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Chapter 6 Inventories and Cost of Sales 1

Quick Check—Chapter 6

QC1
6-1. What accounting principle most guides the allocation of cost of goods available for sale
between ending inventory and cost of goods sold?
6-2. If Skechers sells goods to Famous Footwear with terms FOB shipping point, which
company reports these goods in its inventory while they are in transit?
6-3. An art gallery purchases a painting for $11,400 on terms FOB shipping point. Additional costs
in obtaining and offering the artwork for sale include $130 for transportation-in, $150 for import
tariffs, $100 for insurance during shipment, $180 for advertising, $400 for framing, and $800
for office salaries. In computing inventory, what cost is assigned to the painting?

QC2
6-4. Describe one advantage for each of the inventory costing methods: specific identification,
FIFO, LIFO, and weighted average.
6-5. When costs are rising, which method reports higher net income—LIFO or FIFO?
6-6. When costs are rising, what effect does LIFO have on a balance sheet compared to FIFO?
6-7. A company takes a physical count of inventory at the end of 2015 and finds that ending
inventory is understated by $10,000. Would this error cause cost of goods sold to be
overstated or understated in 2015? In year 2016? If so, by how much?

QC3
6-8. Use LCM applied separately to the following individual items to compute ending inventory.

Product Units Unit Recorded Cost Unit Market Cost

A ........... 20 $ 6 $ 5
B ........... 40 9 8
C .......... 10 12 15
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2 Chapter 6 Inventories and Cost of Sales
Guidance Answers to Quick Checks—Chapter 6
6-1. The matching principle.
6-2. Famous Footwear reports these goods in its inventory.
6-3. Total cost assigned to the painting is $12,180, computed as
$11,400 1 $130 1 $150 1 $100 1 $400.
6-4. Specific identification exactly matches costs and revenues.
Weighted average tends to smooth out cost changes. FIFO
assigns an amount to inventory that closely approximates
current replacement cost. LIFO assigns the most recent
costs incurred to cost of goods sold and likely better
matches current costs with revenues.
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6-5. FIFO—it gives a lower cost of goods sold, a higher gross
profit, and a higher net income when costs are rising.
6-6. When costs are rising, LIFO gives a lower inventory figure
on the balance sheet as compared to FIFO. FIFO’s inven-
tory amount approximates current replacement costs.
6-7. Cost of goods sold would be overstated by $10,000 in 2015
and understated by $10,000 in year 2016.
6-8. The reported LCM inventory amount (using items) is $540,
computed as [(20 3 $5) 1 (40 3 $8) 1 (10 3 $12)].