Which of the following measures the relationship between cost of merchandise sold and the amount of inventory carried during the period?

A. retail method of inventory costing

B. Fixed asset turnover

C. inventory turnover

D. gross profit method of inventory costing

Which of the following is not an example for safeguarding inventory?

A. Returning inventory that is defective or broken.

B. Storing inventory in restricted areas.

C. Matching receiving documents, purchase orders, and vendor’s invoice.

D. Physical devices such as two-way mirrors, cameras, and alarms.

The following lots of a particular commodity were available for sale during the year:

Beginning inventory          10 units at $60

First purchase                   25 units at $65

Second purchase              30 units at $68

Third purchase                  15 units at $75

The firm uses the periodic system and there are 25 units of the commodity on hand at the end of the year. What is the amount of the inventory at the end of the year using the FIFO method?

A. $1,805

B. $1,575

C. $3,585

D. $1,685

A. $1,805

(15 x 75) + (10 x 68) = 1,805

*Side Note: FIFO - Amount of Inventory At the End- Downward

Second purchase              30 units at $68

Third purchase                  15 units at $75

The following lots of a particular commodity were available for sale during the year:

Beginning inventory        5 units at $61

First purchase                15 units at $63

Second purchase           10 units at $74

Third purchase               10 units at $77

The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year. What is the amount of cost of goods sold for the year according to the FIFO method?

A. $1,250

B. $1,375

C. $1,380

D. $1,510

A. $1,250

(5 x 61) + (15 x 63) = 1,250

*Side Note: FIFO  - Amount of Cost of Goods Sold - Upward

Beginning inventory        5 units at $61

First purchase                15 units at $63

The following lots of a particular commodity were available for sale during the year:

Beginning inventory      10 units at $60

First purchase               25 units at $65

Second purchase          30 units at $68

Third purchase              15 units at $75

The firm uses the periodic system and there are 25 units of the commodity on hand at the end of the year. What is the amount of the inventory at the end of the year using the LIFO method?

A. $1,575

B. $1,685

C. $1,805

D. $3,815

A. $1,575

(10 x $60) + (15 x 65) = $1,575

*Side Note: LIFO - Amount of Inventory At the End- Upward

Beginning inventory      10 units at $60

First purchase               25 units at $65

Under a periodic inventory system

A. accounting records continuously disclose the amount of inventory

B. merchandise inventory is debited when goods are returned to vendors

C. a separate account for each type of merchandise is maintained in a subsidiary ledger

D. a physical inventory is taken at the end of the period

If merchandise inventory is being valued at cost and the price level is steadily rising, the method of costing that will yield the highest net income is

A. FIFO

B. periodic

C. average

D. LIFO

Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on hand and the cost of the merchandise sold.

True

False

A purchase order establishes an initial record of the receipt of the inventory.

True

False

FIFO is the inventory costing method that follows the physical flow of the goods.

True

False

In the retail inventory method, the cost to retail ratio is equal to the cost of goods sold divided by the retail price of the good sold.

True

False

The selection of an inventory costing method has no significant impact on the financial statements.

True

False

A perpetual inventory system is an effective means of control over inventory.

True

False

The average cost method will always yield results between FIFO and LIFO.

True

False

Cost flow is in the reverse order in which costs were incurred when using

A. last-in, first-out

B. weighted average

C. average cost

D. first-in, first-out

The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records during May. The company had no beginning inventory on May 1.

Date                  Product Z                 Units         Cost

May 3                Purchase                 5               $20

May 10              Sale                         3

May 17              Purchase                10              $24

May 20              Sale                         6

May 23              Sale                         3

May 30              Purchase                10              $30

Assuming that the company uses the perpetual inventory system, determine the ending inventory for the month of

May using the LIFO inventory cost method.

A. $324

B. $372

C. $320 

D. $364

D. $364

((5-3) x $20) + ((10-6-3) x $24) + (10 x $30) = 364

(2 x $20) + (1 x $24) + (10 x $30) = 364

*Side Note: LIFO - Ending Inventory - Subtract and Multiply Upward

Date                  Product Z                 Units         Cost

May 3                Purchase                 5               $20

May 10              Sale                         3

May 17              Purchase                10              $24

May 20              Sale                         6

May 23              Sale                         3

May 30              Purchase                10              $30

Addison, Inc. uses a perpetual inventory system. The following is information about one inventory item for the month of September:

Sep. 1         Inventory        20 units at $20

         4        Sold                10 units

        10       Purchased      30 units at $25

        17       Sold                20 units

        30       Purchased      10 units at $30

If Addison uses FIFO, the cost of the ending merchandise inventory on September 30 is

A. $650

B. $700

C. $750

D. $800

D. $800

((20 - 10) x $30) + ((30 - 10) x $25) = 800

*Side Note: FIFO - Cost of Ending Merchandise Inventory - Subtract and Multiply Donward

Sep. 1         Inventory        20 units at $20

         4        Sold                10 units

        10       Purchased      30 units at $25

        17       Sold                20 units

        30       Purchased      10 units at $30

The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records during May. The company had no beginning inventory on May 1.

Date          Product Z       Units      Cost

May 3        Purchase        5            $20

May 10      Sale                3

May 17      Purchase       10           $24

May 20      Sale               6

May 23      Sale               3

May 30      Purchase      10            $30

Assuming that the company uses the perpetual inventory system, determine the Gross Profit for the month of May using the LIFO cost method.

A. $348

B. $444

C. $356

D. $452

B. $444

[(3 x 60) + (6 x 60) + (3 x 60)] - [(3 x 20) +(6 x 24) + (3 x 24)] = 444

*Side Note: LIFO - Gross Profit - Upward

Ending inventory is made up of the oldest purchases when a company uses

A. last-in, first-out

B. retail method

C. first-in, first-out

D. average cost

The following lots of a particular commodity were available for sale during the year:

Beginning inventory     10 units at $30

First purchase              25 units at $32

Second purchase         30 units at $34

Third purchase             10 units at $35

The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end of the year according to the LIFO method?

A. $620

B. $655

C. $690

D. $659

A. $620

(10 x $30) + (10 x $32) = $620

*Sde Note: LIFO - Amount of Inventory At the End- Upward

Beginning inventory     10 units at $30

First purchase              25 units at $32

Garrison Company uses the retail method of inventory costing. They started the year with an inventory that had a retail cost of $45,000. During the year they purchased an inventory with a retail cost of $300,000. After performing a physical inventory, they calculated their inventory cost at retail to be $80,000. The mark up is 100% of cost. Determine the ending inventory at its estimated cost.

A. $160,000

B. $45,000

C. $40,000

D. $80,000

C. $40,000

                                                        Cost              Retail

Merchandise Inventory, June 1                            45,000

Purchases in June (net)                                       300,000

Merchandise Available for Sale (300,000-(45,000+80,000)) 345,000

Ratio of Cost to Retail Price (300,000-(45,000+80,000)) / 345,000     50%

Merchandise Inventory, June 30 @ Retail Price      80,000

Merchandise Inventory, June 30 @ Est. Cost (80,000 x .5) 40,000

Merchandise inventory at the end of the year was inadvertently overstated. Which of the following statements correctly states the effect of the error on net income, assets, and owner's equity?

A. net income is overstated, assets are overstated, owner's equity is overstated

B. net income is understated, assets are understated, owner's equity is overstated

C. net income is understated, assets are understated, owner's equity is understated

D. net income is overstated, assets are overstated, owner's equity is understated

During periods of increasing costs, the use of the FIFO method of costing inventory will result in a greater amount of net income than would result from the use of the LIFO cost method.

True

False

During periods of decreasing costs the use of the LIFO method of costing inventory will result in a lower amount of net income than would result from the use of the FIFO method.

True

False

The average cost inventory method is rarely used with a perpetual inventory system.

True

False

Retail Inventory Method

(Definition)

A method of estimating inventory cost that is based on the

relationship of cost to retail price.

Weighted Average Cost

(Equation)

Total of net purchases + Beginning Inventory / Total Purchased Units + Begining Inventory Units

Ex: $95/ 23 units

Inventory Turnover

(Equation)

The relationship between the cost of goods sold and the amount of inventory carried during the period, computed by dividing the cost of goods sold by the average inventory.

Inventory Turnover = Cost of Merchandise Sold / Average Inventory

In other words:

COMS / ((Beginning of year Inventory + End of year Inventory) / 2)

FIFO and LIFO Calculations

1. FIFO amount of inventory at the end of the year

2. FIFO amount of cost of goods sold for the year

3. FIFO cost of merchandise sold

4. FIFO cost of ending merchandise inventory

1. LIFO amount of inventory at the end of the year

2. LIFO amount of cost of goods sold

3. LIFO ending inventory

4. LIFO cost of ending merchandise inventory

4. LIFO gross profit

1. FIFO - Amount of Inventory At the End- Downward

2. FIFO  - Amount of Cost of Goods Sold - Upward

3. FIFO - Cost of Merchandise Sold - Subtract and Multiply Upward

4. FIFO - Cost of Ending Merchandise Inventory - Subtract and Multiply Donward

1. LIFO - Amount of Inventory At the End- Upward

2. LIFO - Amount of Cost of Goods Sold - Downward

3. LIFO - Ending Inventory - Subtract and Multiply Upward

4. LIFO - Cost of Ending Merchandise Inventory - Subtract and Multiply Upward

5. LIFO - Gross Profit - Upward (Review problem)