CH 06

CHAPTER 6
REPORTING AND ANALYZING INVENTORY

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S
TAXONOMY
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT

True-False Statements
1. 1 K 10. 1 K 19. 3 K 28. 3 K 37. 5 K
2. 1 K 11. 2 K 20. 3 C 29. 3 K 38. 5 C
3. 1 K 12. 2 K 21. 3 C 30. 3 K 39. 6 K
4. 1 K 13. 2 K 22. 3 C 31. 3 K 40. 6 K
5. 1 K 14. 2 K 23. 3 K 32. 3 K *41. 7 K
6. 1 K 15. 2 K 24. 3 K 33. 4 K *42. 7 K
7. 1 K 16. 2 K 25. 3 K 34. 4 K *43. 8 K
8. 1 K 17. 3 K 26. 3 K 35. 4 K *44. 8 K
9. 1 K 18. 3 K 27. 3 K 36. 4 K
Multiple Choice Questions
45. 1 K 75. 2 AP 105. 2 AP 135. 3 C 165. 5 AP
46. 1 K 76. 2 AP 106. 2 K 136. 3 K 166. 5 C
47. 1 K 77. 2 AP 107. 2 C 137. 3 C 167. 5 AP
48. 1 K 78. 2 AP 108. 3 AP 138. 3 AP 168. 5 AP
49. 1 K 79. 2 AP 109. 3 AP 139. 3 AP 169. 5 AP
50. 1 K 80. 2 AP 110. 3 AP 140. 3 AP 170. 5 AP
51. 1 K 81. 2 AP 111. 3 AP 141. 3 K 171. 6 K
52. 1 K 82. 2 AP 112. 3 AP 142. 3 C 172. 6 K
53. 1 K 83. 2 AP 113. 3 AP 143. 3 C 173. 6 K
54. 1 K 84. 2 K 114. 3 AP 144. 3 C 174. 6 AP
55. 1 K 85. 2 K 115. 3 AP 145. 4 K 175. 6 C
56. 1 K 86. 2 K 116. 2 AP 146. 4 K 176. 6 C
57. 1 K 87. 2 C 117. 3 AP 147. 4 K 177. 6 AN
58. 1 K 88. 2 AP 118. 2 AP 148. 4 K 178. 6 AN
59. 1 K 89. 2 AP 119. 3 AP 149. 4 AP 179. 6 AN
60. 1 AP 90. 2 AP 120. 2 AP 150. 4 AN 180. 6 C
61. 1 AP 91. 2 AP 121. 2 AP 151. 4 AN 181. 7 K
62. 1 K 92. 2 K 122. 2 AP 152. 5 C 182. 7 AP
63. 1 C 93. 2 K 123. 2 AP 153. 5 AN 183. 7 AP
64. 2 K 94. 2 K 124. 3 AP 154. 5 AN 184. 7 AP
65. 2 K 95. 2 K 125. 3 C 155. 5 AN 185. 7 AP
66. 2 AP 96. 2 K 126. 3 C 156. 5 AN 186. 7 AP
67. 2 AP 97. 2 K 127. 3 C 157. 5 C 187. 8 AN
68. 2 AP 98. 2 K 128. 3 C 158. 5 K *188. 8 AN
69. 2 C 99. 2 K 129. 3 C 159. 5 K *189. 8 AN
70. 2 AP 100. 2 K 130. 3 C 160. 5 K *190. 8 C
71. 2 AP 101. 2 AP 131. 3 C 161. 5 C *191. 8 C
72. 2 AP 102. 2 AP 132. 3 C 162. 5 AP
73. 2 AP 103. 2 AP 133. 3 K 163. 5 AP
74. 2 AP 104. 2 AP 134. 3 K 164. 5 AP
Brief Exercises
192. 1 K 194. 2 AP 196. 2 C 198. 5 AP
FOR INSTRUCTOR USE ONLY

6-2 Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Edition
193. 2 AP 195. 2 AP 197. 4 AP

Exercises
199. 1 AN 204. 2 AP 209. 2 AP 214. 6 AP *219. 8 AN
200. 1 AN 205. 2 AP 210. 2 AP 215. 6 AP *220. 8 AN
201. 1 AN 206. 2 AP 211. 4 AP *216. 7 AP *221. 8 AN
202. 2 AP 207. 2 AP 212. 5 AN *217. 7 AP *222. 8 AN
203. 2 AP 208. 2 AP 213. 6 AN *218. 7 AP *223. 8 AN
Completion Statements
224. 1 K 227. 2 K 230. 2 K 233. 5 K
225. 1 K 228. 3 K 231. 2 K 234. 6 K
226. 1 K 229. 3 K 232. 4 K
Matching
235. 1-6 K
Short Answer Essay
236. 1 K 238. 3 C 240. 3 C 242. 4 C 244. 1 E
237. 2 K 239. 3 K 241. 3 C 243. 6 C 245. 1 AN
*This topic is dealt with in an Appendix to the chapter.
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Learning Objective 1
Item Type Item Type Item Type Item Type Item Type Item Type
1. TF 8. TF 49. MC 56. MC 63. MC 226. CS
2. TF 9. TF 50. MC 57. MC 192. BE 235. Ma
3. TF 10. TF 51. MC 58. MC 199. Ex 236. SA
4. TF 45. MC 52. MC 59. MC 200. Ex 244. SA
5. TF 46. MC 53. MC 60. MC 201. Ex 245. CS
6. TF 47. MC 54. MC 61. MC 224. CS
7. TF 48. MC 55. MC 62. MC 225. CS
11. TF 72. MC 86. MC 100. MC 194. BE 231. CS
12. TF 73. MC 87. MC 101. MC 195. BE 235. Ma
13. TF 74. MC 88. MC 102. MC 196. BE 237. SA
14. TF 75. MC 89. MC 103. MC 202. Ex
15. TF 76. MC 90. MC 104. MC 203. Ex
16. TF 77. MC 91. MC 105. MC 204. Ex
64. MC 78. MC 92. MC 106. MC 205. Ex
65. MC 79. MC 93. MC 116. MC 206. Ex
66. MC 80. MC 94. MC 118. MC 207. Ex
67. MC 81. MC 95. MC 120. MC 208. Ex
68. MC 82. MC 96. MC 121. MC 209. Ex
69. MC 83. MC 97. MC 122. MC 210. Ex
70. MC 84. MC 98. MC 123. MC 227. CS
71. MC 85. MC 99. MC 193. BE 230. CS

Reporting and Analyzing Inventory 6-3
Item Type Item Type Item Type Item Type Item Type Item Type
17. TF 26. TF 110. MC 125. MC 134. MC 143. MC
18. TF 27. TF 111. MC 126. MC 135. MC 144. MC
19. TF 28. TF 112. MC 127. MC 136. MC 228. CS
20. TF 29. TF 113. MC 128. MC 137. MC 229. CS
21. TF 30. TF 114. MC 129. MC 138. MC 235. Ma
22. TF 31. TF 115. MC 130. MC 139. MC 238. SA
23. TF 32. TF 117. MC 131. MC 140. MC 239. SA
24. TF 108. MC 119. MC 132. MC 141. MC 240. SA
25. TF 109. MC 124. MC 133. MC 142. MC 241. SA
33. TF 36. TF 147. MC 150. MC 211. Ex 242. SA
34. TF 145. MC 148. MC 151. MC 232. CS
35. TF 146. MC 149. MC 197. BE 235. Ma
37. TF 155. MC 160. MC 165. MC 170. MC
38. TF 156. MC 161. MC 166. MC 198. BE
152. MC 157. MC 162. MC 167. MC 212. Ex
153. MC 158. MC 163. MC 168. MC 233. CS
154. MC 159. MC 164. MC 169. MC 235. Ma
39. TF 172. MC 175. MC 178. MC 213. Ex 234. CS
40. TF 173. MC 176. MC 179. MC 214. Ex 235. Ma
171. MC 174. MC 177. MC 180. MC 215. Ex 243. SA
41. TF 181. MC 183. MC 185. MC 216. Ex 218. Ex
42. TF 182. MC 184. MC 186. MC 217. Ex
43. TF 187. MC 189. MC 191. MC 220. Ex 222. Ex
44. TF 188. MC 190. MC 219. Ex 221. Ex 223. Ex
Note: TF = True-False C = Completion

MC = Multiple Choice Ex = Exercise
Ma = Matching SA = Short Answer Essay

CHAPTER LEARNING OBJECTIVES
1. Determine how to classify Inventory and inventory quantities. Merchandisers need only
one inventory classification. merchandise inventory to describe the different items that make
up total inventory. Manufacturers, on the other hand, usually classify inventory into three
categories: finished goods work in process and raw materials. To determine inventory
quantities, manufacturers (1) take a physical inventory of goods on hand and (2) determine
the ownership of goods in transit on an consignment.
2. Explain the basis of accounting for inventories and apply the inventory cost flow
methods under a periodic inventory system. The primary basis of accounting for
inventories is cost. Cost includes all expenditures necessary to acquire goods and place
them in a condition ready for sale. Cost of goods available for sale includes (a) cost of
beginning inventory and (b) cost of goods purchased. The inventory cost flow methods are:
specific identification and three assumed cost flow methods—FIFO, LIFO, and average-cost.
3. Explain the financial statement and tax effects of each of the inventory cost flow
assumptions. The cost of goods available for sale may be allocated to cost of goods sold
and ending inventory by specific identification or by a method based on an assumed cost
flow. When prices are rising, the first-in, first-out (FIFO) method results in lower cost of goods
sold and higher net income than the average-cost and the last-in, first-out (LIFO) methods.
The reverse is true when prices are falling. In the balance sheet, FIFO results in an ending
inventory that is closest to current value, whereas the inventory under LIFO is the farthest
from current value. LIFO results in the lowest income taxes (because of lower taxable
income).
4. Explain the lower-of-cost-or-market basis of accounting for inventories. Companies use
the lower-of-cost-or-market (LCM) basis when the current replacement cost (market) is less
than cost. Under LCM, companies recognize the loss in the period in which the price decline
occurs.
5. Compute and interpret the inventory turnover. The inventory turnover is calculated as
cost of goods sold divided by average inventory. It can be converted to average days in
inventory by dividing 365 days by the inventory turnover. A higher turnover or lower average
days in inventory suggests that management is trying to keep inventory levels low relative to
its sales level.
6. Describe the LIFO reserve and explain its importance for comparing results of
different companies. The LIFO reserve represents the difference between ending inventory
using LIFO and ending inventory if FIFO were employed instead. For some companies this
difference can be significant, and ignoring it can lead to inappropriate conclusions when
using the current ratio or inventory turnover.
*7. Apply the inventory cost flow methods to perpetual inventory records. Under FIFO, the
cost of the earliest goods on hand prior to each sale is charged to cost of goods sold. Under
LIFO, the cost of the most recent purchase prior to sale is charged to cost of goods sold.
Under the average-cost method, a new average cost is computed after each purchase.

* 8. Indicate the effects of inventory errors on the financial statements. In the income
statement of the current year: (1) An error in beginning inventory will have a reverse effect on
net income (e.g. overstatement of inventory results in understatement of net income, and
vice versa). (2) An error in ending inventory will have a similar effect on net income (e.g.
overstatement of inventory results in overstatement of net income). If ending inventory errors
are not corrected in the following period, their effect on net income for that period is reversed,
and total net income for the two years will be correct. In the balance sheet: Ending inventory
errors will have the same effect on total assets and total stockholders’ equity and no effect on
liabilities.

TRUE-FALSE STATEMENTS
1. Raw materials inventories are the goods that a manufacturing company has
completed and are ready to be sold to customers.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
2. A manufacturer’s inventory consists of raw materials, work in process, and finished

goods.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
3. When the terms of sale are FOB shipping point, legal title to the goods remains
with the seller until the goods reach the buyer.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
4. Goods in transit shipped FOB shipping point should be included in the buyer’s
ending inventory.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
5. Goods that have been purchased FOB destination but are in transit, should be
excluded from a physical count of goods by the buyer.
Reporting
6. If the ownership of merchandise passes to the buyer when the seller ships the
merchandise, the terms are stated as FOB destination.
Reporting
7. Under the periodic inventory system, both the sales amount and the cost of goods
sold amount are recorded when each item of merchandise is sold.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
8. Under a periodic inventory system, the merchandise on hand at the end of the
period is determined by a physical count of the inventory.
Reporting
9. Consigned goods are held for sale by one party although ownership of the goods
is retained by another party.
Reporting
10. Goods held on consignment should be included in the consignor’s ending

inventory.
Reporting
11. In accounting for inventory, the assumed flow of costs must match the physical
flow of goods.
Business Economics


12. Inventory methods such as FIFO and LIFO deal more with flow of costs than with
flow of goods.
Business Economics
13. The average cost inventory method relies on a simple average calculation.
Business Economics
14. If prices never changed there would be no need for alternative inventory methods.
Business Economics
15. The specific identification method of costing inventories tracks the actual physical
flow of the goods available for sale.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics
16. Management may choose any inventory costing method it desires as long as the
cost flow assumption chosen is consistent with the physical movement of goods in the
company.
17. The First-in, First-out (FIFO) inventory method results in an ending inventory
valued at the most recent cost.
Reporting
18. The expense recognition principle requires that the cost of goods sold be matched
against the ending merchandise inventory in order to determine income.
Reporting
19. The specific identification method of inventory valuation is desirable when a

company sells a large number of low-unit cost items.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
20. If a company has no beginning inventory and the unit cost of inventory items does
not change during the year, the value assigned to the ending inventory will be the same
under LIFO and average cost flow assumptions.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
21. If the unit price of inventory is increasing during a period, a company using the
LIFO inventory method will show less gross profit for the period, than if it had used the
FIFO inventory method.
Reporting
22. If a company has no beginning inventory and the unit price of inventory is
increasing during a period, the cost of goods available for sale during the period will be
the same under the LIFO and FIFO inventory methods.
Reporting

23. A company may use more than one inventory cost flow method at the same time.
Reporting
24. Use of the LIFO inventory valuation method enables a company to report paper or
phantom profits.
Reporting
25. The LIFO inventory method agrees with the actual physical movement of goods in
most businesses.
Reporting
26. In periods of falling prices, LIFO will result in a higher ending inventory valuation
than FIFO.
27. In periods of falling prices, FIFO will result in a larger net income than the LIFO
method.
28. If a company changes its inventory valuation method, the effect of the change on
net income should be disclosed in the financial statements.
Reporting
29. A major criticism of the FIFO inventory method is that it magnifies the effects of the
business cycle on business income.
Reporting
30. The LIFO method is rarely used because most companies do not sell the last
goods they purchase first.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None,
31. The LIFO inventory method tends to smooth out the peaks and valleys of a
business cycle.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None,
32. Computers has made the periodic inventory system more popular and easier to
apply.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Leverage Technology, AICPA FN: Leverage Technology, AICPA PC:
None, IMA: Business Applications
33. When the market value of inventory is lower than its cost, the inventory is written
down to its market value.
34. The lower-of-cost-or-market rule implies that it is unrealistic to carry inventory at a

cost that is in excess of its market value.

Reporting

35. Accountants believe that the write down from cost to market should not be made
in the period in which the price decline occurs.
36. Under the LCM basis, market is defined as selling price, not current replacement
cost.
Reporting
37. The inventory turnover is calculated as cost of goods sold divided by ending
inventory.
Business Economics
38. An inventory turnover that is too high may indicate that the company is losing sales
opportunities because of inventory shortages.
Business Economics
39. The LIFO reserve is the difference between ending inventory using LIFO and
ending inventory if FIFO were used instead.
Reporting
40. The FIFO reserve is a required disclosure for companies that use FIFO.
Reporting
*41. When the average cost method is applied in a perpetual inventory system, the sale
of goods will change the unit cost that remains in inventory.
Reporting
*42. When the average cost method is applied to a perpetual inventory system, a
moving average cost per unit is computed with each purchase.
Reporting
*43. An error in the ending inventory of the current period will have a similar effect on
net income of the next accounting period.
Reporting
*44. An error that overstates the ending inventory will also cause net income for the
period to be overstated.
Reporting

Answers to True-False Statements

1. F 9. T 17. T 25. F 33. T *41. F
2. T 10. T 18. F 26. T 34. T *42. T
3. F 11. F 19. F 27. F 35. F *43. F
4. T 12. T 20. T 28. T 36. F *44. T
5. T 13. F 21. T 29. T 37. F
6. F 14. T 22. T 30. F 38. T
7. F 15. T 23. T 31. T 39. T
8. T 16. F 24. F 32. F 40. F
MULTIPLE CHOICE QUESTIONS

45. Manufactured inventory that has begun the production process but is not yet completed is
a. work in process.
b. raw materials.
c. merchandise inventory.
d. finished goods.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
46. The factor which determines whether or not goods should be included in a physical count
of inventory is
a. physical possession.
b. legal title.
c. management's judgment.
d. whether or not the purchase price has been paid.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
47. If goods in transit are shipped FOB destination

a. the seller has legal title to the goods until they are delivered.
b. the buyer has legal title to the goods until they are delivered.
c. the transportation company has legal title to the goods while the goods are in transit.
d. no one has legal title to the goods until they are delivered.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
48. Independent internal verification of the physical inventory process occurs when
a. the employee is required to count all items twice for sake of verification.
b. the items counted are compared to the inventory account balance.
c. a second employee counts the inventory and compares the result to the count made
by the first employee.
d. all prenumbered inventory tags are accounted for.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None,

49. An employee assigned to counting computer monitors in boxes should

a. estimate the number if there is a large quantity to be counted.
b. read each box and rely on the box description for the contents.
c. determine that the box contains a monitor.
d. rely on the warehouse records of the number of computer monitors.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Internal Controls
50. After the physical inventory is completed,

a. quantities are listed on inventory summary sheets.
b. quantities are entered into various general ledger inventory accounts.
c. the accuracy of the inventory summary sheets is checked by the person listing the
quantities on the sheets.
d. unit costs are determined by dividing the quantities on the summary sheets by the
total inventory costs.
IMA: Internal Controls
51. When is a physical inventory usually taken?

a. When goods are not being sold or received.
b. When the company has its greatest amount of inventory.
c. At the end of the company’s fiscal year.
d. When the company has its greatest amount of inventory and at the end of the
company's fiscal year.
52. Which of the following should not be included in the physical inventory of a company?
a. Goods held on consignment from another company.
b. Goods in transit from another company shipped FOB shipping point.
c. Goods shipped on consignment to another company.
d. All of these answer choices should be included.
Reporting
53. Tidwell Company's goods in transit at December 31 include sales made

(1) FOB destination
(2) FOB shipping point
and purchases made
(3) FOB destination
(4) FOB shipping point.
Which items should be included in Tidwell's inventory at December 31?
a. Sales made FOB shipping point and purchase made FOB destination
b. (1) and (4)
c. (1) and (3)
d. (2) and (4)
Reporting

54. The term "FOB" denotes

a. free on board.
b. freight on board.
c. free only (to) buyer.
d. freight charge on buyer.
Reporting
55. Goods held on consignment are

a. never owned by the consignee.
b. included in the consignee’s ending inventory.
c. kept for sale on the premises of the consignor.
d. included as part of no one’s ending inventory.
Reporting
56. Many companies use just-in-time inventory methods. Which of the following is not an
advantage of this method?
a. It limits the risk of having obsolete items in inventory.
b. Companies may not have quantities to meet customer demand.
c. It lowers inventory levels and costs.
d. Companies can respond to individual customer requests.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None,
57. When a perpetual inventory system is used, which of the following is a purpose of taking a
physical inventory?
a. To check the accuracy of the perpetual inventory records
b. To determine cost of goods sold for the accounting period
c. To compute inventory ratios
d. All are a purpose of taking a physical inventory when a perpetual inventory system is
used.
Reporting
58. Which statement is false?

a. Taking a physical inventory involves actually counting, weighing, or measuring each
kind of inventory on hand.
b. No matter whether a periodic or perpetual inventory system is used, all companies
need to determine inventory quantities at the end of each accounting period.
c. An inventory count is generally more accurate when goods are not being sold or
received during the counting.
d. Companies that use a perpetual inventory system must take a physical inventory to
determine inventory on hand on the balance sheet date and to determine cost of
goods sold for the accounting period.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

59. Reeves Company is taking a physical inventory on March 31, the last day of its fiscal year.
Which of the following must be included in this inventory count?
a. Goods in transit to Reeves, FOB destination
b. Goods that Reeves is holding on consignment for Parker Company
c. Goods in transit that Reeves has sold to Smith Company, FOB shipping point
d. Goods that Reeves is holding in inventory on March 31 for which the related Accounts
Payable is 15 days past due
Reporting
60. At December 31, 2014 Mohling Company’s inventory records indicated a balance of
$602,000. Upon further investigation it was determined that this amount included the
following:
 $112,000 in inventory purchases made by Mohling shipped from the seller 12/27/14
terms FOB destination, but not due to be received until January 2nd
 $74,000 in goods sold by Mohling with terms FOB destination on December 27th. The
goods are not expected to reach their destination until January 6th.
 $6,000 of goods received on consignment from Dollywood Company
What is Mohling’s correct ending inventory balance at December 31, 2014?

a. $490,000
b. $596,000
c. $410,000
d. $484,000
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA
Solution: $602,000  $112,000  $6,000  $484,000
61. At December 31, 2014 Howell Company’s inventory records indicated a balance of
$858,000. Upon further investigation it was determined that this amount included the
following:
 $168,000 in inventory purchases made by Howell shipped from the seller 12/27/14
terms FOB destination, but not due to be received until January 2nd
 $111,000 in goods sold by Howell with terms FOB destination on December 27th. The
goods are not expected to reach their destination until January 6th.
 $9,000 of goods received on consignment from Westwood Company
What is Howell’s correct ending inventory balance at December 31, 2014?
a. $690,000
b. $849,000
c. $570,000
d. $681,000
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution: $858,000  $168,000  $9,000  $681,000
62. Manufacturers usually classify inventory into all the following general categories except:
a. work in process
b. finished goods
c. merchandise inventory
d. raw materials
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

63. For companies that use a perpetual inventory system, all of the following are purposes for
taking a physical inventory except to:
a. check the accuracy of the records.
b. determine the amount of wasted raw materials.
c. determine losses due to employee theft.
d. determine ownership of the goods.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
64. Inventory costing methods place primary reliance on assumptions about the flow of
a. goods.
b. costs.
c. resale prices.
d. values.
Reporting
65. The LIFO inventory method assumes that the cost of the latest units purchased are
a. the last to be allocated to cost of goods sold.
b. the first to be allocated to ending inventory.
c. the first to be allocated to cost of goods sold.
d. not allocated to cost of goods sold or ending inventory.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
66. Alpha First Company just began business and made the following four inventory
purchases in June:
June 1 150 units $ 780
June 10 200 units 1,170
June 15 200 units 1,260
June 28 150 units 990
$4,200
A physical count of merchandise inventory on June 30 reveals that there are 210 units on
hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is
a. $1,092
b. $1,131
c. $1,386
d. $1,368
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: $780 + [($1,170  200)  (210  150)]  $1,131

67. Baker Bakery Company just began business and made the following four inventory
purchases in June:
June 10 200 units 1,170
June 15 200 units 1,260
$4,200
hand. Using the FIFO inventory method, the amount allocated to ending inventory for
June is
a. $1,092
b. $1,131
c. $1,368
d. $1,386
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: $990 + [($1,260  200)  (210  150)]  $1,368
68. Charlene Cosmetics Company just began business and made the following four inventory
purchases in June:
June 10 200 units 1,170
June 15 200 units 1,260
$4,200
hand. Using the average cost method, the amount allocated to the ending inventory on
June 30 is
a. $1,229.
b. $1,368.
c. $1,323.
d. $1,260.
Solution: ($4,200  700)  210  $1,260
69. Echo Sound Company just began business and made the following four inventory
purchases in June:
June 10 200 units 1,170
June 15 200 units 1,260
$4,200
hand. The inventory method which results in the highest gross profit for June is
a. the FIFO method.
b. the LIFO method.
c. the average cost method.
d. not determinable.
Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

70. Atom Company just began business and made the following four inventory purchases in
June:
June 10 200 units 1,120
June 15 200 units 1,140
$3,970
hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is
a. $1,105.
b. $1,100.
c. $1,170.
d. $1,180.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: $825 + [($1,120  200)  (200  150)]  $1,105
71. Quark Inc. just began business and made the following four inventory purchases in June:
June 10 200 units 1,120
June 15 200 units 1,140
$3,970
hand. Using the FIFO inventory method, the amount allocated to ending inventory for
June is
a. $1,105.
b. $1,100.
c. $1,170.
d. $1,180.
Solution: $885 + [($1,140  200)  (200  150)]  $1,170
72. A company just began business and made the following four inventory purchases in June:
June 10 200 units 1,120
June 15 200 units 1,140
$3,970
hand. Using the average-cost method, the amount allocated to the ending inventory on
June 30 is
a. $1,134.
b. $1,180.
c. $1,100.
d. $1,120.
Solution: [($3,970  700)  200]  $1,134

73. A company purchased inventory as follows:

200 units at $5.00
300 units at $5.50
The average unit cost for inventory is
a. $5.00.
b. $5.25.
c. $5.30.
d. $5.50.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics
Solution: [($200  $5.00) + (300  $5.50)]  (200 + 300)  $5.30
74. Noise Makers Inc has the following inventory data:

July 1 Beginning inventory 20 units at $19 $ 380
7 Purchases 70 units at $20 1,400
22 Purchases 10 units at $22 220
$2,000
A physical count of merchandise inventory on July 30 reveals that there are 32 units on
hand. Using the average cost method, the value of ending inventory is
a. $620.
b. $640.
c. $651.
d. $660.
Solution: [($2,000  100)  32]  $640
75. Olympus Climbers Company has the following inventory data:

$2,000
hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for
July is
a. $620.
b. $660.
c. $1,340.
d. $1,380.
Solution: $380 + [(100  32  20)  $20]  $1,340

76. Pop-up Party Favors Inc has the following inventory data:
$2,000
hand. Using the FIFO inventory method, the amount allocated to ending inventory for July
is
a. $620.
b. $660.
c. $640.
d. $704.
Solution: $220 + [(32  10)  $20]  $660
77. Quiet Phones Company has the following inventory data:

$2,000
hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for
July is
a. $620.
b. $660.
c. $1,340.
d. $1,380.
Solution: $220 + [(100  32  10)  $20]  $1,380
78. Radical Radials Company has the following inventory data:

$2,000
hand. Using the LIFO inventory method, the amount allocated to ending inventory for July
is
a. $620
b. $608
c. $640
d. $704.
Solution: $380 + [(32  20)  $20]  $620

79. Orange-Aide Company has the following inventory data:

$2,090
hand. Using the average cost method, the value of ending inventory is
a. $535
b. $523
c $525
d $550
Solution: [($2,090  100)  $25]  $523
80. Peach Pink Inc. has the following inventory data:

$2,090
hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for
July is
a. $1,555
b. $1,585
c. $1,505.
d. $1,540.
Solution: $400 + [(100  25  20)  $21]  $1,555
81. Grape Gratuities Company has the following inventory data:

$2,090
hand. Using the FIFO inventory method, the amount allocated to ending inventory for July
is
a. $585.
b. $505.
c. $535.
d. $550.
Solution: $220 + [(25  10)  $21]  $535

82. Apple-A-Day Company has the following inventory data:

$2,090
hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for
July is
a. $1,585
b. $1,540
c. $1,555.
d. $1,540.
Solution: $220 + [(100  25  10)  $21]  $1,585
83. Bonkers Bananas has the following inventory data:

$2,090
hand. Using the LIFO inventory method, the amount allocated to ending inventory for July
is
a. $550
b. $505
c. $535
d. $500.
Solution: $400 + [(25  20)  $21]  $505
84. Which of the following is an inventory costing method?

a. Periodic
b. Specific identification
c. Perpetual
d. Lower of cost or market
Reporting
85. Inventory costing methods place primary reliance on assumptions about the flow of
a. good.
b. costs.
c. resale prices.
d. values.
Reporting

86. Which of the following terms best describes the assumption made in applying the four
inventory methods?
a. Goods flow
b. Cost flow
c. Asset flow
d. Physical flow
Reporting
87. An assumption about cost flow is necessary

a. because it is required by the income tax regulation.
b. even when there is no change in the purchase price on inventory.
c. only when the flow of goods cannot be determined.
d. because prices usually change, and tracking which units have been sold is difficult.
Business Economics
88. Piper Pipes has the following inventory data:

July 1 Beginning inventory 30 units at $120
5 Purchases 180 units at $112
14 Sale 120 units
30 Sale 84 units
Assuming that a periodic inventory system is used, what is the cost of goods sold on a
LIFO basis.
a. $10,992
b. $11,022
c. $23,088.
d. $23,118
Solution: (90  $115) + [(120 + 84  90)  $112]  $23,118
89. Trumpeting Trumpets has the following inventory data:

14 Sale 120 units
30 Sale 84 units
Assuming that a periodic inventory system is used, what is the cost of goods sold on a
FIFO basis.
a. $10,992
b. $11,022
c. $23,088.
d. $23,118
Solution: (30  $120) + [(120 + 84  30)  $112]  $23,088

90. Sassy Saxophones has the following inventory data:

14 Sale 120 units
30 Sale 84 units
Assuming that a periodic inventory system is used, what is the amount allocated to ending
inventory on a LIFO basis.
a. $10,992
b. $11,022
c. $23,088.
d. $23,118
Solution: (30 + 180  120 + 90  84) 96; (30  $120) + (66  $112)  $10,992
91. Clear Clarinets has the following inventory data:

14 Sale 120 units
30 Sale 84 units
Assuming that a periodic inventory system is used, what is the amount allocated to ending
inventory on a FIFO basis.
a. $10,932
b. $11,022
c. $23,088.
d. $23,118
Solution: (30 + 180  120 + 90  84)  96; (90  $115) + (6  $112)  $11,022
92. Which of the following items will increase inventoriable costs for the buyer of goods?
a. Purchase returns and allowances granted by the seller
b. Purchase discounts taken by the purchaser
c. Freight charges paid by the seller
d. Freight charges paid by the purchaser
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
93. Of the following companies, which one would not likely employ the specific identification
method for inventory costing?
a. Music store specializing in organ sales
b. Farm implement dealership
c. Antique shop
d. Hardware store
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

94. A problem with the specific identification method is that

a. inventories can be reported at actual costs.
b. management can manipulate income.
c. matching is not achieved.
d. the lower of cost or market basis cannot be applied.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
95. The selection of an appropriate inventory cost flow assumption for an individual company
is made by
a. the external auditors.
b. the SEC.
c. the internal auditors.
d. management.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None,
96. Which of the following is not a common cost flow assumption used in costing inventory?
a. First-in, first-out
b. Middle-in, first-out
c. Last-in, first-out
d. Average cost
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None,
97. The accounting principle that requires that the cost flow assumption be consistent with the
physical movement of goods is
a. called the matching principle.
b. called the consistency principle.
c. nonexistent; that is, there is no such accounting requirement.
d. called the physical flow assumption.
98. Which of the following statements is true regarding inventory cost flow assumptions?
a. A company may use more than one costing method concurrently.
b. A company must comply with the method specified by industry standards.
c. A company must use the same method for domestic and foreign operations.
d. A company may never change its inventory costing method once it has chosen a
method.
99. Which of the following statements is correct with respect to inventories?

a. The FIFO method assumes that the costs of the earliest goods acquired are the last to
be sold.
b. It is generally good business management to sell the most recently acquired goods
first.
c. Under FIFO, the ending inventory is based on the latest units purchased.
d. FIFO seldom coincides with the actual physical flow of inventory.
Business Economics

100. Given equal circumstances, which inventory method would probably be the most time
consuming?
a. FIFO
b. LIFO
c. Average cost
d. Specific identification.
Business Economics
101. Serene Stereos has the following inventory data:

Nov. 1 Inventory 30 units @ $4.00 each
8 Purchase 120 units @ $4.30 each
A physical count of merchandise inventory on November 30 reveals that there are 100
units on hand. Cost of goods sold under FIFO is
a. $438
b. $846
c. $421
d. $863
Solution: (30  $4.00) + (120  $4.30) + [(300  100  30  120)  $4.20]  $846
102. Automobile Audio has the following inventory data:

units on hand. Ending inventory under FIFO is
a. $438
b. $846
c. $421
d. $863
Solution: (90  $4.40) + [(100  90)  $4.20]  $438
103. Carryable CDs has the following inventory data:

units on hand. Cost of goods sold under LIFO is
a. $438
b. $846
c. $421
d. $863
Solution: (90  $4.40) + (60  $4.20) + [(200  150)  $4.30]  $863

104. Delightful Discs has the following inventory data:

units on hand. Ending inventory under LIFO is
a. $438
b. $421
c. $846
d. $863
Solution: (30  $4.00) + [(100  30)  $4.30]  $421
105. Laser Listening has the following inventory data:

units on hand. Assuming that the specific identification method is used and that ending
inventory consists of 30 units from each of the three purchases and 10 units from the
November 1 inventory, cost of goods sold is
a. $427.
b. $857.
c. $854.
d. $836.
Solution: (20  $4.00) + (90  $4.30) + (30  $4.20) + (60 $4.40)  $857
106. Which inventory costing method should a gasoline retailer use?

a. Average cost
b. LIFO
c. FIFO
d. Either LIFO or FIFO.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
107. In periods of rising prices, which is an advantage of using the LIFO inventory costing
method?
a. Ending inventory will include latest (most recent) costs and thus be more realistic.
b. Cost of goods sold will include latest (most recent) costs and thus will be more
realistic.
c. Net income will be the highest and thus reflect the prosperity of the company.
d. Phantom profits are reported.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

108. Hogan Industries had the following inventory transactions occur during 2014:
Units Cost/unit
Feb. 1, 2014 Purchase 36 $45
Mar. 14, 2014 Purchase 62 $47
May 1, 2014 Purchase 44 $49
The company sold 102 units at $63 each and has a tax rate of 30%. Assuming that a
periodic inventory system is used, what is the company’s gross profit using LIFO?
(rounded to whole dollars)
a. $4,882
b. $4,730
c. $1,696
d. $1,544
Solution: (44  $49) + [(102  $44)  $47]  $4,882; [(102  $63)  $4,882]  $1,544
Units Cost/unit
Feb. 1, 2014 Purchase 36 $45
Mar. 14, 2014 Purchase 62 $47
periodic inventory system is used, and operating expenses of $600, what is the
company’s after-tax income using LIFO? (rounded to whole dollars)
a. $944
b. $1,096
c. $767
d. $661
Solution: (44  $49) + [(102  $44)  $47]  $4,882; [(102  $63)  $4,882]  $1,544; ($1,544  $600)  .70 $661
Units Cost/unit
Feb. 1, 2014 Purchase 36 $45
Mar. 14, 2014 Purchase 62 $47
periodic inventory system is used, what is the company’s gross profit using FIFO?
a. $4,882
b. $4,730
c. $1,696
d. $1,544
Solution: (36  $45) + (62  $47) + [(102  98)  $49]  $4,730; [(102  $63)  $4,730]  $1,696

Units Cost/unit
Feb. 1, 2014 Purchase 36 $45
Mar. 14, 2014 Purchase 62 $47
periodic inventory system is used and operating expenses of $600, what is the company’s
after-tax income using FIFO? (rounded to whole dollars)
a. $944
b. $1,096
c. $767
d. $661
Solution: (36  $45) + (62  $47) + [(102  98)  $49]  $4,730; [(102  $63)  $4,730]  $1,696; ($1,696  $600)  .70  $767
112. Dole Industries had the following inventory transactions occur during 2014:
Units Cost/unit
Feb. 1, 2014 Purchase 72 $90
Mar. 14, 2014 Purchase 124 $94
periodic inventory system is used, what is the company’s gross profit using LIFO?
a. $19,528
b. $18,920
c. $6,784
d. $6,176
Solution: (88  $98) + [(204  88)  $94]  $19,528; [(204  $126)  $19,528]  $6,176
Units Cost/unit
Feb. 1, 2014 Purchase 72 $90
Mar. 14, 2014 Purchase 124 $94
periodic inventory system is used, and operating expenses of $2,000, what is the
company’s after-tax income using LIFO? (rounded to whole dollars)
a. $4,176
b. $4,323
c. $3,349
d. $2,923
Solution: (88  $98) + [(204  88)  $94]  $19,528; [(204  $126)  $19,528]  $6,176; ($6,176  $2,000)  .70  $2,923

Units Cost/unit
Feb. 1, 2014 Purchase 72 $90
Mar. 14, 2014 Purchase 124 $94
periodic inventory system is used, what is the company’s gross profit using FIFO?
a. $19,528
b. $18,920
c. $6,784
d. $6,176
Solution: (72  $90) + (124  $94) + [(204  196)  $98]  $18,920; [(204  $126)  $18,920]  $6,784
115 Dole Industries had the following inventory transactions occur during 2014:
Units Cost/unit
Feb. 1, 2014 Purchase 72 $90
Mar. 14, 2014 Purchase 124 $94
periodic inventory system is used and operating expenses of $2,000, what is the
company’s after-tax income using FIFO? (rounded to whole dollars)
a. $4,176
b. $4,784
c. $3,349
d. $2,923
Solution: (72  $90) + (124  $94) + [(204  196)  $98]  $18,920; [(204  $126)  $18,920]  $6,784; ($6,784  $2,000)  .70  $3,349
116. Hoover Company had beginning inventory of $15,000 at March 1, 2014. During the
month, the company made purchases of $55,000. The inventory at the end of the month is
$17,300. What is cost of goods sold for the month of March?
a. $52,700
b. $55,000
c. $70,000
d. $72,300
Solution: ($15,000 + $55,000)  $17,300  $52,700

117. A company just starting in business purchased three merchandise inventory items at the
following prices. First purchase $80; Second purchase $95; Third purchase $85. If the
company sold two units for a total of $290 and used FIFO costing, the gross profit for the
period would be
a. $115.
b. $125.
c. $110.
d. $100.
Solution: $290  ($80 + $95)  $115
118. At May 1, 2014, Heineken Company had beginning inventory consisting of 200 units with
a unit cost of $7. During May, the company purchased inventory as follows:
400 units at $7
600 units at $8
The company sold 1,000 units during the month for $12 per unit. Heineken uses the
average cost method. The average cost per unit for May is
a. $7.00.
b. $7.50.
c. $7.60.
d. $8.00.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Solution: [(200 + $7) + (400  $7) + (600  $8)]  1,200  $7.50
400 units at $7
600 units at $8
average cost method. Heineken's gross profit for the month of May is
a. $4,500
b. $7,500
c. $9,000
d. $12,000
Solution: [(200  $7) + (400  $7) + (600  $8)]  1,200  $7.50; [($12  $7.50)]  1,000  $4,500
400 units at $7
600 units at $8
average cost method. The value of Heineken's inventory at May 31, 2014 is
a. $1,400
b. $1,500
c. $1,600
d. $9,000
Solution: [(200  $7) + (400  $7) + (600  $8)]  1,200  $7.50; [($1,200  $1,000)  $7.50]  $1,500

121. Dobler Company uses a periodic inventory system. Details for the inventory account for
the month of January 2014 are as follows:
Units Per unit price Total
Balance, 1/1/2014 200 $5.00 $1,000
Purchase, 1/15/2014 100 5.30 530
Purchase, 1/28/2014 100 5.50 550
An end of the month (1/31/2014) inventory showed that 160 units were on hand. How
many units did the company sell during January 2014?
a. 60
b. 160
c. 200
d. 240
Solution: [(200 + 100 + 100)  160]  240
Balance, 1/1/2014 200 $5.00 $1,000
Purchase, 1/15/2014 100 5.30 530
Purchase, 1/28/2014 100 5.50 550
An end of the month (1/31/2014) inventory showed that 160 units were on hand. If the
company uses FIFO, what is the value of the ending inventory?
a. $880
b. $800
c. $868
d. $1,212
Solution: $550 + [(160  100)  $5.30]  $868
Balance, 1/1/2014 200 $5.00 $1,000
Purchase, 1/15/2014 100 5.30 530
Purchase, 1/28/2014 100 5.50 550
company uses LIFO, what is the value of the ending inventory?
a. $843
b. $800
c. $868
d. $1,280
Solution: (160  $5.00)  $800

Balance, 1/1/2014 200 $5.00 $1,000
Purchase, 1/15/2014 100 5.30 530
Purchase, 1/28/2014 100 5.50 550
company uses FIFO and sells the units for $10 each, what is the gross profit for the
month?
a. $1,188
b. $1,212
c. $2,400
d. $1,600
Solution: (200  $5.00) + [(400  160  200)  $5.30]  $1,212; [(400  160)  $10]  $1,212  $1.188
125. In periods of rising prices, the inventory method which results in the inventory value on the
balance sheet that is closest to current cost is the
a. FIFO method.
b. LIFO method.
c. average-cost method.
d. tax method.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
126. In a period of declining prices, which of the following inventory methods generally results
in the lowest balance sheet figure for inventory?
a. Average cost method
b. LIFO method
c. FIFO method
d. Need more information to answer
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
127. In a period of rising prices, which of the following inventory methods generally results in
the lowest net income figure?
a. Average cost method
b. LIFO method
c. FIFO method
d. Need more information to answer
Business Economics
128. Which inventory method generally results in costs allocated to ending inventory that will
approximate their current cost?
a. LIFO
b. FIFO
c. Average cost method
d. Whichever method that produces the highest ending inventory figure
Business Economics

129. Two companies report the same cost of goods available for sale but each employs a
different inventory costing method. If the price of goods has increased during the period,
then the company using
a. LIFO will have the highest ending inventory.
b. FIFO will have the highest cost of goods sold.
c. FIFO will have the highest ending inventory.
d. LIFO will have the lowest cost of goods sold.
Reporting
130. If companies have identical inventoriable costs but use different inventory flow
assumptions when the price of goods have not been constant, then the
a. cost of goods sold of the companies will be identical.
b. cost of goods purchased during the year will be identical.
c. ending inventory of the companies will be identical.
d. net income of the companies will be identical.
Reporting
131. In a period of increasing prices, which inventory flow assumption will result in the lowest
amount of income tax expense?
a. FIFO
b. LIFO
c. Average cost method
d. Income tax expense for the period will be the same under all assumptions.
Reporting
132. Given equal circumstances and generally rising costs, which inventory method will
increase the tax expense the most?
a. FIFO
b. LIFO
c. Average cost
d. Income tax expense for the period will be the same under all assumptions.
Reporting
133. The specific identification method of costing inventories is used when the
a. physical flow of units cannot be determined.
b. company sells large quantities of relatively low cost homogeneous items.
c. company sells large quantities of relatively low cost heterogeneous items.
d. company sells a limited quantity of high-unit cost items.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None,
134. The specific identification method of inventory costing

a. always maximizes a company's net income.
b. always minimizes a company's net income.
c. has no effect on a company's net income.
d. may enable management to manipulate net income.
Reporting

135. The managers of Hong Company receive performance bonuses based on the net income
of the firm. Which inventory costing method are they likely to favor in periods of declining
prices?
a. LIFO
b. Average Cost
c. FIFO
d. Physical inventory method
Reporting
136. In periods of inflation, phantom or paper profits may be reported as a result of using the
a. perpetual inventory method.
b. FIFO costing assumption.
c. LIFO costing assumption.
d. periodic inventory method.
Reporting
137. Selection of an inventory costing method by management does not usually depend on
a. the fiscal year end.
b. income statement effects.
c. balance sheet effects.
d. tax effects.
Reporting
138. The accountant at Landry Company is figuring out the difference in income taxes the
company will pay depending on the choice of either FIFO or LIFO as an inventory costing
method. The tax rate is 30% and the FIFO method will result in income before taxes of
$8,740. The LIFO method will result in income before taxes of $8,100. What is the
difference in tax that would be paid between the two methods?
a. $640
b. $448
c. $192
d. Cannot be determined from the information provided.
Solution: [($8,740  $8,100)  .30]  192
139. The accountant at Patton Company has determined that income before income taxes
amounted to $11,000 using the FIFO costing assumption. If the income tax rate is 30%
and the amount of income taxes paid would be $600 greater if the LIFO assumption were
used, what would be the amount of income before taxes under the LIFO assumption?
a. $11,600
b. $13,000
c. $9,000
d. $10,400
Solution: [($600  30) + $11,000]  $13,000

140. The manager of Weiser is given a bonus based on net income before taxes. The net
income after taxes is $35,700 for FIFO and $29,400 for LIFO. The tax rate is 30%. The
bonus rate is 20%. How much higher is the manager's bonus if FIFO is adopted instead of
LIFO?
a. $9,000
b. $12,600
c. $1,800
d. $6,300
Solution: [($35,700  $29,400) .70]  $9,000; $9,000  .20  $1,800
141. The consistent application of an inventory costing method enhances

a. conservatism.
b. accuracy.
c. comparability.
d. efficiency.
Reporting
142. Ace Company is a retailer operating in an industry that experiences inflation (rising
prices). Ace wants to maintain a high current ratio. Which inventory costing method should
Ace consider using?
a. LIFO
b. Average
c. FIFO
d. No inventory costing method directly affects the current ratio.
Business Economics
prices). Ace wants the most realistic cost of goods sold. Which inventory costing method
should Ace consider using?
a. Average because all inventory costs will then represent an average amount.
b. Specific identification is the most realistic method because it involves the actual costs.
c. LIFO because cost of goods sold represents the latest costs.
d. FIFO because cost of goods sold represents the earliest costs.
Business Economics
prices). Ace wants the most realistic ending inventory. Which inventory costing method
should Ace consider using?
a. Average because all inventory costs will then represent an average amount.
b. Specific identification is the most realistic method because it involves the actual costs.
c. LIFO because ending inventory represents the earliest costs.
d. FIFO because ending inventory represents the latest costs.
Business Economics

145. The lower of cost or market basis of valuing inventories is an example of

a. comparability.
b. the historical cost principle.
c. conservatism.
d. consistency.
Business Economics
146. When applying the lower of cost or market rule to inventory valuation, market generally
means
a. current replacement cost.
b. original cost.
c. resale value.
d. original cost, less physical deterioration.
Business Economics
147. The situation that requires a departure from the cost basis of accounting to the lower of
cost or market basis in valuing inventory is necessitated by
a. a decline in the value of the inventory.
b. an increase in selling price.
c. an increase in the value of the inventory.
d. a desire for more profit.
Business Economics
148. Which statement concerning lower of cost or market (LCM) is incorrect?

a. LCM is an example of a company choosing the accounting method that will be least
likely to overstate assets and income.
b. Under the LCM basis, market does not apply because assets are always recorded and
maintained at cost.
c. The LCM basis uses current replacement cost because a decline in this cost usually
leads to a decline in the selling price of the inventory item.
d. LCM is applied after one of the cost flow assumptions has been applied.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
149. Jenks Company developed the following information about its inventories in applying the
lower of cost or market (LCM) basis in valuing inventories:
Product Cost Market
A $57,000 $60,000
B 40,000 38,000
C 80,000 81,000
If Jenks applies the LCM basis, the value of the inventory reported on the balance sheet
would be
a. $177,000.
b. $179,000.
c. $175,000.
d. $181,000.
Solution: $57,000 + $38,000 + $80,000]  $175,000

150. Nelson Corporation sells three different products. The following information is available on
December 31:
Inventory Item Units Cost per unit Market value per unit
X 150 $4.00 $3.50
Y 300 $2.00 $1.50
Z 750 $3.00 $4.00
When applying the lower of cost or market rule to each item, what will Nelson's total
ending inventory balance be?
a. $3,450
b. $3,225
c. $3,975
d. $3,300
Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: (150  $3.50) + (300  $1.50] + (750  $3.00)  $3,325
151. Whitman Corporation sells six different products. The following information is available on
December 31:
Inventory Item Units Cost per unit Market value per unit Estimated Selling Price
Tin 30 $ 500 $ 505 $ 515
Titanium 10 5,000 4,950 5,100
Stainless Steel 40 2,000 1,910 1,985
Aluminum 40 350 285 290
Iron 20 400 410 425
Fiberglass 20 300 295 310
When applying the lower of cost or market rule to each item, what will Whitman's total
ending inventory balance be?
a. $173,000
b. $166,200
c. $166,550
d. $166,400
Solution: (30  $500) + (10  $4,950] + (40  $1,910) + (40 + $285) + (20  $400) + (20  295)  $166,200
152. Johnson Company has a high inventory turnover that has increased over the last year. All
of the following statements are true regarding this situation except Johnson County:
a. is minimizing funds tied up in inventory.
b. is increasing the amount of inventory on hand relative to sales.
c. may be losing sales due to inventory shortages.
d. has a cost of goods sold that is increasing relative to its average inventory.
Business Economics

153. Use the following information regarding Black Company and Red Company to answer the
question “Which amount is equal to Black Company's "days in inventory" for 2014 (to the
closest decimal place)?”
Inventory
Year Turnover Ending Inventory
Black Company 2012 $26,340
2013 10.7 $29,890
2014 10.4 $30,100
Red Company 2012 $25,860

2013 9.0 $24,750
2014 9.5 $22,530
a. 35.1 days
b. 34.1 days
c. 82.5 days
d. 29.5 days
Ans: A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: 365  10.4  35.1
question “Which amount is equal to Red Company's "days in inventory" for 2013 (to the
closest decimal place)?”
Inventory
2013 10.7 $29,890
2014 10.4 $30,100

2013 9.0 $24,750
2014 9.5 $22,530
a. 67.8 days
b. 38.4 days
c. 28.1 days
d. 40.6 days
Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: 365  9  40.6

question “Which of the following is Black Company's "cost of goods sold" for 2013 (to the
closest dollar)?”
Inventory
2013 10.7 $29,890
2014 10.4 $30,100

2013 8.8 $24,750
2014 9.5 $22,530
a. $300,830
b. $281,838
c. $319,823
d. $320,946
Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: 10.7  $29,890  $319,823
question “Which of the following is Red Company's "cost of goods sold" for 2014 (to the
closest dollar)?”
Inventory
Year Turnover Ratio Ending Inventory
2013 10.7 $29,890
2014 10.2 $30,100

2013 9.0 $24,750
2014 9.5 $22,530
a. $222,684
b. $235,125
c. $224,580
d. $214,035
Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: 9.5  $22,530  $214,035
157. Which of the following companies would most likely have the highest inventory turnover?
a. An art gallery.
b. An automobile manufacturer.
c. A piano manufacturer.
d. A bakery.
Business Economics

158. An aircraft company would most likely have a

a. high inventory turnover.
b. low profit margin.
c. high volume.
d. low inventory turnover.
Business Economics
159. The inventory turnover is calculated by dividing cost of goods sold by

a. beginning inventory.
b. ending inventory.
c. average inventory.
d. 365 days.
Business Economics
160. Days in inventory is calculated by dividing 365 days by

a. average inventory.
b. beginning inventory.
c. ending inventory.
d. the inventory turnover.
Business Economics
161. Which of these would cause the inventory turnover ratio to increase the most?
a. Increasing the amount of inventory on hand.
b. Keeping the amount of inventory on hand constant but increasing sales.
c. Keeping the amount of inventory on hand constant but decreasing sales.
d. Decreasing the amount of inventory on hand and increasing sales.
Business Economics
162. The following information was available for Camara Company at December 31, 2014:
beginning inventory $80,000; ending inventory $120,000; cost of goods sold $560,000;
and sales $800,000. Camara’s inventory turnover in 2014 was
a. 8.0 times.
b. 6.7 times.
c. 5.6 times.
d. 4.7 times.
Solution: $560,000  [($80,000 + $120,000) 2]  5.6
163. The following information was available for Camara Company at December 31, 2014:
beginning inventory $80,000; ending inventory $120,000; cost of goods sold $560,000;
and sales $800,000. Camara’s days in inventory in 2014 was
a. 45.6 days.
b. 54.5 days.
c. 65.2 days.
d. 77.7 days.
Solution: 365  5.6  65.2

164. The following information was available for Bowyer Company at December 31, 2014:
beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; and
sales $1,200,000. Bowyer’s inventory turnover in 2014 was
a. 15.0 times.
b. 11.0 times.
c. 12.6 times.
d. 9.8 times.
Solution: $880,000  [($90,000 + $70,000) 2]  11
165. The following information was available for Bowyer Company at December 31, 2014:
beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; and
sales $1,200,000. Bowyer’s days in inventory in 2014 was
a. 24.3 days.
b. 33.2 days.
c. 29 days.
d. 37.2 days.
Solution: 365  11  33.2
166. A low number of days in inventory may indicate all of the following except
a. Sales opportunities may be lost because of inventory shortages.
b. There is less chance of having obsolete inventory items.
c. The company has fewer funds tied up in inventory.
d. Management has achieved the best balance between too much and too little inventory
levels.
Business Economics
167. Redeker Company had the following records:

2014 2013 2012
Ending inventory $34,580 $32,650 $30,490
Cost of goods sold 182,000 178,000 174,200
What is Redeker’s inventory turnover for 2013? (rounded)

a. 5.6 times
b. 5.5 times
c. 0.2 times
d. 5.3 times
Solution: $178,000  [($32,650 + $30,490) 2]  5.6

168. Redeker Company had the following records:

2014 2013 2012
What is Redeker’s average days in inventory for 2014? (rounded)

a. 67.6 days
b. 66.4 days
c. 68.9 days
d. 68.25 days
Solution: $365  5.5  67.6
169. Barnett Company had the following records:

2014 2013 2012
What is Barnett’s inventory turnover for 2013? (rounded)

a. 7.6 times
b. 8.1 times
c. 0.1 times
d. 7.8 times
Solution: $255,250  [($32,650 + $30,490) 2]  8.1
170. Barnett Company had the following records:

2014 2013 2012
What is Barnett’s average days in inventory for 2013? (rounded)

a. 45.1 days
b. 48.0 days
c. 46.8 days
d. 365 days
Solution: 365  8.1  45.1
171. The difference between ending inventory using LIFO and ending inventory using FIFO is
referred to as the
a. FIFO reserve.
b. inventory reserve.
c. LIFO reserve.
d. periodic reserve.
Reporting

172. The LIFO reserve is

a. the difference between the value of the inventory under LIFO and the value under
FIFO.
b. an amount used to adjust inventory to the lower of cost or market.
c. the difference between the value of the inventory under LIFO and the value under
average cost.
d. the amount used to adjust inventory to history cost.
Reporting
173. Reporting which one of the following allows analysts to make adjustments to compare
companies using different cost flow methods?
a. FIFO reserve
b. Inventory turnover
c. LIFO reserve
d. Current replacement cost
Reporting
174. Butler Company reported ending inventory at December 31, 2014 of $1,200,000 under
LIFO. It also reported a LIFO reserve of $210,000 at January 1, 2014, and $300,000 at
December 31, 2014. Cost of goods sold for 2014 was $4,600,000. If Butler Company had
used FIFO during 2014, its cost of goods sold for 2014 would have been
a. $4,900,000.
b. $4,690,000.
c. $4,510,000.
d. $4,300,000.
Solution: [$4,600,000  ($300,000  $210,000)]  4,510,000
175. To adjust a company’s LIFO cost of goods sold to FIFO cost of goods sold
a. the ending LIFO reserve is added to LIFO cost of goods sold.
b. the ending LIFO reserve is subtracted from LIFO cost of goods sold.
c. an increase in the LIFO reserve is subtracted from LIFO cost of goods sold.
d. a decrease in the LIFO reserve is subtracted from LIFO cost of goods sold.
Reporting
176. All of the following statements are true regarding the LIFO reserve except:
a. Companies using LIFO are required to report the LIFO reserve.
b. The equation (LIFO inventory – LIFO reserve = FIFO inventory) adjusts the inventory
balance from LIFO to FIFO.
c. The financial statement differences of using LIFO normally increase the longer a
company uses LIFO.
d. Current ratios and the inventory turnover can be significantly affected if a company
has material LIFO reserves.
Reporting

177. Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and
Evans Services to answer the question “What is Danforth's LIFO reserve for 2013?”
(amounts in $ millions) Boxter Clifford Danforth Evans

Inventory Method for 2013 & 2014 LIFO FIFO LIFO FIFO
2013 Ending inventory assuming LIFO $324 N/A $225 N/A
2013 Ending inventory assuming FIFO $427 $535 $310 $663
2013 Current assets
(reported on balance sheet) $1,677 $2,031 $1,308 $2,748
2013 Current liabilities $987 $1,209 $545 $1,200
2014 Current assets
2014 Current liabilities $1,306 $1,410 $465 $1,000
2014 Cost of goods sold $4,678 $5,042 $3,000 $7,000
a. $535
b. $85
c. $42
d. $58
Ans: B, LO: 6, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: $310  $225  $85
Evans Services to answer the question “Using the LIFO reserve adjustment, which
company would has the strongest liquidity position for 2014 as expressed by the current
ratio?”

2013 Current assets
2014 Current assets
a. Boxter
b. Clifford
c. Danforth
d. Evans
Ans: C, LO: 6, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

Evans Services to answer the question “Using the LIFO adjustment, what is Boxter's
inventory turnover ratio for 2014 (to the closest decimal place)?”

2013 Current assets
2014 Current assets
a. 12.3 times
b. 9.3 times
c. 7.5 times
d. 6.4 times
Ans: A, LO: 6, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Solution: $4,678  [($324 + $436)  2]  $380
Evans Services to answer the question “Using the LIFO adjustment, which company
shows the greatest improvement in its current ratio from 2013 to 2014?”

2013 Current assets
2014 Current assets
a. Boxter
b. Clifford
c. Danforth
d. Evans
Ans: B, LO: 6, Bloom: C, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

*181. In a perpetual inventory system,

a. LIFO cost of goods sold will be the same as in a periodic inventory system.
b. average costs are based entirely on unit cost simple averages.
c. a new average is computed under the average cost method after each sale.
d. FIFO cost of goods sold will be the same as in a periodic inventory system.
Reporting
*182. Classic Floors has the following inventory data:

July 1 Beginning inventory 15 units at $6.00
5 Purchases 60 units at $6.60
14 Sale 40 units
30 Sale 28 units
Assuming that a perpetual inventory system is used, what is the cost of goods sold on a
LIFO basis for July?
a. $465.60
b. $236.40
c. $702.00
d. $348.00
Solution: (40  $6.60) + (28  $7.20)  $465.60
*183. Classic Floors has the following inventory data:

July 1 Beginning inventory 15 units at $6.00
14 Sale 40 units
30 Sale 28 units
Assuming that a perpetual inventory system is used, what is the value of ending inventory
on a LIFO basis for July?
a. $465.60
b. $702.00
c. $354.00
d. $236.40
Solution: (15  $6.00) + (20  $6.60) + (2  $7.20) $236.40

*184. Snug-As-A-Bug Blankets has the following inventory data:

14 Sale 60 units
30 Sale 42 units
Assuming that a perpetual inventory system is used, what is the cost of goods sold on a
a. $5,802
b. $5,772
c. $5,796.
d. $5,916
Solution: (60  $56) + (42  $58)  $5,796

14 Sale 60 units
30 Sale 42 units
Assuming that a perpetual inventory system is used, what is the ending inventory on a
a. $2,748
b. $2,754
c. $2,772.
d. $5,796
Solution: (15  $60) + (30  $56) + (3  $58)  $2,754

14 Sale 60 units
30 Sale 42 units
Assuming that a perpetual inventory system is used, what is ending inventory (rounded)
under the average cost method for July?
a. $2,750
b. $2,784
c. $2,406.
d. $2,772
Solution: [(15  $60) + (90  $56)]  105  $56.571; [(45  $56.571) + (45  $58)]  90  $57.286; 48  $57.286  $2,750

*187. An error in the physical count of goods on hand at the end of a period resulted in a
$10,000 overstatement of the ending inventory. The effect of this error in the current
period is
Cost of Goods Sold Net Income
a. Understated Understated
b. Overstated Overstated
c. Understated Overstated
d. Overstated Understated
*188. If beginning inventory is understated by $10,000, the effect of this error in the current
period is
Cost of Goods Sold Net Income
a. Understated Understated
b. Overstated Overstated
c. Understated Overstated
d. Overstated Understated
*189. A company uses the periodic inventory method and the beginning inventory is overstated
by $4,000 because the ending inventory in the previous period was overstated by $4,000;
the ending inventory for this period is correct. The amounts reflected in the current end of
the period balance sheet are
Asset Stockholders’ Equity
a. Overstated Overstated
b. Correct Correct
c. Understated Understated
d. Overstated Correct
*190. An overstatement of the beginning inventory results in

a. no effect on the period’s net income.
b. an overstatement of net income.
c. an understatement of net income.
d. a need to adjust purchases.
Reporting
*191. An overstatement of ending inventory in one period results in

a. no effect on net income of the next period.
b. an overstatement of net income of the next period.
c. an understatement of net income of the next period.
d. an overstatement of the ending inventory of the next period.
Reporting

Answers to Multiple Choice Questions

45. a 66. b 87. d 108. d 129. c 150. b 171. c
46. b 67. c 88. d 109. d 130. b 151. b 172. a
47. a 68. d 89. c 110. c 131. b 152. b 173. c
48. c 69. a 90. a 111. c 132. a 153. a 174. c
49. c 70. a 91. b 112. d 133. d 154. d 175. d
50. a 71. c 92. d 113. d 134. d 155. a 176. b
51. c 72. a 93. d 114. c 135. a 156. d 177. b
52. a 73 c 94. b 115. c 136. b 157. d 178. c
53. b 74. b 95. d 116. a 137. a 158. d 179. a
54. a 75. c 96. b 117. a 138. c 159. c 180. b
55. a 76. b 97. c 118. b 139. b 160. d *181. d
56. b 77. d 98. a 119. a 140. c 161. d *182. a
57. a 78. a 99. c 120. b 141. c 162. c *183 d
58. d 79. b 100. d 121. d 142. c 163. c *184. c
59. d 80. a 101. b 122. c 143. c 164. b *185. b
60. d 81 c 102. a 123. b 144. d 165. b *186. a
61. d 82. a 103. d 124. a 145. c 166. a *187. c
62. c 83. b 104. b 125. a 146. a 167. a 188. c
63. d 84. b 105. b 126. c 147. a 168. a *189. b
64. b 85. b 106. d 127. b 148. b 169. b *190. c
65. c 86. b 107. b 128. b 149. c 170. a *191. c

BRIEF EXERCISES
Be. 192
Shellan Kamp Company identifies the following items for possible inclusion in the physical
inventory. Indicate whether each item should be included or excluded from the inventory taking.
1. Goods shipped on consignment by Shellan Kamp to another company.
2. Goods in transit from a supplier shipped FOB destination.
3. Goods shipped via common carrier to a customer with terms FOB shipping point.
4. Goods held on consignment from another company.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
None, IMA: Business Economics
Solution 192 (5 min.)

1. Included
2. Excluded
3. Excluded
4. Excluded
Be. 193
In the first month of operations, Dieker Company made three purchases of merchandise in the
following sequence: (1) 200 units at $6, (2) 300 units at $7, and (3) 400 units at $8. Assuming
there are 250 units on hand, compute the cost of the ending inventory under (1) the FIFO method
and (2) the LIFO method. Dieker uses a periodic inventory system.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

1. FIFO
250 x $8 = $2,000
2. LIFO
200 x $6 = $1,200
50 x $7 = 350
$1,550
Be. 194
Hess Company's inventory records show the following data for the month of September:
Units Unit Cost

Inventory, September 1 100 $3.00
Purchases: September 8 450 3.50
September 18 300 3.70
A physical inventory on September 30 shows 150 units on hand.
Calculate the value of ending inventory and cost of goods sold if the company uses FIFO
inventory costing and a periodic inventory system.


Ending inventory of 150 units: 150 × $3.70 = $555
Cost of goods sold:

Units available for sale (100 + 450 + 300) = 850
Units sold 850 – 150 = 700
100 × $3 = $ 300
450 × $3.50 = 1,575
150 × $3.70 = 555
Cost of goods sold $ 2,430
Be. 195
Hess Company's inventory records show the following data for the month of September:
Units Unit Cost

Inventory, September 1 100 $3.00
Purchases: September 8 450 3.50
September 18 300 3.70
A physical inventory on September 30 shows 150 units on hand.
Calculate the value of ending inventory and cost of goods sold if the company uses LIFO
inventory costing and a periodic inventory system.

Ending inventory: (100 units × $3.00) + (50 units × $3.50) = $475
Cost of goods sold: (300 units × $3.70) + (400 units × $3.50) = $2,510
Be. 196
The management of Otto Corp. is considering the effects of various inventory costing methods on
its financial statements and its income tax expense. Assuming that the price the company pays
for inventory is increasing, which method will:
1. result in the lowest income tax expense?
2. provide the highest net income?
3. provide the highest ending inventory?
4. result in the most stable earnings over a number of years?
Ans: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

1. In times of rising costs, the LIFO method will result in the lowest income tax
expense.
2. In times of rising costs, the FIFO method will result in the highest net income.
3. In times of rising costs, the FIFO method will result in the highest ending inventory.
4. In times of rising costs, the average cost method will result in the most stable
earnings over a number of years.

Be. 197
The Entertainment Center accumulates the following cost and market data at December 31.
Inventory Cost Market

Categories Data _ _ Data_
Camera $11,000 $10,200
Camcorders 8,000 8,500
DVDs 14,000 12,600
What is the lower-of-cost-or-market value of the inventory?


Inventory Cost Market Lower of Cost
Categories Data _ _ Data_ or Market
Camera $11,000 $10,200 $10,200
Camcorders 8,000 8,500 8,000
DVDs 14,000 12,600 12,600
$30,800
Be. 198
At December 31, 2014, the following information (in thousands) was available for Kitselman Inc.:
ending inventory $22,600; beginning inventory $21,400; cost of goods sold $198,000; and sales
revenue $430,000. Calculate the inventory turnover and days in inventory for Kitselman.
$198,000
Inventory Turnover = = 9.0 times
($22,600 + $21,400)/2
365
Days in Inventory = = 40.6 days
9.0

EXERCISES
Ex. 199
The Cain Company has just completed a physical inventory count at year end, December 31,
2014. Only the items on the shelves, in storage, and in the receiving area were counted and
costed on the FIFO basis. The inventory amounted to $80,000. During the audit, the independent
CPA discovered the following additional information:
(a) There were goods in transit on December 31, 2014, from a supplier with terms FOB
destination, costing $10,000. Because the goods had not arrived, they were excluded from
the physical inventory count.
(b) On December 27, 2014, a regular customer purchased goods for cash amounting to $1,000
and had them shipped to a bonded warehouse for temporary storage on December 28, 2014.
The goods were shipped via common carrier with terms FOB shipping point. The customer
picked the goods up from the warehouse on January 4, 2015. Cain Company had paid $500 for
the goods and, because they were in storage, Cain included them in the physical inventory count.
(c) Cain Company, on the date of the inventory, received notice from a supplier that goods
ordered earlier, at a cost of $4,000, had been delivered to the transportation company on
December 28, 2014; the terms were FOB shipping point. Because the shipment had not
arrived on December 31, 2014, it was excluded from the physical inventory.
(d) On December 31, 2014, there were goods in transit to customers, with terms FOB shipping
point, amounting to $800 (expected delivery on January 8, 2015). Because the goods had
been shipped, they were excluded from the physical inventory count.
(e) On December 31, 2014, Cain Company shipped $2,500 worth of goods to a customer, FOB
destination. The goods arrived on January 5, 2014. Because the goods were not on hand,
they were not included in the physical inventory count.
(f) Cain Company, as the consignee, had goods on consignment that cost $3,000. Because these
goods were on hand as of December 31, 2014, they were included in the physical inventory
count.
Instructions
Analyze the above information and calculate a corrected amount for the ending inventory. Explain
the basis for your treatment of each item.
Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:


Start with $80,000
Item (a) – (Because the goods were shipped FOB destination title will pass
to Cain upon arrival. Properly excluded.)
Item (b) – 500 (Goods should be excluded. The customer accepted title when
the goods left Cain FOB shipping point.)
Item (c) + 4,000 (Goods belong to Cain. Title passed when supplier delivered the
goods to the transportation company.)
Item (d) – (Because the goods were shipped FOB shipping point Cain no
longer has title to these goods. Properly excluded.)
Item (e) + 2,500 (Goods were shipped FOB destination. Cain retains title until the
customer receives them.)
Item (f) – 3,000 (These goods are owned by the consignor, not the consignee,
and should not be included in Cain's inventory.)
Corrected inventory $83,000
Ex. 200
Dalton Company was undergoing an end of year audit of its financial records. The auditors were
in the process of reviewing Dalton’s inventory for year end, December 31, 2014. They completed
an end of year inventory. The value of the ending inventory prior to any adjustments was
$185,000, but before finishing up they had a few questions. Discussion with Dalton’s accountant
revealed the following:
(a) Dalton sold goods costing $60,000 to Summey Company FOB shipping point on December
28. The goods are not expected to reach Summey until January 12. The goods were not
included in the physical inventory because they were not in the warehouse.
(b) The physical count of the inventory did not include goods costing $95,000 that were shipped
to Dalton FOB destination on December 27 and were still in transit at year-end.
(c) Dalton received goods costing $25,000 on January 2. The goods were shipped FOB
shipping point on December 26 by Strong Company. The goods were not included in the
physical count.
(d) Dalton sold goods costing $40,000 to Hampton Company FOB destination on December 30.
The goods were received by Hampton Company on January 8. Because the goods had
been shipped, they were excluded from the physical inventory count.
(e) Dalton received goods costing $42,000 on January 2 that were shipped FOB destination on
December 29. The shipment was a rush order that was suppose to arrive December 31.
This purchase was included in the ending inventory of $192,000.
(f) Dalton Company, as the consignee, had goods on consignment that cost $3,000. Because
these goods were on hand as of December 31, they were included in the physical inventory
count.
Instructions
Analyze the above information and calculate a corrected amount for the ending inventory. Explain
the basis for your treatment of each item.


Start with $185,000
Item (a) – (Because the goods were shipped FOB shipping point title
passed to Button upon shipping. Properly excluded.)
Item (b) – (Goods should be excluded. Title does not pass to Dalton until
goods are received).
Item (c) +25,000 (Goods belong to Dalton. Title passed when supplier delivered
the goods to the transportation company.)
Item (d) +40,000 (Because the goods were shipped FOB destination point Dalton
has title to these goods.)
Item (e) –42,000 (Goods were shipped FOB destination. Dalton does not take
title until they receive them no matter when expected.)
Item (f) – 3,000 (These goods are owned by the consignor, not the consignee,
and should not be included in Dalton's inventory.)
Corrected inventory $205,000
Ex. 201
Dennis Lee, an auditor with Knapp CPAs, is performing a review of Dobson Company's inventory
account. Dobson did not have a good year, and top management is under pressure to boost
reported income. According to its records, the inventory balance at year-end was $640,000.
However, the following information was not considered when determining that amount.
1. Included in the company's count were goods with a cost of $200,000 that the company is
holding on consignment. The goods belong to Agler Corporation.
2. The physical count did not include goods purchased by Dobson with a cost of $40,000 that
were shipped FOB shipping point on December 28 and did not arrive at Dobson's warehouse
until January 3.
3. Included in the inventory account was $22,000 of office supplies that were stored in the
warehouse and were to be used by the company's supervisors and managers during the
coming year.
4. The company received an order on December 29 that was boxed and was sitting on the
loading dock awaiting pick-up on December 31. The shipper picked up the goods on January
1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods
had a selling price of $40,000 and a cost of $30,000. The goods were not included in the
count because they were sitting on the dock.
5. On December 29, Dobson shipped goods with a selling price of $90,000 and a cost of
$70,000 to Central Sales Corporation FOB shipping point. The goods arrived on January 3.
Central Sales had only ordered goods with a selling price of $10,000 and a cost of $8,000.
However, a sales manager at Dobson had authorized the shipment and said that if Central
wanted to ship the goods back next week, it could.
6. Included in the count was $50,000 of goods that were parts for a machine that the company
no longer made. Given the high-tech nature of Dobson's products, it was unlikely that these
obsolete parts had any other use. However, management would prefer to keep them on the
books at cost, "since that is what we paid for them, after all."

Ex. 201 (Cont.)

Instructions
Prepare a schedule to determine the correct inventory amount. Provide explanations for each
item above, saying why you did or did not make an adjustment for each item.

Ending inventory-as reported $640,000
1. Subtract from inventory: The goods belong to Agler Corporation. Dobson is merely
holding them as a consignee. (200,000)
2. Add to inventory: The goods belong to Dobson as soon as they are shipped
(December 28). 40,000
3. Subtract from inventory: Office supplies should be carried in a separate account.
They are not considered inventory held for resale. (22,000)
4. Add to inventory: The goods belong to Dobson until they are shipped (Jan. 1). 30,000
5. Add to inventory: Central Sales ordered goods with a cost of $7,000. Dobson
should record the corresponding sales revenue of $10,000. Dobson's decision to
ship extra "unordered" goods does not constitute a sale. The manager's statement
that Central could ship the goods back indicates that Dobson knows this over-
shipment is not a legitimate sale. The manager acted unethically in an attempt to
improve Dobson's reported income by over-shipping. 62,000*
6. Subtract from inventory: GAAP requires that inventory be valued at the lower of
cost or market. Obsolete parts should be adjusted from cost to zero if they have no
other use. (50,000)
Correct inventory $500,000
*($70,000–$8,000)
Ex. 202
Grother Company uses the periodic inventory method and had the following inventory information
available:
Units Unit Cost Total Cost
1/1 Beginning Inventory 100 $4 $ 400
1/20 Purchase 500 $5 2,500
7/25 Purchase 100 $7 700
10/20 Purchase 300 $8 2,400
1,000 $6,000
A physical count of inventory on December 31 revealed that there were 350 units on hand.

Ex. 202 (Cont.)
Instructions
Answer the following independent questions and show computations supporting your answers.
1. Assume that the company uses the FIFO method. The value of the ending inventory at
December 31 is $__________.
2. Assume that the company uses the average cost method. The value of the ending inventory
on December 31 is $__________.
3. Assume that the company uses the LIFO method. The value of the ending inventory on
December 31 is $__________.
4. Determine the difference in the amount of income that the company would have reported if it
had used the FIFO method instead of the LIFO method. Would income have been greater or
less?

1. FIFO: Ending inventory $2,750
300 units @$8 = $2,400
50 units @$7 = 350
350 units $2,750
2. Average Cost: Ending inventory $2,100

$6,000  1,000 = $6.00 per unit  350 units = $2,100
3. LIFO: Ending Inventory $1,650

100 units @$4 = $ 400
250 units @$5 = 1,250
350 units $1,650
4. FIFO: Cost of goods sold $3,250

100 units @$4 = $ 400
500 units @$5 = 2,500
50 units @$7 = 350
650 units $3,250
LIFO: Cost of goods sold $4,475

300 units @$8 $2,400
100 units @$7 700
250 units @$5 1,250
650 units $4,350
Income would have been $1,100; ($4,350 vs. $3,250) greater if the company used FIFO instead
of LIFO.

Ex. 203
Hansen Company uses the periodic inventory method and had the following inventory information
available:
1/1 Beginning Inventory 100 $3 $ 300
1/20 Purchase 500 $4 2,000
7/25 Purchase 100 $5 500
10/20 Purchase 300 $6 1,800
1,000 $4,600
Instructions
December 31 is $__________.
2. Assume that the company uses the average cost method. The value of the ending inventory
December 31 is $__________.
4. Determine the difference in the amount of income that the company would have reported if it
had used the FIFO method instead of the LIFO method. Would income have been greater or
less?

1. FIFO: Ending inventory $2,200
300 units @$6 = $1,800
80 units @$5 = 400
380 units $2,200
2. Average Cost: Ending inventory $1,748
$4,600  1,000 = $4.60 per unit  380 units = $1,748
3. LIFO: Ending Inventory $1,420

100 units @$3 = $ 300
280 units @$4 = 1,120
380 units $1,420
4. FIFO: Cost of goods sold $2,400
100 units @$3 = $ 300
500 units @$4 = 2,000
20 units @$5 = 100
620 units $2,400
LIFO: Cost of goods sold $3,180
300 units @$6 $1,800
100 units @$5 500
220 units @$4 880
620 units $3,180

Solution 203 (Cont.)

Income would have been $780; ($3,180 vs. $2,400) greater if the company used FIFO instead of
LIFO.
Ex. 204
Faster Company uses the periodic inventory method and had the following inventory information
available:
1/1 Beginning Inventory 15 $8.00 $ 120
1/20 Purchase 60 $8.80 528
7/25 Purchase 30 $8.40 252
10/20 Purchase 45 $9.60 432
150 $1,332
Instructions
December 31 is $__________.
2. Assume that the company uses the Average Cost method. The value of the ending inventory
December 31 is $__________.
4. Assume that the company uses the FIFO method. The value of the cost of goods sold at
December 31 is $__________.

1. FIFO: Ending inventory $516
45 units @$9.60 = 432
10 units @$8.40 = 84
55 units $516
2. Average Cost: Ending inventory $488

$1,332  150 = $8.88 per unit  55 units = $488
3. LIFO: Ending Inventory $472

15 units @$8.00 = $ 120
40 units @$8.80 = 352
55 units $472
4. FIFO: Cost of goods sold $816

15 units @$8.00 = $ 120
60 units @$8.80 = 528
20 units @$8.40 = 168

95 units $ 816

Ex. 205
Compute the cost to be assigned to ending inventory for each of the methods indicated given the
following information about purchases and sales during the year.
January 1 Beginning Inventory 150 items @ $4 = $ 600

May 1 Purchases 450 items @ $6 = 2,700
Total Available 600 items $3,300
Total Sales 430 items
December 31 Ending Inventory 170
Cost assigned on an average cost basis $__________
Cost assigned on a FIFO basis $__________
Costs assigned on a LIFO basis $__________

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: Business Economics

$935 [($3,300/600) x 170]
$1,020 (170 x $6)
$ 720 [(150 x $4)+(20 x $6)]
Ex. 206
Compute the cost to be assigned to ending inventory for each of the methods indicated given the
following information about purchases and sales during the year.
January 1 Beginning Inventory 100 items @ $7 = $ 700

May 1 Purchases 400 items @ $8 = 3,200
Total Available 500 items $3,900
Total Sales 360 items
December 31 Ending Inventory 140
Cost assigned on an average cost basis $__________
Cost assigned on a FIFO basis $__________
Costs assigned on a LIFO basis $__________

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: Business Economics

$1,092 [($3,900/500) x 140)]
$1,120 (140 x $8)
$1,020 [(100 x $7)+(40 x $8)]

Ex. 207
Wooderson Company sells many products. Gizmo is one of its popular items. Below is an analysis of
the inventory purchases and sales of Gizmo for the month of March. Wooderson Company uses the
periodic inventory system.
Purchases Sales
Units Unit Cost Units Selling Price/Unit
3/1 Beginning inventory 100 $40
3/3 Purchase 60 $50
3/4 Sales 60 $80
3/10 Purchase 200 $55
3/16 Sales 70 $90
3/19 Sales 90 $90
3/25 Sales 60 $90
3/30 Purchase 40 $60
Instructions
(a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March.
(Show computations)
(b) Using the weighted-average method, calculate the amount assigned to the inventory on
hand on March 31. (Show computations)
(c) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on
March 31. (Show computations)
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

Purchases Sales
3/3 Purchase 60 $50
3/4 Sales 60 $80
3/10 Purchase 200 $55
3/16 Sales 70 $90
3/19 Sales 90 $90
3/25 Sales 60 $90
400 280
(a) Using FIFO - the earliest units purchased were the first sold.
3/1 100 @ $40 = $ 4,000
3/3 60 @ 50 = 3,000
3/10 120 @ 55 = 6,600
280 units $13,600 = the cost of goods sold
(b) Calculate the weighted average unit cost:
$20,400  400 = $51
$51  units in ending inventory (400 available less 280 sold = 120)
$51  120 = $6,120

(c) There are 120 units in ending inventory. They are comprised of the first units purchased
when LIFO is assumed.
3/1 100 @ $40 = $4,000
3/3 20 @ $50 = 1,000
120 units $5,000 = Ending inventory
Ex. 208
Torrey Company uses the periodic inventory system to account for inventories. Information
related to Torrey Company's inventory at October 31 is given below:
October 1 Beginning inventory 400 units @ $10.00 = $ 4,000

8 Purchase 800 units @ $10.40 = 8,320
16 Purchase 600 units @ $10.80 = 6,480
24 Purchase 200 units @ $11.60 = 2,320
Total units and cost 2,000 units $21,120
Instructions
1. Show computations to value the ending inventory using the FIFO cost assumption if 500 units
remain on hand at October 31.
2. Show computations to value the ending inventory using the weighted-average cost method if
500 units remain on hand at October 31.
3. Show computations to value the ending inventory using the LIFO cost assumption if 500 units
remain on hand at October 31.

1. 500 units in ending inventory.
Under FIFO, the units remaining in inventory are the ones purchased most recently.
10/24 200 units @ $11.60 = $2,320
10/16 300 units @ $10.80 = 3,240
500 units $5,560

Under average cost method, the weighted-average cost per unit must be computed.
$21,120  2,000 units = $10.56
500 units  $10.56 = $5,280

Under LIFO, the units remaining are the ones purchased earliest.
10/1 400 units @ $10.00 = $4,000
10/8 100 units @ $10.40 = 1,040
$5,040

Ex. 209
Hanlin Company uses the periodic inventory system to account for inventories. Information
related to Hanlin Company's inventory at January 31 is given below:
January 1 Beginning inventory 400 units @ $12.00 = $ 4,800

8 Purchase 800 units @ $12.40 = 9,920
16 Purchase 600 units @ $12.80 = 7,680
24 Purchase 200 units @ $13.20 = 2,640
Total units and cost 2,000 units $25,040
Instructions
1. Show computations to value the ending inventory using the FIFO cost assumption if 600 units
remain on hand at January 31.
2. Show computations to value the ending inventory using the weighted-average cost method if
600 units remain on hand at January 31.
3. Show computations to value the ending inventory using the LIFO cost assumption if 600 units
remain on hand at January 31.

Under FIFO, the units remaining in inventory are the ones purchased most recently.
1/24 200 units @ $13.20 = $2,640
1/16 400 units @ $12.80 = 5,120
600 units $7,760
Under average cost method, the weighted-average cost per unit must be computed.
$25,040  2,000 units = $12.52
600 units  $12.52 = $7,512

Under LIFO, the units remaining are the ones purchased earliest.
1/1 400 units @ 12.00 = $4,800
1/8 200 units @ 12.40 = 2,480
600 units $7,280

Ex. 210
Johnson Company reports the following for the month of June.
Date Explanation Units Unit Cost Total Cost

June 1 Inventory 225 $5 $1,125
12 Purchase 525 6 3,150
23 Purchase 750 7 5,250
30 Inventory 280
(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 costing method gives the highest ending inventory? The highest cost of goods sold?
Why?
(c) How do the average-cost values for ending inventory and cost of goods sold relate to ending
inventory and cost of goods sold for FIFO and LIFO?

(a) (1) FIFO
Beginning inventory (225  $5) ........................................... $1,125

Purchases
June 12 (525  $6) ........................................................ $3,150
June 23 (750  $7) ........................................................ 5,250 8,400
Cost of goods available for sale .......................................... 9,525
Less: Ending inventory (280  $7) ...................................... 1,960
Cost of goods sold .............................................................. $7,565
(2) LIFO
Cost of goods available for sale .......................................... $9,525

Less: Ending inventory (225  $5) + (55  $6)..................... 1,455
Cost of goods sold .............................................................. $8,070
(3) AVERAGE COST
Cost of Goods Total Units Weighted Average

Available for Sale ÷ Available for Sale = Unit Cost
$9,525 1,500 $6.35
Ending inventory (280  $6.35) $1,778

Cost of goods sold (1,220  $6.35) $7,747
or $9,525 – $1,778 = $7,747
(b) The FIFO method will produce the highest ending inventory because costs have been rising.
Under this method, the earliest costs are assigned to cost of goods sold, and the latest costs
remain in ending inventory. The LIFO method will produce the highest cost of goods sold for
Plato Company. Under LIFO the most recent costs are charged to cost of goods sold and the
earliest costs are included in the ending inventory.

(c) The average cost ending inventory ($1,778) is higher than LIFO ($1,455) but lower than FIFO
($1,960). For cost of goods sold, average cost ($7,747) is higher than FIFO ($7,565) but
lower than LIFO ($8,070).
Ex. 211
Wolf Camera Shop Inc. uses the lower-of-cost-or-market basis for its inventory. The following
data are available at December 31.
Market
Units Cost/Unit Value/Unit
Cameras
Minolta 5 $175 $168
Canon 7 148 152
Light Meters
Vivitar 15 125 119
Kodak 10 120 135
Instructions
What amount should be reported on Wolf Camera Shop's financial statements, assuming the
lower-of-cost-or-market rule is applied?

Inventory at
Market Lower-of-Cost- Lower-of-Cost-
Cost/Unit Value/Unit or-Market Units or-Market
Cameras:
Minolta $175 $168 $168 5 $ 840
Canon 148 152 148 7 1,036
Light Meters:
Vivitar 125 119 119 15 1,785
Kodak 120 135 120 10 1,200
Total $4,861
Ex. 212
This information is available for Groneman, Inc. for 2013 and 2014.
(in millions) 2013 2014

Beginning inventory $ 2,290 $ 2,522
Ending inventory 2,522 2,618
Cost of goods sold 24,351 23,099
Sales 43,251 43,232
Instructions
Calculate the inventory turnover, days in inventory, and gross profit rate for Groneman., Inc. for
2013 and 2014. Comment on any trends.



2013 2014
Inventory $24,351 $23,099
turnover ($2,290 + $2,522)  2 ($2,522 + $2,618)  2
ratio
$24,351 = 10.1 times $23,099 = 9.0 times
$2,406 $2,570
Days in 365 = 36.1 days 365 = 40.6 days

inventory 10.1 9.0
Gross $43,251–$24,351 = .44 $43,232–$23,099 = .47

profit rate $43,251 $43,232
The inventory turnover decreased by approximately 11% from 2013 to 2014 while the days in
inventory increased by a similar amount (12%) over the same period. Both of these changes
would be considered unfavorable since it's better to have a higher inventory turnover ratio with a
corresponding lower days in inventory. Groneman., Inc.'s gross profit rate increased by 6.8%
from 2013 to 2014.
Ex. 213
Burnham Company reported the following summarized annual data at the end of 2014:
Sales revenue $1,600,000
Cost of goods sold* 900,000
Gross margin 700,000
Operating expenses 400,000
Income before income taxes $ 300,000
*Based on an ending FIFO inventory of $250,000.
The income tax rate is 30%. The controller of the company is considering a switch from FIFO to
LIFO. He has determined that on a LIFO basis, the ending inventory would have been $205,000.
Instructions
(a) Restate the summary information on a LIFO basis.
(b) What effect, if any, would the proposed change have on Burnham’s income tax expense, net
income, and cash flows?
(c) If you were an owner of this business, what would your reaction be to this proposed change?
Ans: N/A, LO: 6, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

(a) Restate to a LIFO basis:
Sales revenue $1,600,000
Cost of goods sold* 945,000
Gross margin 655,000
Operating expenses 400,000
Income before income taxes $ 255,000
*Ending inventory would be $45,000 less ($250,000 – $205,000 = $45,000) under LIFO,
thereby increasing cost of goods by $45,000.


(b) The taxes on the FIFO basis would be:
$300,000  .30 = $90,000
Leaving net income of $210,000; ($300,000 – $90,000 = $210,000).
The taxes on the LIFO basis would be:

$255,000  .30 = $76,500
Leaving Net Income of $178,500; ($255,000 – $76,500= $178,500).
Switching to the LIFO basis will result in $13,500 less income tax expense and less net
income of $31,500. The cash effect is $13,500; ($90,000 – $76,500 = $13,500) saved in
taxes if LIFO were used.
(c) Owners of the business may favor the LIFO basis since more cash will be available for use
in the business. LIFO results in more cash being retained in the business since less is paid
out for income taxes.
Ex. 214
The following information is available from the annual reports of Young and Olde:
(Amounts in millions)
Young Olde
2014 ending Inventory $ 6,031 $ 4,816
2013 ending inventory 6,162 5,044
Sales revenue 29,656 36,704
2014 LIFO reserve 227 —
2013 LIFO reserve 225 —
Instructions
(a) Calculate the inventory turnover and days in inventory for both companies.
(b) Calculate Young’s inventory turnover after adjusting for the LIFO reserve. Young uses the
LIFO inventory method.
(c) What conclusion concerning the management of inventory can be drawn from these data?

(a) Young Olde
$25,937 $31,983
Inventory turnover ($6,031 + $6,162) ÷ 2 ($4,816 + $5,044) ÷ 2
$25,937 $31,983
———— = 4.25 times ——— = 6.49 times
$6,096.5 $4,930
Days in inventory 365 ÷ 4.25 = 85.9 days 365 ÷ 6.49 = 56.2 days

(b) 2014 2013

LIFO inventory $6,031 $6,162
LIFO reserve 227 225
FIFO inventory $6,258 $6,387
LIFO cost of goods sold $25,937

Less: increase in LIFO reserve ($227 – $225) (2)
FIFO cost of goods sold $25,935
Inventory turnover = $25,935 ÷ [($6,258 + $6,387) ÷ 2]

= $25,935 ÷ $6,322.5 = 4.10
(c) Olde’s inventory turnover ratio is approximately 53% [(6.49 – 4.25) ÷ 4.25)] higher than
Young’s ratio. In addition, Olde’s days in inventory is 35% [85.9 – 56.2) ÷ 85.9] lower than
Young’s. Generally, a firm prefers to maintain as high an inventory turnover as possible. It
can be concluded that Olde is more effective in managing inventory than Young.
Ex. 215
The following information is available for Wallace Company for 2014. Wallace uses the LIFO
inventory method.
Beginning inventory $ 600,000

Ending inventory 700,000
Beginning LIFO reserve 200,000
Ending LIFO reserve 300,000
Cost of goods sold 5,980,000
Sales 8,000,000
Instructions
(a) Calculate the inventory turnover and days in inventory for Wallace Company based on LIFO.
(b) Calculate the inventory turnover and days in inventory after adjusting for the LIFO reserve.

(a) Inventory turnover = $5,980,000 ÷ [($600,000 + $700,000) ÷ 2]
= $5,980,000 ÷ $650,000 = 9.2 times
Days in inventory = 365 days ÷ 9.2 = 39.7 days

(b) Beginning Ending

LIFO inventory $600,000 $ 700,000
LIFO reserve 200,000 300,000
FIFO inventory $800,000 $1,000,000
LIFO cost of goods sold $5,980,000

Less: increase in LIFO reserve ($300,000 – $200,000) (100,000)
FIFO cost of goods sold $5,880,000
Inventory turnover = $5,880,000 ÷ [($800,000 + $1,000,000) ÷ 2]

= $5,880,000 ÷ $900,000 = 6.5 times
Days in inventory = 365 days ÷ 6.5 = 56.2 days
*Ex. 216
Woodson Company sells many products. Gizmo is one of its popular items. Below is an analysis
of the inventory purchases and sales of Gizmo for the month of March. Woodson Company uses
the perpetual inventory system.
Purchases Sales
3/3 Purchase 60 $50
3/4 Sales 60 $80
3/10 Purchase 200 $55
3/16 Sales 90 $90
3/19 Sales 70 $90
3/25 Sales 60 $90
Instructions
(Show computations)
(b) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on
*Solution 216 (20 min.)

Purchases Sales
3/3 Purchase 60 $50
3/4 Sales 60 $80
3/10 Purchase 200 $55
3/16 Sales 90 $90
3/19 Sales 70 $90
3/25 Sales 60 $90
400 280

*Solution 216 (Cont.)
3/1 100 @ $40 = $ 4,000
3/3 60 @ 50 = 3,000
3/10 120 @ 55 = 6,600
280 units $13,600 = The cost of goods sold
(b) There are 120 units in ending inventory. The beginning inventory layer was reduced by 20
units and the first two purchases were consumed. The last purchase was made after all
sales occurred.
3/1 80 @ $40 = $3,200

3/30 40 @ $60 = 2,400
*Ex. 217
Grayson Company sells many products. Gizmo is one of its popular items. Below is an analysis of
the inventory purchases and sales of Gizmo for the month of March. Grayson Company uses the
perpetual inventory system.
Purchases Sales
3/3 Purchase 60 $60
3/4 Sales 60 $120
3/10 Purchase 200 $65
3/16 Sales 90 $130
3/19 Sales 70 $130
3/25 Sales 50 $130
Instructions
(Show computations)
(b) Using the FIFO assumption, calculate the value of ending inventory for March.
(c) Using the moving average cost method, calculate the amount assigned to the inventory on
hand on March 31. (Show computations)
(d) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on
(e) Using the LIFO assumption, calculate the amount charged to cost of goods sold for March.
(Show computations)


Purchases Sales
3/3 Purchase 60 $60
3/4 Sales 60 $120
3/10 Purchase 200 $65
3/16 Sales 90 $130
3/19 Sales 70 $130
3/25 Sales 50 $130
400 270
3/1 100 @ $55 = $ 5,500
3/3 60 @ 60 = 3,600
3/10 110 @ 65 = 7,150
270 units $16,250 = The cost of goods sold
(b) Using FIFO – the latest purchased units were left in inventory.
3/30 40 @ $ 75 = $ 3,000
3/10 90 @ $ 65 = 5,850
130 $8,850
(c) Calculate the value of ending inventory using the weighted average cost:
Date Purchases Cost of Goods Sold Balance

3/1 Beginning Inventory (100 @ 55) $ 5,500.00
3/3 (60 @ 60) $ 3,600 (160 @ 56.875) 9,100.00
3/4 (60 @ 56.875) (100 @ 56.875) 5,687.50
3/10 (200 @ 65) $13,000 (300 @ 62.292) 18,687.50
3/16 (90 @ 62.292) (210 @ 62.292) 13,081.32
3/19 (70 @ 62.292) (140 @ 62.292) 8,720.88
3/25 (50 @ 62.292) (90 @ 62.292) 5,606.28
3/30 (40 @ 75) $ 3,000 (130 @ 66.202) 8,606.28
(d) There are 130 units in ending inventory. They are comprised of the first units purchased
prior to each sale when LIFO is assumed.
3/1 90 @ $55 = $4,950
3/3 40 @ $75 = 3,000
(e) Using LIFO – the latest purchased units purchased prior to the sale were the first sold.
3/3 60 @ $60 = $ 3,600
3/10 90 @ $65 = 5,850
3/10 80 @ $65 = 5,200
3/10 30 @ $65 = 1,950
3/1 10 @ $55 = 1,550
270 units $17,150

*Ex. 218
Plato Company reports the following for the month of June.
Date Explanation Units Unit Cost Total Cost
June 1 Inventory 225 $5 $1,125
12 Purchase 525 6 3,150
23 Purchase 750 7 5,250
30 Inventory 330
Instructions
(a) Calculate the cost of the ending inventory and the cost of goods sold for each cost flow
assumption, using a perpetual inventory system. Assume a sale of 570 units occurred on
June 15 for a selling price of $8 and a sale of 600 units on June 27 for $9. ( Note: For the
average-cost method, round unit cost to three decimal places.)
(b) Why is the average unit cost not $6 [($5 + $6 + $7)  3 = $6]?

(a)
FIFO
Date Purchases Cost of goods sold Balance
June 1 (225 @ $5) $1,125
June 12 (525 @ $6) $3,150 (225 @ $5)
(525 @ $6) $4,275
June 15 (225 @ $5) $1,125

(345 @ $6) $2,070 (180 @ $6) $1,080
June 23 (750 @ $7) $5,250 (180 @ $6)
(750 @ $7) $6,330
June 27 (180 @ $6) $1,080

(420 @ $7) $2,940
$7,215 (330 @ $7) $2,310
Ending inventory: $2,310. Cost of goods sold: $7,215
LIFO
June 1 (225 @ $5) $1,125
June 12 (525 @ $6) $3,150 (225 @ $5)
(525 @ $6) $4,275
June 15 (525 @ $6) $3,150

(45 @ $5) $ 225 (180 @ $5) $ 900
June 23 (750 @ $7) $5,250 (180 @ $5)
(750 @ $7) $6,150
(180 @ $5)
$1,950
June 27 (600 @ $7) $4,200 (150 @ $7)
$7,575
Ending inventory: $1,950. Cost of goods sold: $7,575

*Solution 218 (Cont.)
Moving Average
June 1 (225 @ $5) $1,125
June 12 (525 @ $6) $3,150 (750 @ $5.70) $4,275
June 15 (570 @ $5.70) $3,249 (180 @ $5.70) $1,026
June 23 (750 @ $7) $5,250 (930 @ $6.748*) $6,276
June 27 (600 @ $6.748) $4,049* (330 @ $6.748) $2,227
$7,298
*rounded
Ending inventory: $2,227. Cost of goods sold: $7,298.
(b) The simple average would be [($5 + $6 + $7) ÷ 3] or $6. However, the average cost method
uses a weighted average unit cost that changes each time a purchase is made rather than a
simple average.
*Ex. 219
Carter Company reported these income statement data for a 2-year period.
2014 2013
Sales $250,000 $210,000
Beginning inventory 40,000 30,000
Cost of goods purchased 202,000 173,000
Cost of goods available for sale 242,000 203,000
Gross profit $ 58,000 $ 47,000
Carter Company uses a periodic inventory system. The inventories at January 1, 2013, and
December 31, 2014, are correct. However, the ending inventory at December 31, 2013, is
overstated by $4,000.
Instructions
(a) Prepare correct income statement data for the 2 years.
(b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?


(a)
2013 2014
Sales ....................................................................... $210,000 $250,000
Cost of goods sold
Beginning inventory ............................................. 30,000 36,000
Cost of goods purchased ..................................... 173,000 202,000
Cost of goods available for sale ........................... 203,000 238,000
Ending inventory
($40,000 – $4,000) ........................................... 36,000 50,000
Cost of goods sold ....................................... 167,000 188,000
Gross profit .............................................................. $ 43,000 $ 62,000
(b) The cumulative effect on total gross profit for the two years is zero as shown below:
Incorrect gross profits: $47,000 + $58,000 = $105,000

Correct gross profits: $43,000 + $62,000 = 105,000
Difference $ 0
*Ex. 220
For each of the independent events listed below, analyze the impact on the indicated items at the
end of the current year by placing the appropriate code letter in the box under each item.
Code: O = item is overstated
U = item is understated
NA = item is not affected
Items
Stockholders’ Cost of Net
Events Assets Equity Goods Sold Income
1. The ending inventory in the previous period
was overstated.
2. A physical count of goods on hand at the
end of the current year resulted in some
goods being counted twice.
3. Goods purchased on account in December
of the current year and shipped FOB
shipping point were recorded as purchases,
but were not included in the count of goods
on hand on December 31 because they had
not arrived by December 31.
4. Goods purchased on account in December
of the current year and shipped FOB
destination were recorded as purchases, but
were not included in the count of goods on
hand on December 31 because they had not
arrived by December 31.

*Ex. 220 (Cont.)

5. The internal auditors discovered that the
ending inventory in the previous period was
understated $15,000 and that the ending
inventory in the current period was
overstated $25,000.

Items
Stockholders’ Cost of Net
Events Assets Equity Goods Sold Income
1. NA NA O U
2. O O U O
3. U U O U
4. NA U O U
5. O O U O
*Ex. 221
Condensed income statements for Swift Corporation are shown below for two years.
2013 2014
Sales $75,000 $90,000

Cost of Goods Sold 45,000 54,000
Gross Profit $30,000 $36,000
Operating Expense 15,000 15,000
Net Income $15,000 $21,000
Compute the corrected net income for 2013 and 2014 assuming that the inventory as of the end
of 2013 was mistakenly understated by $7,000.
2013 $ __________ 2014 $__________


2013 = $22,000
2014 = $14,000

*Ex. 222
Condensed income statements for Werly Corporation are shown below for two years.
2013 2014
Sales $75,000 $90,000

Cost of Goods Sold 45,000 54,000
Gross Profit $30,000 $36,000
Operating Expense 15,000 15,000
Net Income $15,000 $21,000
Compute the corrected net income for 2013 and 2014 assuming that the inventory as of the end
of 2013 was mistakenly overstated by $5,000.
2013 $ __________ 2014 $__________


2013 = $10,000
2014 = $26,000
*Ex. 223
Arnold Pharmacy reported cost of goods sold as follows:
2013 2014
Cost of goods sold $837,000 $900,000
Arnold made two errors:
(1) 2013 ending inventory was overstated by $6,000.
(2) 2014 ending inventory was understated by $11,000.

*Ex. 223 (Cont.)
Instructions
Assuming the errors had not been corrected, indicate the dollar effect that the errors had on the
items appearing on the financial statements listed below. Also indicate if the amounts are
overstated (O) or understated (U).
2013 2014
Overstated/ Overstated/
Amount Understated Amount Understated
Total assets $_________ _______ $_________ _______
Stockholders’ equity $_________ _______ $_________ _______
Cost of goods sold $_________ _______ $_________ _______
Net income $_________ _______ $_________ _______


2013 2014
Overstated/ Overstated/
Amount Understated Amount Understated
Total assets $6,000 O $11,000 U
Stockholders’ equity $6,000 O $11,000 U
Cost of goods sold $6,000 U $17,000 O
Net income $6,000 O $17,000 U
Correct cost of goods sold:

2013 2014
Cost of goods sold $843,000 $883,000

COMPLETION STATEMENTS
224. In a manufacturing company, goods that are ready to be sold to customers are referred to
as ________________, whereas in a merchandising company they are generally referred
to as _______________.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None,
IMA: Reporting
225. In a manufacturing company, there are three categories of inventory: they are
_____________________, _________________, and _________________.
IMA: Reporting
226. When the terms of sale are FOB ______________, ownership of the goods passes to the
buyer when the public carrier accepts the goods from the seller.
IMA: Reporting
227. The two inventory costing systems used are the ______________ and ______________.
IMA: Reporting
228. When a business holds goods of other parties without taking ownership, and tries to sell
them for a fee, the goods are called ____________ goods.
IMA: Reporting
229. Cost of goods available for sale must be allocated between cost of goods ___________
and ______________.
IMA: Reporting
230. The ______________ method tracks the actual physical flow of each unit of inventory
available for sale; however, management may be able to manipulate ______________ by
using this method.
231. If the unit cost of inventory has continuously increased, the ______________, first-out
inventory valuation method will result in a higher valued ending inventory than if the
______________, first-out method had been used.
232. Under the LCM basis, market is defined as current ______________ cost.
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
None, IMA: Business Economics
233. The ______________ is calculated as cost of goods sold divided by average inventory.

234. The _____________ is a required disclosure for companies that use LIFO.
IMA: Reporting
Answers to Completion Statements

224. finished goods, merchandise inventory 229. sold, ending inventory
225. raw materials, work in process and 230. specific identification, income
finished goods. 231. first-in, last-in
226. shipping point 232. replacement
227. periodic, perpetual. 233. inventory turnover
228. consigned 234. LIFO reserve
MATCHING
235. Match the items below by entering the appropriate code letter in the space provided.
A. Merchandise Inventory F. First-in, first-out (FIFO) method

B. Work in process G. Last-in, first-out (LIFO) method
C. FOB shipping point H. Average cost method
D. FOB destination I. LIFO reserve
E. Specific identification method J. Inventory turnover ratio
_____ 1. The difference between inventory reported using LIFO and inventory using FIFO.
_____ 2. Tracks the actual physical flow for each inventory item available for sale.
_____ 3. Goods that are only partially completed in a manufacturing company.
_____ 4. Cost of goods sold consists of the most recent inventory purchases.
_____ 5. Goods ready for sale to customers by retailers and wholesalers.
_____ 6. Title to the goods transfers when the public carrier accepts the goods from the
seller.
_____ 7. Ending inventory valuation consists of the most recent inventory purchases.
_____ 8. The same unit cost is used to value ending inventory and cost of goods sold.
_____ 9. Title to goods transfers when the goods are delivered to the buyer.
_____ 10. Measures the number of times the inventory sold during the period.
Ans: N/A, LO: 1-6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None,
IMA: Reporting

Answers to Matching
1. I 6. C
2. E 7. F
3. B 8. H
4. G 9. D
5. A 10. J
SHORT-ANSWER ESSAY QUESTIONS

S-A E 236
The periodic and the perpetual inventory systems are two methods that companies use to
account for inventories. Briefly describe the major features of each system and explain why a
physical inventory is necessary under both systems.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA
PC: Communications, IMA: Business Economics
Solution 236
When a periodic inventory system is used, the Inventory account remains the same throughout
the period. Separate accounts are used to record the transactions. Cost of goods sold is
determined by the following formula:
Beginning inventory + Net purchases - Ending inventory
The determination of ending inventory is made by a physical count. When a perpetual inventory
system is used, the purchase and sale of goods is recorded directly in the Inventory account,
which eliminates the need for separate purchases accounts. Cost of goods sold is recognized for
each sale by debiting the account and crediting Inventory. At the end of the period, the ending
account balance in inventory represents the amount of inventory that should be on hand.
However, a company should conduct a physical inventory count, at least once a year, because
differences could result from spoilage, theft, or errors.
S-A E 237
What is the primary basis of accounting for inventories? What is the major objective in accounting
for inventories?
Solution 237
The primary basis of accounting for inventories is cost in accordance with the historical cost
principle. The major objective of accounting for inventories is the proper determination of net
income in accordance with the expense recognition principle.
S-A E 238
A survey of major U.S. companies revealed that 77% of those companies used either LIFO or
FIFO cost flow methods, while 19% used average cost, and only 4% used other methods.
Requirement

Provide brief, yet concise responses to the following questions.
a. Why are LIFO and FIFO so popular?
b. Since computers and inventory management software are readily available, why aren’t
more companies using specific identification?
Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA
Solution 238
a. FIFO and LIFO are based on cost flow assumptions that may be unrelated to the physical
flow of goods. The reasons for using one of these methods involve the effects on the income
statement, balance sheet, and taxes that the company must pay.
In periods of rising prices (inflation), LIFO provides for a lower net income, thus resulting in a
lower tax liability. LIFO reflects the most realistic cost of goods sold (the most recent or
highest costs), however the cost of inventory on the balance sheet is distorted because it
consists of the earliest or lowest costs.
In periods of rising prices, FIFO provides for the most realistic ending inventory cost on the
balance sheet (using the most recent or highest costs). On the income statement, FIFO
represents the least realistic cost of goods sold because the amount consists of the earliest or
lowest costs. This makes net income higher, which is good for the external financial
statements but it thus results in a higher tax liability. In periods of falling prices, opposite
results apply.
Companies must choose an inventory method and follow it each year (consistency) until a
proper accounting change is made. The LIFO conformity rule states that if LIFO is used for
tax purposes, it must also be used for financial reporting purposes. This rule keeps
companies from using LIFO for tax purposes to show the lower net income and FIFO for
external reporting to show the higher net income.
b. With computers and inventory management software, it would appear that the specific
identification method would be the most popular because it matches the actual cost of each
item sold to its selling price. However, using computers to keep up with the information does
not eliminate some of the problems with using specific identification.
One problem is an ethical one. A major disadvantage of the specific identification method is
that management may be able to manipulate net income. For example, it can boost net
income by selling units purchased at a low cost, or reduce net income by selling units
purchased at a high cost. As long as customers receive the units they demand, they are
indifferent when the company bought them. This manipulation means that net income is not
objectively measured.
Another problem is that the costs of maintaining a specific identification system may outweigh the
benefits of using such a method. As mentioned in part a, financial statement and tax effects of
using FIFO and LIFO are more beneficial to companies than simply being able to match the
actual cost of a unit to its selling price.

S-A E 239
Your office is on the 68th floor of your building. The CEO’s office is on the 77th floor. The two of
you are waiting for an elevator one morning. The CEO states “Our prices are rising and I want the
lowest net income for tax purposes and the highest ending inventory for external reporting
purposes. Which inventory method should we use?
Requirement
You have three minutes to respond to the CEO. What is your response?
Solution 239
You have asked a very good question and I am glad to respond to it.
In periods of rising prices, LIFO results in the lowest net income, thus resulting in the lowest
income tax. FIFO results in the highest net income, thus resulting in the most favorable external
reporting information.
Unfortunately companies cannot use LIFO for tax purposes and FIFO for financial reporting
purposes. The LIFO conformity rule states that if LIFO is used for tax purposes, it must also be
used for financial reporting purposes.
This LIFO conformity rule causes company decision makers to weigh all of the pros and cons of
each inventory method. While LIFO does produce the lowest net income when prices are rising,
there is a danger in using it. Since LIFO ending inventory represents the oldest costs of the
company, it becomes necessary to try to maintain a constant level of units of ending inventory. If
the level of inventory units falls at the end of the accounting period, phantom, or paper, profits
end up in net income. This creates a larger income tax liability.
To avoid this problem, and to report the highest net income for external financial purposes, I
suggest that the company use FIFO.
S-A E 240
Your former college roommate is opening a new retail store and asks you “Which inventory
costing method should I use?”
What is your response? Include a comparison of the tax effect, balance sheet effect, and income
statement effect for FIFO versus LIFO.
Solution 240
It is always good to hear from you and you have certainly asked a very good question. Since the
consistency principle requires that you adopt accounting methods and stay with them (until there
is need for a proper change), it is very important to consider the options before starting a
business.
I suggest that you consider one of the three cost flow assumptions – Average, First-In, First-Out
(FIFO), or Last-In, First-Out (LIFO). These methods are based on the assumption of cost flows
instead of the actual physical flow of goods.

The effects on the income statement, balance sheet, and tax returns depend on whether your
company experiences rising prices or falling prices.
Here is a summary of the effects for each inventory method, for companies that experience rising
prices (the opposite will be true for falling prices).
Inventory Tax Income Statement Balance Sheet

Method Effect Effect Effect
Average Falls between FIFO and Falls between FIFO and Falls between FIFO and
LIFO LIFO LIFO
FIFO Highest net income, thus Highest net income. Thus Most realistic ending
highest taxes more attractive for external inventory because the
financial reporting latest costs are matched
to ending inventory
LIFO Lowest net income, thus Lowest net income (If you Most unrealistic ending
lowest taxes (works best if use LIFO for tax purposes, inventory because the
constant levels of inventory you must also use it for earliest costs are
units are maintained) external financial matched to ending
reporting.) inventory
S-A E 241
FIFO and LIFO are the two most common cost flow assumptions made in costing inventories.
The amounts assigned to the same inventory items on hand may be different under each cost
flow assumption. If a company has no beginning inventory, explain the difference in ending
inventory values under the FIFO and LIFO cost bases when the price of inventory items
purchased during the period have been (1) increasing, (2) decreasing, and (3) remained constant.
Solution 241
The FIFO method determines the ending inventory by the cost of the most recent purchase. The
LIFO method determines the ending inventory by the cost of the earliest purchase. Therefore, if
the FIFO method is used and the prices during the period are increasing, the ending inventory
under FIFO will be greater than under LIFO. Likewise, if the FIFO method is used and the prices
during the period are decreasing, the ending inventory under FIFO will be less than under LIFO. If
prices remain constant and the company has no beginning inventory, then there will be no
difference in ending inventory.
S-A E 242
Glenda Carson is studying for the next accounting midterm examination. What should Glenda
know about (a) departing from the cost basis of accounting for inventories and (b) the meaning of
"market" in the lower-of-cost-or-market method?

Solution 242
Glenda should know the following:
(a) A departure from the cost basis of accounting for inventories is justified when the value of the
goods is no longer as great as its cost. The writedown to market should be recognized in the
period in which the price decline occurs.
(b) Market means current replacement cost, not selling price. For a merchandising company,
market is the cost at the present time from the usual suppliers in the usual quantities.
S-A E 243
What is the LIFO reserve? What are the consequences of ignoring a large LIFO reserve when
analyzing a company?
PC: Communications, IMA: Reporting
Solution 243
The LIFO reserve is a required disclosure for companies that employ LIFO. It is the difference
between ending inventory using LIFO and ending inventory if FIFO were used instead. Ignoring a
large LIFO reserve when analyzing a company can distort any comparisons that an analyst might
try to make with a company's competitors that used FIFO.
S-A E 244 (Ethics)

Angie and Neal Fry are department managers in the housewares and shoe departments,
respectively, for Calhouns, a large department store. Neal has observed Angie taking inventory
from her own department home, apparently without paying for it. He hesitates confronting Angie
because he is due to be promoted, and needs Angie's recommendation. He also does not want to
notify the company management directly, because he doesn't want an ethics investigation on his
record, believing that it will give him a “goody-goody” image. This week, Angie tried on several
pairs of expensive running shoes in his department before finding a pair that suited her. She did
not, however, buy them. That very pair was missing this morning.
Calhouns recently replaced its old periodic inventory system with a perpetual inventory system
using scanners and bar codes. In addition, the annual inventory is to be replaced by a monthly
inventory conducted by an independent firm. On hearing the news of the changes, Neal relaxes.
"The system will catch Angie now," he says to himself.
Required:
1. Is Neal's attitude justified? Why or why not?
2. What, if any, action should Neal take now?
Ans: N/A, LO: 1, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Communications, IMA: Internal Controls
Solution 244
1. Neal's attitude is not justified. The system will only be able to detect that merchandise is
missing, not to determine who took it.
2. Neal should notify his superiors at once. He has knowledge of what may be criminal acts, and
by concealing them, he is very close to becoming a party to the acts. Neal's apparent fear of
not being promotable because of a “goody-goody” image seems unjustified. It would seem
more likely that Neal's refusal to accept unethical (and illegal) acts by others would make him
a more valuable manager. He may even be jeopardizing his career with Calhouns if someone
else reports Angie's actions. The resulting investigation may implicate Neal because of his
failure to notify the proper authorities in a timely manner.

S-A E 245 (Communication)

Al Bodkin, a new employee of Crafter's Paradise, recorded $1,000 in consigned goods received
as part of the firm's inventory. The goods were received one day after the end of the fiscal period,
but Al reasoned that the goods should be included in inventory sooner because Crafter's paid the
freight. The mistake was brought to his attention by the purchasing department who said the
goods should not have been recorded as Crafter’s inventory at all. Al told Sid Goza, the
purchasing supervisor, that nobody needed to worry, because the mistake would cancel itself out
the following month. In Al's opinion, there was no reason to get everyone excited over nothing,
especially since it was monthly, and not annual, financial statements that were affected. Sid Goza
has reported the problem to the accounting department.
Required:
You are Al's supervisor. Write a memo to Al explaining why the error should have been corrected.
Ans: N/A, LO: 1, Bloom: AN, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA
PC: Communications, IMA: Reporting
Solution 245
MEMO
TO: Al Bodkin, Accounting Department
FROM: Martha King, Supervisor
DATE: March 12, 200x
It has come to my attention that $1,000 in consigned goods were included in the inventory
reported in our January financial statements. You were informed that this amount should
be removed from inventory, which you did not do, apparently believing that February's
entries would correct the error.
The error would have been corrected in February if it were only a matter of your recording
inventory in the wrong month. January's inventory and expenses would have been
overstated, and February's understated, but the net effect would have been zero. Since the
$1,000 is a fairly large amount, however, that still would not have been appropriate.
The error you made, however, was to enter into inventory goods that the company did not
own, and will not own. Consigned goods are owned by the consignors until purchased by
customers. We only provide our shops for the consignors to sell their goods, and we collect
a fee for doing so.
Please correct the error at once. We may need to notify some of the other departments of
the error as well. Please arrange to meet with me in my office as soon as possible to
discuss the matter.
(signature)

IFRS QUESTIONS
1. The requirements for accounting for and reporting of inventories under IFRS, compared to
GAAP, tend to be more
a. detailed.
b. rules-based.
c. principles-based.
d. full of disclosure requirements.
Problem Solving, IMA: Quantitative Methods
2. The major IFRS requirements related to accounting for and reporting inventories are
a. the same as GAAP.
b. the same as GAAP with a couple of exceptions.
c. completely different fom GAAP.
d. not comparable to GAAP.
3. Inventory accounting under IFRS differs from GAAP in regard to

a. neither the use of LIFO nor lower-of-cost-or-market.
b. the use of LIFO but not lower-of-cost-or-market.
c. the use of lower-of-cost-or-market but not LIFO.
d. the use of LIFO and lower-of-cost-or-market.
4. Under GAAP, companies can choose which inventory system?

LIFO FIFO
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No
5. Under IFRS, companies can choose which inventory system?

LIFO FIFO
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No

6. Inventories are defined by IFRS as

a. held-for-sale in the ordinary course of business.
b. in the process of production for sale in the ordinary course of business.
c. in the form of materials or supplies to be consumed in the production process or in the
providing of services.
d. All of these answer choices are correct.
7. Specific Identification can be used for inventory valuation under

GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes
8. Specific Identification must be used for inventory valuation where the inventory items are
not interchangeable under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes
9. GAAP’s provision for ownership of goods (goods-in-transit or consigned goods), as well

as which costs to include in inventory, as compared to IFRS are:
Ownership of goods Costs to include in inventory
a. essentially similar essentially similar
b. essentially different essentially different
c. essentially similar essentially different
d. essentially different essentially similar
Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
10. The only acceptable cost flow assumptions under IFRS are
a. FIFO and LIFO.
b. FIFO and average.
c. LIFO and average.
d. FIFO, LIFO and average.
11. LIFO can be used

a. under neither GAAP nor IFRS.
b. under IFRS but not GAAP.
c. under GAAP but not IFRS.
d. under both GAAP and IFRS.

12. The requirement that companies use the same cost flow assumption of all goods of a
similar nature is found in
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes
13. IFRS defines market for lower-of-cost-or market as

a. net realizable value.
b. estimated selling price in the ordinary course of business.
c. replacement cost.
d. replacement cost less costs of disposal.
Ans: A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
14. GAAP defines market for lower-of-cost-or market essentially as

a. net realizable value.
b. estimated selling price in the ordinary course of business.
c. replacement cost.
d. replacement cost less costs of disposal.

16. Inventory written down under lower-of-cost-or market may be written back up to original
cost in a subsequent period under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes
17. The option to value inventory at fair value exists under

GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes
18. Certain agricultural and mineral products can be reported at net realizable value under
GAAP IFRS
a. Yes No
b. Yes Yes
c. No No
d. No Yes
19. The convergence issue that will be most difficult to resolve in the area of inventory
accounting is:
a. FIFO.
b. LIFO.
c. ownership of goods.
d. costs to include in inventory.

CH 06

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CH 06

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CHAPTER 6

REPORTING AND ANALYZING INVENTORY

Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT

FOR INSTRUCTOR USE ONLY

193. 2 AP 195. 2 AP 197. 4 AP

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

FOR INSTRUCTOR USE ONLY

Note: TF = True-False C = Completion

FOR INSTRUCTOR USE ONLY

CHAPTER LEARNING OBJECTIVES

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

2. A manufacturer’s inventory consists of raw materials, work in process, and finished

10. Goods held on consignment should be included in the consignor’s ending

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

19. The specific identification method of inventory valuation is desirable when a

FOR INSTRUCTOR USE ONLY

34. The lower-of-cost-or-market rule implies that it is unrealistic to carry inventory at a

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

47. If goods in transit are shipped FOB destination

FOR INSTRUCTOR USE ONLY

49. An employee assigned to counting computer monitors in boxes should

50. After the physical inventory is completed,

51. When is a physical inventory usually taken?

53. Tidwell Company's goods in transit at December 31 include sales made

FOR INSTRUCTOR USE ONLY

54. The term "FOB" denotes

55. Goods held on consignment are

58. Which statement is false?

FOR INSTRUCTOR USE ONLY

What is Mohling’s correct ending inventory balance at December 31, 2014?

Solution: $602,000  $112,000  $6,000  $484,000

Solution: $858,000  $168,000  $9,000  $681,000

FOR INSTRUCTOR USE ONLY

Solution: $780 + [($1,170  200)  (210  150)]  $1,131

FOR INSTRUCTOR USE ONLY

Solution: $990 + [($1,260  200)  (210  150)]  $1,368

Solution: ($4,200  700)  210  $1,260

FOR INSTRUCTOR USE ONLY

Solution: $825 + [($1,120  200)  (200  150)]  $1,105

Solution: $885 + [($1,140  200)  (200  150)]  $1,170

Solution: [($3,970  700)  200]  $1,134

FOR INSTRUCTOR USE ONLY

73. A company purchased inventory as follows:

Solution: [($200  $5.00) + (300  $5.50)]  (200 + 300)  $5.30

74. Noise Makers Inc has the following inventory data:

Solution: [($2,000  100)  32]  $640

75. Olympus Climbers Company has the following inventory data:

Solution: $380 + [(100  32  20)  $20]  $1,340

FOR INSTRUCTOR USE ONLY

Solution: $220 + [(32  10)  $20]  $660

77. Quiet Phones Company has the following inventory data:

Solution: $220 + [(100  32  10)  $20]  $1,380

78. Radical Radials Company has the following inventory data:

Solution: $380 + [(32  20)  $20]  $620

FOR INSTRUCTOR USE ONLY

79. Orange-Aide Company has the following inventory data:

Solution: [($2,090  100)  $25]  $523