:
Purchases:
Final inventory: 10% $294,000 =
Cost of goods sold: 90% $294,000 =
294,000
235,200
58,800
1,200
60,000
$294,000
29,400
$264,600
(The $1,200 discount lost is reported in the other expense section of the income statement.)
(2) Gross method:
Purchases:
Less purchase discounts:
.02 $240,000 =
Goods available
Final inventory:
10% $295,200 =
Cost of goods sold:
90% $295,200 =
$300,000
4,800
295,200
29,520
$265,680
(Assuming that the $4,800 discount is

prorated between the cost of goods sold,
90%, and the final inventory, 10%.)
OR
Purchases:
Less purchase discounts:
.02 $240,000 =
Goods available
Final inventory:
10% $300,000 =
Cost of goods sold:
$295,200 $30,000 =
$300,000
4,800
295,200
30,000
$265,200
(Assuming that the $4,800 discount is used

to reduce cost of goods sold. Final inventory
is carried at the gross amount.)
8 - 37
Pr. 8-142Inventory methods.

Jones Company was formed on December 1, 2014. The following information is available from
Jones's inventory record for Product X.
Units
Unit Cost
January 1, 2015 (beginning inventory)
1,600
$18.00
Purchases:
January 5, 2015
2,600
$20.00
January 25, 2015
2,400
$21.00
February 16, 2015
1,000
$22.00
March 15, 2015
1,800
$23.00
A physical inventory on March 31, 2015, shows 2,500 units on hand.
Instructions
Prepare schedules assuming the periodic method to compute the ending inventory at March 31,
2015, under each of the following inventory methods:
(a) FIFO.
(b) Weighted-average.
*(c) LIFO.
Show supporting computations in good form.
Solution 8-142
(a)
Jones Company
COMPUTATION OF INVENTORY FOR PRODUCT X
UNDER FIFO INVENTORY METHOD
March 31, 2015
March 15, 2015
February 16, 2015
March 31, 2015, inventory
(b)
Units
1,800
700
2,500
Unit Cost
$23.00
22.00
Total Cost
$41,400
15,400
$56,800
Jones Company
UNDER WEIGHTED-AVERAGE INVENTORY METHOD
March 31, 2015
Beginning inventory
January 5, 2015
January 25, 2015
February 16, 2015
March 15, 2015
Units
1,600
2,600
2,400
1,000
1,800
9,400
Weighted average cost ($194,600 9,400)

Unit Cost
$18.00
20.00
21.00
22.00
23.00
Total Cost
$ 28,800
52,000
50,400
22,000
41,400
$194,600
$20.70
2,500
$20.70
$51,750
8 - 38
Solution 8-142 (cont.)

*(c)
Jones Company
UNDER LIFO INVENTORY METHOD
March 31, 2015
Beginning inventory
January 5, 2015 (portion)
Units
1,600
900
2,500
Unit Cost
$18.00
20.00
Total Cost
$28,800
18,000
$46,800

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CH 08

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CHAPTER 8

Identify major classifications of inventory.

Distinguish between perpetual and periodic inventory systems.

Understand the items to include as inventory cost.

Describe and compare the methods used to price inventories.

Describe the LIFO cost flow assumption.

Test Bank for Intermediate Accounting: IFRS Edition, 2e

Both merchandising and manufacturing companies normally have multiple inventory

IFRS requires manufacturers to disclose their inventory components on the statement of

Valuation of Inventories: A Cost-Basis Approach

True False AnswersConceptual

Which of the following inventories carried by a manufacturer is similar to the merchandise

Where should raw materials be classified on the statement of financial position?

Which of the following accounts is not reported in inventory?

Test Bank for Intermediate Accounting: IFRS Edition, 2e

Tang, Inc. sells collectible jewelry on consignment from various manufacturers.

Why are inventories included in the computation of net income?

Which of the following is a characteristic of a perpetual inventory system?

Valuation of Inventories: A Cost-Basis Approach

How is a significant amount of consignment inventory reported in the statement of

What is consigned inventory?

When using a perpetual inventory system,

Goods in transit which are shipped f.o.b. shipping point should be

Goods in transit which are shipped f.o.b. destination should be

Test Bank for Intermediate Accounting: IFRS Edition, 2e

Use the following information for questions 40 and 41.

This transaction is known as a(n)

Valuation of inventories requires the determination of all of the following except

Valuation of Inventories: A Cost-Basis Approach

Feine Co. accepted delivery of merchandise which it purchased on account. As of

On June 15, 2015, Wynne Corporation accepted delivery of merchandise which it

Test Bank for Intermediate Accounting: IFRS Edition, 2e

When inventory is misstated, its presentation lacks?

Valuation of Inventories: A Cost-Basis Approach

Which of the following is a product cost as it relates to inventory?

Which of the following is a period cost?

Which of the following is included in inventory costs?

Which of the following is correct?

Costs which are inventoriable include all of the following except

Test Bank for Intermediate Accounting: IFRS Edition, 2e

Use the following information for questions 66 and 67.

Valuation of Inventories: A Cost-Basis Approach

Test Bank for Intermediate Accounting: IFRS Edition, 2e

Valuation of Inventories: A Cost-Basis Approach

Multiple Choice AnswersConceptual

Test Bank for Intermediate Accounting: IFRS Edition, 2e

Elkins Corporation uses the perpetual inventory method. On March 1, it purchased

Malone Corporation uses the perpetual inventory method. On March 1, it purchased

Valuation of Inventories: A Cost-Basis Approach

Use the following information for questions 93 through 95.

Test Bank for Intermediate Accounting: IFRS Edition, 2e

The following information is available for Naab Company for 2015:

The amount to be recorded as a purchase return is

Valuation of Inventories: A Cost-Basis Approach

By how much should the account payable be adjusted on May 31?

Use the following information for questions 99 and 100.

Use the following information for questions 101 and 102.

The value assigned to cost of goods sold if Niles uses FIFO is

Test Bank for Intermediate Accounting: IFRS Edition, 2e

*102. The value assigned to ending inventory if Niles uses LIFO is

Use the following information for questions 104 and 105.

Valuation of Inventories: A Cost-Basis Approach

Test Bank for Intermediate Accounting: IFRS Edition, 2e