Class Practice #2

Inventories
Q#1
Distinguish between FOB shipping point and FOB destination. Identify the freight terms that will result in
a debit to Inventory by the buyer and a debit to Freight-Out by the seller.
The letters FOB mean Free on Board. FOB shipping point means that goods are placed free on
board the carrier by the seller. The buyer then pays the freight and debits Merchandise
Inventory. FOB destination means that the goods are placed free on board to the buyer’s place
of business. Thus, the seller pays the freight and debits Freight-out.

Q#2
(a) Reeves Company ships merchandise to Cox Company on December 30. The merchandise reaches the
buyer on January 6. Indicate the terms of sale that will result in the goods being included in (1) Reeve’s
December 31 inventory, and (2) Cox’s December 31 inventory.
(b) Under what circumstances should reeve Company include consigned goods in its inventory?
(a) (1) The goods will be included in Reeves Company’s inventory if the terms of sale are FOB
destination.
(2) They will be included in Cox Company’s inventory if the terms of sale are FOB shipping point.

(b) Reeves Company should include goods shipped to a consignee in its inventory. Goods held
by Reeves Company on consignment should not be included in inventory.
Q#3
Topp Hat Shop received a shipment of hats for which it paid the wholesaler $2,970. The price of the hats
was $3,000 but Topp was given a $30 cash discount and required to pay freight charges of $50. In
addition, Topp paid $130 to cover the travel expenses of an employee who negotiated the purchase of the
hats.

What amount will Topp record for inventory? Why?

Inventoriable costs are $3,020 (invoice cost $3,000 + freight charges $50 – purchase discounts
$30). The amount paid to negotiate the purchase is a buying cost that normally is not included in
the cost of inventory because of the difficulty of allocating these costs. Buying costs are
expensed in the year incurred.

Q# 4
Hendrix Entertainment Center has 5 televisions on hand at the balance sheet date. Each cost $400. The
current replacement cost is $380 per unit. Under the lower-of-cost-or-market basis of accounting for
inventories, what value should be reported for the televisions on the balance sheet? Why?
Hendrix Entertainment Center should report the CD players at $380 each for a total of $1,900. $380
is the current replacement cost under the lower-of-cost-or-market basis of accounting for inventories.
A decline in replacement cost usually leads to a decline in the selling price of the item. Valuation
at LCM is conservative.

Q# 5
Warnke Stores has 20 toasters on hand at the balance sheet date. Each costs $27. The current replacement
cost is $30 per unit. Under the lower-of-cost-or- market basis of accounting for inventories, what value
should Warnke report for the toasters on the balance sheet? Why?
Warnke Stores should report the toasters at $27 each for a total of $540. The $27 is the lower of cost
or market. It is used because it is the lower of the inventory’s cost and current replacement cost.

Q# 6
Sayaovang Company discovers in 2017 that its ending inventory at December 31, 2016, was $7,000
understated. What effect will this error have on (a) 2016 net income, (b) 2017 net income, and (c) the
combined net income for the 2 years?

(a) Sayaovang Company’s 2016 net income will be understated $7,000; (b) 2016 net income will be
overstated $7,000; and (c) the combined net income for the two years will be correct.

Q# 7
Dreher Company’s balance sheet shows Inventory$162,800. What additional disclosures should be
made?
The Company should disclose: (1) the major inventory classifications, (2) the basis of
accounting (cost or lower of cost or market), and (3) the costing method (FIFO, LIFO, or average).

Q# 8
Pawlowski Company has net sales of $400,000 and cost of goods available for sale of $300,000. If the
gross profit rate is 35%, what is the estimated cost of the ending inventory? Show computations.
The estimated cost of the ending inventory is $40,000:
Net sales ...................................................................................................... . $400,000
Less: Gross profit ($400,000 X 35%) ..................................................... . 140,000
Estimated cost of goods sold ................................... . .................................. $260,000
Cost of goods available for sale ................... .............................................. $300,000
Less: Cost of goods sold................................ ............ ..................................... 260,000
Estimated cost of ending inventory............................... . ............................ $ 40,000

Q# 9
Assume that Morgan Company uses a periodic inventory system and has these account balances:
Purchases $450,000, Purchase Returns and Allowances $11,000, Purchase Discounts $8,000, and Freight-
In $16,000. Determine net purchases and cost of goods purchased.
Purchases................................................................................... $450,000
Less: Purchase returns and allowances ............. $11,000
Purchase discounts................................................... 8,000 19,000
Net purchases........................................................................... $431,000
Net purchases........................................................................... $431,000
Add: Freight-in ........................................................................ 16,000
Cost of goods purchased...................................................... $447,000

Q# 10
Assume the same information as in 9 and also that Morgan Company has beginning inventory of $60,000,
ending inventory of $90,000, and net sales of $630,000. Determine the amounts to be reported for cost of
goods sold and gross profit.
Net sales ..................................................................................... $630,000
Beginning inventory.............................................................. $ 60,000
Add: Cost of goods purchased*........................................ 447,000
Cost of goods available for sale ....................................... 507,000
Ending inventory...................................................................... 90,000
Cost of goods sold.................................................................. 417,000
Gross profit................................................................................ $213,000
Q# 11
Mrs.Wellington has prepared the following list of statements about service companies
and merchandisers.
1. Measuring net income for a merchandiser is conceptually the same as for a service company.
2. For a merchandiser, sales less operating expenses is called gross profit.
3. For a merchandiser, the primary source of revenues is the sale of inventory.
4. Sales salaries is an example of an operating expense.
5. The operating cycle of a merchandiser is the same as that of a service company.
6. In a perpetual inventory system, no detailed inventory records of goods on hand are maintained.
7. In a periodic inventory system, the cost of goods sold is determined only at the end of the
accounting period.
8. A periodic inventory system provides better control over inventories than a perpetual system.

Identify each statement as true or false. If false, indicate how to correct the statement.
1. True.
2. False. For merchandising company, sales less cost of goods sold is called gross profit.
3. True.
4. True.
5. False. The operating cycle of a merchandising company differs from that that of a service
company. The operating cycle of a merchandising company is ordinarily longer.
6. False. In a periodic inventory system, no detailed inventory records of goods on hand are
maintained.
7. True.
8. False. A perpetual inventory system provides better control over inventories than a periodic
system.

Q# 12
Presented below is financial information for two different companies.
Viet Naise
Company Company
Sales $90,000 (d)
Sales returns (a) $ 5,000
Net sales 84,000 100,000
Cost of goods sold 56,000 (e)
Gross profit (b) 41,500
Operating expenses 15,000 (f)
Net income (c) 15,000

Determine the missing amounts.

(a) (*missing amount)
a. Sales........................................................................................... $ 90,000
*Sales returns........................................................................... (6,000)
Net sales ................................................................................... $ 84,000

b. Net sales ................................................................................... $ 84,000

Cost of goods sold................................................................ (56,000)
*Gross profit ............................................................................. $ 28,000

c. Gross profit.............................................................................. $ 28,000

Operating expenses.............................................................. (15,000)
*Net income............................................................................... $ 13,000
d. *Sales .......................................................................................... $105,000
Sales returns ........................................................................... (5,000)
Net sales ................................................................................... $100,000

e. Net sales ................................................................................... $100,000

*Cost of goods sold................................................................ (58,500)
Gross profit.............................................................................. $ 41,500

f. Gross profit.............................................................................. $ 41,500

*Operating expenses ............................................................. (26,500)
Net income............................................................................... $ 15,000

Q# 13
The trial balance of Zarrito Company at the end of its fiscal year, August 31, 2008,
includes these accounts: Merchandise Inventory $17,200; Purchases $149,000; Sales $190,000,
Freight-in $4,000; Sales Returns and Allowances $3,000; Freight-out $1,000, and Purchase
Returns and Allowances $2,000.The ending merchandise inventory is $25,000.

Prepare a cost of goods sold section for the year ending August 31 (periodic inventory).
Inventory, September 1, 2007 .............................................. $ 17,200
Purchases.............................................................. $149,000
Less: Purchase returns and allowances......................... 2,000
Net Purchases........................................................... 147,000
Add: Freight-in........................................................... 4,000
Cost of goods purchased.......................................... 151,000
Cost of goods available for sale ......................................... 168,200
Inventory, August 31, 2008 ................................................... 25,000
Cost of goods sold......................................................... $143,200

Q# 14 On January 1, 2008, Rachael Runde Corporation had merchandise inventory of $50,000.

At December 31, 2008, Rachael Runde had the following account balances.

 Freight-in $ 4,000
 Purchases 500,000
 Purchase discounts 6,000
 Purchase returns and allowances 2,000
 Sales 800,000
 Sales discounts 5,000
 Sales returns and allowances 10,000

At December 31, 2008, Rachael Runde determines that its ending inventory is $60,000.

(a) Compute Rachael Runde’s 2008 gross profit.

(b) Compute Rachael Runde’s 2008 operating expenses if net income is $130,000 and there are
no nonoperating activities.
(a) Sales............................................................... $800,000
Less: Sales returns and allowances....... $ 10,000
Sales discounts .............................. 5,000 15,000
Net sales........................................................ 785,000
Cost of goods sold
Inventory, January 1........................... 50,000
Purchases .............................................. $500,000
Less: Purch. rets. and alls. .............. (2,000)
Purch. discounts ..................... (6,000) 492,000
Add: Freight-in ..................................... 4,000
Cost of goods available for sale..... 546,000
Inventory, December 31 .................... (60,000)
Cost of goods sold...................... 486,000
Gross profit ........................................... $299,000

(b) Gross profit $299,000 – Operating expenses = Net income $130,000.

Operating expenses = $169,000.

Q#15
Below is a series of cost of goods sold sections for companies A, B, C, and D.
A B C D
Beginning inventory $ 150 $ 70 $ 1,000 $ (j)
Purchases 1,600 1,080 (g) 43,590
Purchase returns and allowances 40 (d) 290 (k)
Net purchases (a) 1,030 6,210 41,090
Freight-in 110 (e) (h) 2,240
Cost of goods purchased (b) 1,280 7,940 (l)
Cost of goods available for sale 1,820 1,350 (i) 49,530
Ending inventory 310 (f) 1,450 6,230
Cost of goods sold (c) 1,230 7,490 43,300

Fill in the lettered blanks to complete the cost of goods sold sections.
(a) $1,560 ($1,600 – $40)
(b) $1,670 ($1,560 + $110)
(c) $1,510 ($1,820 – $310)
(g) $6,500 ($290 + $6,210)
(h) $1,730 ($7,940 – $6,210)
(i) $8,940 ($1,000 + $7,940)
(d) $50 ($1,080 – $1,030)
(e) $250 ($1,280 – $1,030)
(f) $120 ($1,350 – $1,230)
(j) $6,200 ($49,530 – $43,330 from (I))
(k) $2,500 ($43,590 – $41,090)
(l) $43,330 ($41,090 + $2,240)

Q# 16
Gerald D. Englehart Company has the following inventory, purchases, and sales data for the month of
March.

Inventory: March 1 200 units @ $4.00 $ 800

Purchases: March 10 500 units @ $4.50 2,250
March 20 400 units @ $4.75 1,900
March 30 300 units @ $5.00 1,500
Sales: March 15 500 units
 March 25 400 units
The physical inventory count on March 31 shows 500 units on hand.

Under a periodic inventory system, determine the cost of inventory on hand at March 31
and the cost of goods sold for March under (a) FIFO, (b) average-cost
1. The cost of goods available for sale is $6,450, as follows.
Inventory: 200 units @ $4.00 $ 800
Purchases: March 10 500 units @ $4.50 2,250
March 20 400 units @ $4.75 1,900
March 30 300 units @ $5.00 1,500
Total: 1,400 $6,450

Under a periodic inventory system, the cost of goods sold under each cost flow method is as follows.
(a) FIFO Method
Ending inventory:
Unit Total
Date Units Cost Cost
March 30 300 $5.00 $1,500
March 20 200 4.75 950 $2,450
Cost of goods sold: $6,450 - $2,450 = $4,000

(c) Average-Cost Method

Average unit cost: $6,450 ÷ 1,400 = $4.607
Ending inventory: 500 x $4.607 = $2,303.50
Cost of goods sold: $6,450 - $2,303.50 = $4,146.50

Q# 17
First Bank and Trust is considering giving Lima Company a loan. Before doing so, they decide that
further discussions with Lima’s accountant may be desirable. One area of particular concern is the
inventory account, which has a year-end balance of $297,000.

Discussions with the accountant reveal the following.

1. Lima sold goods costing $38,000 to Comerica Company, FOB shipping point on December 28 . The
goods were not expected to arrive at Comerica Company until January 12. The goods were not included
in the physical inventory because they were not in the warehouse.
2. The physical count of the inventory did not include goods costing $95,000 that were shipped
to Lima FOB destination on December 27 and were still in transit at year-end.
3. Lima received goods costing $22,000 on January 2. The goods were shipped FOB shipping point, on
December 26 by Galant Co. The goods are not includedin the physical count.
4. Lima sold goods costing $35,000 to Emerick Co., FOB destination, on December 30. The goods were
received at Emerick on January 8. They were not included in Lima’s physical inventory.
5. Lima received goods costing $44,000 on January 2 that were shipped FOB destination on December
29. The shipment was a rush order that was supposed to arrive December 31.This purchase was included
in the ending inventory of $297,000.

Determine the correct inventory amount on December 31.

Ending inventory—physical count.................................................... $297,000
1. No effect—title passes to purchaser upon shipment when terms are FOB shipping point 0
2. No effect—title does not transfer to Lima until goods are received............... 0
3. Add to inventory: Title passed to Lima when goods were shipped ...... ....... 22,000
4. Add to inventory: Title remains with Lima until purchaser receives goods ....... 35,000
5. The goods did not arrive prior to year-end. The goods therefore, cannot be included
in the inventory (44,000)
Correct inventory.................................................................................... $310,000

Q# 18
Thomas Company had 100 units in beginning inventory at a total cost of $10,000.The company
purchased 200 units at a total cost of $26,000. At the end of the year, Thomas had 80 units in ending
inventory.
a. Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO, (2)
LIFO, and (3) average-cost.
b. Which cost flow method would result in the highest net income?
c. Which cost flow method would result in inventories approximating current cost in the balance
sheet?
d. Which cost flow method would result in Thomas paying the least taxes in the first year?
2. (a) 1. FIFO
3. Beginning inventory .................................................. $10,000
4. Purchases...................................................................... 26,000
5. Cost of goods available for sale ............................ 36,000
6. Less: ending inventory (80 X $130) ..................... (10,400)
7. Cost of goods sold..................................................... $25,600
8.
9. 2. LIFO
10. Beginning inventory .................................................. $10,000
11. Purchases...................................................................... 26,000
12. Cost of goods available for sale ............................ 36,000
13. Less: ending inventory (80 X $100) ..................... (8,000)
14. Cost of goods sold..................................................... $28,000
15.
16. 3. AVERAGE
17. Beginning inventory .................................................. $10,000
18. Purchases...................................................................... 26,000
19. Cost of goods available for sale ............................ 36,000
20. Less: ending inventory (80 X $120) ..................... (9,600)
21. Cost of goods sold..................................................... $26,400
22.
23. (b) The use of FIFO would result in the highest net income since the earlier lower costs are
matched with revenues.
24. (c) The use of FIFO would result in inventories approximating current cost in the balance sheet,
since the more recent units are assumed to be on hand.
25. (d) The use of LIFO would result in Jones paying the least taxes in the first year since income
will be lower.

Q# 19
Fontana Co. began operations on May 1. It uses a perpetual inventory system. During May the company
had the following purchases and sales.

Purchases
Date Units Unit Cost Sales Units
May 1 7 $150
May 4 4
 May 8 8 $170
May 12 5
May 15 6 $185
May 20 3
May 25 4

(a) Determine the ending inventory under a perpetual inventory system using (1) FIFO, (2)
average-cost, and (3) LIFO.
(b) Which costing method produces the highest ending inventory valuation?
(a) (1) FIFO
Date Purchases Cost of
Goods Sold Balance
May 1 (7 @ $150) $1,050 (7 @ $150) $1,050
4 (4 @ $150) $600 (3 @ $150) $ 450
8 (8 @ $170) $1,360 (3 @ $150)
(8 @ $170) } $1,810
(3 @ $150)
12
(2 @ $170) } $790
(6 @ $170) $1,020
(6 @ $170) }
15 (6 @ $185) $1,110
(6 @ $185) } $2,130
20 (3 @ $170) $510 (3 @ $170)
(6 @ $185) } $1,620
25 (3 @ $170)
(1 @ $185) } $695
(5 @ $185) $ 925
(2) AVERAGE-COST
Date Purchases Cost of
Goods Sold Balance
May 1 (7 @ $150) $1,050 ( 7 @ $150) $1,050
4 (4 @ $150) $600 ( 3 @ $150) $ 450
8 (8 @ $170) $1,360 (11 @ $164.55)* $1,810
12 (5 @ $164.55) $823 ( 6 @ $164.55) $ 987
15 (6 @ $185) $1,110 (12 @ $174.75)** $2,097
20 (3 @ $174.75) $524 ( 9 @ $174.75) $1,573
25 (4 @ $174.75) $699 ( 5 @ $174.75) $ 874
*Average-cost = $1,810 ÷ 11 (rounded)
**$2,097 ÷ 12

LIFO
Date Purchases
Cost of
Goods Sold Balance
May 1 (7 @ $150) $1,050 (7 @ $150) $1,050
4 (4 @ $150) $600 (3 @ $150) $ 450
8 (8 @ $170) $1,360 (3 @ $150)
(8 @ $170) } $1,810
(3 @ $150)
12 (5 @ $170) $850 (3 @ $170) } $ 960
 (3 @ $150)
15 (6 @ $185) $1,110 (3 @ $170)
(6 @ $185) } $2,070
(3 @ $150)
20 (3 @ $185) $555 (3 @ $170)
(3 @ $185) } $1,515
(3 @ $185) (3 @ $150)
25 (1 @ $170) } $725 (2 @ $170) } $ 790

(b) (1) The highest ending inventory is $925 under the FIFO method.
(2) The lowest ending inventory is $790 under the LIFO method.