Test Bank, Intermediate Accounting, 14th ed.

11

CHAPTER 8
Cost of Goods Sold and Inventory:
Identification and Valuation
MULTIPLE CHOICE QUESTIONS
Theory/Definitional Questions

1 Costs included in work in process inventory

2 Definition of LIFO reserve
3 LIFO conformity rule
4 Interim period LIFO liquidation
5 Inventory pools
6 Examples of inventory
7 Goods on consignment
8 Flow of product costs through inventory accounts
9 Inventory shrinkage--how it affects raw materials and cost of goods sold
10 Determination of cost of goods sold
11 Goods on consignment--included in consignor's inventory
12 Use of discounts lost account
13 The effect of omission of purchase on inventory and cost of goods sold
14 Weighted average inventory--not appropriate for perpetual system
15 Goods shipped FOB destination are included in sellers inventory
16 FIFO with falling prices--gives highest cost of goods sold
17 Specific identification--matches cost flow with physical flow
18 Goods shipped FOB shipping point are included in buyers inventory
19 FIFO--best approximates specific identification in manufacturing
20 LIFO with rising prices gives lowest reported net income
21 Journal entry when merchandise is returned under perpetual system
22 Inventory valuation under LIFO versus FIFO
23 Dollar-value LIFO--specific identification cannot be used for layers
24 Perpetual inventory system
25 Double-extension and link-chain methods--variations of dollar-value LIFO
26 Goods in transit at year-end purchased FOB shipping point
27 Application of double extension
28 How warehouse costs and discounts affect inventory values
29 Periodic inventory method--trade discounts not reported separately
12 Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

30 Journal entry when merchandise is defective under perpetual system

31 Weighted average inventory--not appropriate for perpetual system
32 LIFO--appropriate for periodic or perpetual
33 FIFO--most closely reports current cost
34 Effect of decreasing inventory costs under FIFO and LIFO
35 FIFO with rising prices--same amount for perpetual and periodic
36 Dollar value LIFO--basis for computations
37 Determining the inventory method best for predicting future earnings
38 Ending inventory under the dollar-value LIFO method

Computational Questions
39 Purchases made net of discount
40 Determination of net purchases with net and gross methods
41 Computation of purchase amount under gross method
42 Computation of FIFO cost of goods sold
43 Computation of cost of goods sold
44 Determination of accounts payable balance
45 Computation of FIFO periodic inventory
46 Computation of LIFO periodic inventory
47 Computation of LIFO perpetual inventory
48 Computation of FIFO perpetual inventory
49 Computation of weighted average periodic inventory
50 Computation of moving average perpetual inventory
51 Computation of number of days sales in average inventories
52 Computation of cost of goods sold
53 Computation of cost of merchandise available for sale
54 Computation of dollar-value LIFO inventory
55 Computation of dollar-value LIFO inventory
56 Computation of dollar-value LIFO inventory
57 Computation of dollar-value LIFO inventory
58 Computation of freight-in
59 Computation of ending inventory
60 Computation of cost of goods sold
61 Computation of inventory turnover
62 Computation of cost of goods available for sale
63 Computation of inventory turnover
64 Computation of inventory cost
65 Computation of value of inventory under the dollar-value LIFO method
66 Computation of value of inventory under the dollar-value LIFO method
67 Computation of value of inventory under the dollar-value LIFO method
68 Computation of value of inventory under the dollar-value LIFO method
69 Computation of ending inventory under periodic FIFO costing alternative
70 Computation of ending inventory under periodic LIFO costing alternative
Test Bank, Intermediate Accounting, 14th ed. 13

71 Computation of cost of unit available for sale using the average cost
method
72 Computation of cost of goods sold
73 Computation of cost of goods sold
74 Computation of inventory balance using the average cost method
75 Computation of cost of ending inventory using periodic LIFO inventory
method
76 Computation of year-end inventory balance
77 Computation of accounts payable balance
78 Computation of accounts payable balance
79 Computation of cost of goods sold
80 Computation of periodic FIFO cost of goods sold
81 Computation of periodic LIFO cost of goods sold
82 Computation of cost of goods sold using the average cost method
83 Computation of dollar-value LIFO inventory
84 Calculate inventory turn-over

PROBLEMS
1 Computation of ending inventory by subtracting items that should not be
included
2 Computation of LIFO inventory for three years
3 Computation of cost of goods available for sale
4 Correct entries under periodic inventory system
5 Computation of inventory under LIFO, FIFO, and moving average
6 Computation of inventory under dollar-value LIFO
7 Computation of inventory under LIFO, FIFO; give gross margin LIFO
8 Computation of periodic LIFO, FIFO, weighted average
9 Computation of dollar value LIFO inventory
10 Computation of ending inventory using the dollar-value LIFO method
11 Computation of perpetual moving average and periodic weighted average
12 Computation of dollar value LIFO for five successive years
13 Computation of price index using double-extension method
14 Price index with double extension, dollar-value LIFO inventory
15 Change from LIFO to FIFO
16 LIFO liquidation
14 Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

MULTIPLE CHOICE QUESTIONS

c 1. Which of the following would not be included in the cost of work in process
LO1 inventory?
a. Cost of electricity to operate factory equipment
b. Maintenance costs of factory equipment
c. Depreciation on office equipment in the sales managers office
d. Depreciation on factory equipment

d 2. The term LIFO reserve refers to

LO6 a. a cost flow assumption for valuing inventory.
b. a special fund set aside to cover LIFO liquidations.
c. inventory pools used in the dollar-value LIFO method.
d. the difference between the ending inventory amount under LIFO and the
ending inventory amount under another inventory cost flow assumption.

d 3. Which of the following statements is true?

LO6 a. A company must use the FIFO cost flow assumption for taxes as
well as for financial accounting and reporting.
b. A company may use FIFO for inventory valuation purposes on the
balance sheet provided that LIFO cost of goods sold is reported on the
income statement.
c. Application of LIFO for financial reporting purposes must strictly follow
IRS regulations relating to LIFO.
d. LIFO is the only inventory method that must be used for financial
reporting purposes if used for tax purposes.

a 4. If a company experiences a liquidation of a LIFO inventory layer in the

second
LO6 quarter that is expected to be restored by the end of the annual financial
reporting period, the company should
a. treat the layer as if it were liquidated and include in cost of goods sold the
expected replacement cost of the inventory sold.
b. deplete the LIFO layer as if the interim period were an annual period.
c. change to an alternative inventory cost method, such as FIFO, so that the
problem of LIFO liquidation is not encountered.
d. delay the recognition of both revenue and cost of goods sold on the
inventory involved until a final determination of the LIFO inventory can be
made at the end of the annual period.
Test Bank, Intermediate Accounting, 14th ed. 15

c 5. Which one of the following statements regarding inventory pools is not

correct?
LO9 a. A company is not required to use the same pools for tax and financial
reporting purposes.
b. The unit cost assigned to items in a new layer may be based on the
weighted average cost of acquisitions during the period.
c. The larger and more diverse the composition of a pool, the greater the
likelihood of inventory liquidation under LIFO.
d. Layers of good acquired at varying price levels can exist in a single pool.

d 6. Which of the following would not be reported as inventory?

LO1 a. Land acquired for resale by a real estate firm
b. Stocks and bonds held for resale by a brokerage firm
c. Partially completed goods held by a manufacturing company
d. Machinery acquired by a manufacturing company for use in the
production process

b 7. Goods on consignment are

LO3 a. included in the consignees inventory.
b. recorded in a consignment out account which is an inventory account.
c. recorded in a consignment in account which is an inventory account.
d. All of the above.

b 8. Which of the following describes the flow of product costs through the
inventory
LO1 accounts of a manufacturer?
a. Raw materials, goods in process, factory overhead, finished goods
b. Raw materials, goods in process, finished goods
c. Raw materials, direct labor, factory overhead, finished goods
d. Raw materials, direct labor, factory overhead

c 9. Western Manufacturing Company uses a perpetual inventory system for its

raw
LO2 materials. The inventory records reflect a raw materials balance of $378,500
at December 31. A physical inventory taken on that date revealed raw
materials of $375,750. How will the $2,750 difference affect raw materials
inventory and cost of goods sold, assuming it is attributed to normal
shrinkage?
Raw Materials Cost of Goods Sold
a. Increase Decrease
16 Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

b. Decrease No effect
c. Decrease Increase
d. No effect Increase

d 10. Cost of goods sold is equal to

LO2 a. the cost of inventory on hand at the end of a period plus net purchases
minus the cost of inventory on hand at the beginning of a period.
b. the cost of inventory on hand at the beginning of a period minus net
purchases plus the cost of inventory on hand at the end of a period.
c. the cost of inventory on hand at the beginning of a period plus net sales
minus the cost of inventory on hand at the end of a period.
d. the cost of inventory on hand at the beginning of a period plus net
purchases minus the cost of inventory on hand at the end of a period.

a 11. Goods on consignment should be included in the inventory of

LO3 a. the consignor but not the consignee.
b. the consignee but not the consignor.
c. both the consignor and the consignee.
d. neither the consignor nor the consignee.

d 12. The use of a discounts lost account implies that the recorded cost of a
LO4 purchased inventory item is its
a. invoice price.
b. invoice price plus the purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.

d 13. A company using a periodic inventory system neglected to record a purchase

LO3 of merchandise on account at year-end. This merchandise was omitted from
the year-end physical count. How will these errors affect inventory at year-
end and cost of goods sold for the year?
Cost of Goods
Inventory Sold
a. No effect Understate
b. No effect Overstate
c. Understate Understate
d. Understate No effect

c 14. Which inventory costing method would not be appropriate for a manufacturer
LO5 using a perpetual inventory system?
a. First-in, first-out
b. Last-in, first-out
c. Average cost
Test Bank, Intermediate Accounting, 14th ed. 17

d. Dollar-value LIFO

a 15. If goods shipped FOB destination are in transit at the end of the year, they
LO3 should be included in the inventory balance of the
a. seller.
b. common carrier.
c. buyer.
d. bank.

a 16. In a period of falling prices, the use of which of the following inventory cost
flow
LO7 methods would typically result in the highest cost of goods sold?
a. FIFO
b. LIFO
c. Weighted average cost
d. Specific identification

b 17. The specific identification method of inventory costing

LO5 a. eliminates all opportunity for profit manipulation.
b. matches the flow of recorded costs with the physical flow of goods.
c. can be used only with a perpetual inventory system.
d. is a violation of generally accepted accounting principles.

a 18. Merchandise shipped FOB shipping point on the last day of the year should
LO3 ordinarily be included in
a. the buyers inventory balance.
b. the sellers inventory balance.
c. neither the buyers nor sellers inventory balance.
d. both the buyers and the sellers inventory balances.

b 19. Which inventory pricing method best approximates specific identification in

most
LO7 manufacturing situations?
a. Activity-based costing
b. FIFO
c. Average cost
d. LIFO
18 Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

a 20. In a period of rising prices, the inventory cost allocation method that tends to
LO7 result in the lowest reported net income is
a. LIFO.
b. FIFO.
c. moving average.
d. weighted average.

c 21. The Allen Company makes the following entry in its accounting records:
LO2
Inventory........................................................................ 200
Cost of Goods Sold............................................... 200

This entry would be made when

a. merchandise is sold and the periodic inventory method is used.
b. merchandise is sold and the perpetual inventory method is used.
c. merchandise is returned and the perpetual inventory method is used.
d. merchandise is returned and the periodic inventory method is used.

b 22. For the past four years, ODoud Corp. has used LIFO for inventory valuation.
LO7 The inventory value at the end of year four was $85,000, but would have
been $60,500 if FIFO had been used throughout the four-year period. If
ODoud had used FIFO for the entire four years, income before taxes would
have been
a. $24,500 more over the four-year period.
b. $24,500 less over the four-year period.
c. $24,500 more in year four.
d. $24,500 less in year four.

d 23. In applying dollar-value LIFO, which of the following inventory cost flow
methods
LO10 could not be used to value incremental inventory layers?
a. Average cost
b. FIFO
c. LIFO
d. Specific identification

d 24. Which of the following is not true of the perpetual inventory method?
LO2 a. Purchases are recorded as debits to the inventory account.
b. The entry to record a sale includes a debit to Cost of Goods Sold and a
credit to Inventory.
c. After a physical inventory count, Inventory is credited for any missing
inventory.
d. Purchase returns are recorded by debiting Accounts Payable and
crediting Purchase Returns and Allowances.
Test Bank, Intermediate Accounting, 14th ed. 19

c 25. The double-extension method is a variation of which of the following

inventory
LO10 cost flow methods?
a. Moving average
b. FIFO
c. Dollar-value LIFO
d. Conventional (lower-of-cost-or-market) retail

d 26. Goods in transit at year-end purchased FOB shipping point were

appropriately
LO3 recorded in the purchases account but were incorrectly excluded from the
ending inventory. What effect will this omission have on the company's
assets, liabilities, and retained earnings at year-end?
a. No effect, no effect, overstated
b. No effect, no effect, understated
c. Understated, no effect, overstated
d. Understated, no effect, understated

a 27. When the double-extension approach to the dollar-value LIFO inventory cost
LO10 flow method is used, the inventory layer added in the current year is
multiplied by an index number. How would the following be used in the
calculation of this index number?
Ending Inventory Ending Inventory
at Current-Year Cost at Base-Year Cost
a. Numerator Denominator
b. Numerator Not Used
c. Denominator Numerator
d. Not Used Denominator

a 28. A company records inventory at the gross invoice price. Theoretically, how
LO4 should the following affect the costs in inventory?

Warehousing Cash Discounts

Costs Available
a. Increase Decrease
b. No effect Decrease
c. No effect No effect
d. Increase No effect

a 29. When using the periodic inventory method, which of the following generally
20 Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

LO4 would not be separately accounted for in the computation of cost of goods
sold?
a. Trade discounts applicable to purchases during the period
b. Cash (purchase) discounts taken during the period
c. Purchase returns and allowances of merchandise during the period
d. Cost of transportation-in for merchandise purchases during the period

d 30. A firm using the perpetual inventory method returned defective merchandise
LO4 costing $2,000 to one of its suppliers. The entry to record this transaction will
include a debit to
a. Accounts Receivable.
b. Inventory.
c. Purchase Returns and Allowances.
d. Accounts Payable.

b 31. The average cost method is applicable to which of the following inventory
LO5 systems?
Periodic Perpetual
a. Yes Yes
b. Yes No
c. No Yes
d. No No

c 32. The LIFO inventory cost flow method may be applied to which of the following
LO5 inventory systems?
Periodic Perpetual
a. No No
b. No Yes
c. Yes Yes
d. Yes No

a 33. Which of the following inventory costing methods reports most closely the
LO5 current cost of inventory on the balance sheet?
a. FIFO
b. Specific identification
c. Weighted average
d. LIFO

b 34. Which of the following will occur when inventory costs are decreasing?
Test Bank, Intermediate Accounting, 14th ed. 21

LO7 a. LIFO will result in lower net income and lower ending inventory than will
FIFO.
b. FIFO will result in lower net income and lower ending inventory than will
LIFO.
c. LIFO will result in a lower net income, but a higher ending inventory, than
will FIFO.
d. FIFO will result in a lower net income, but a higher ending inventory, than
will LIFO.

c 35. During periods of rising prices, when the FIFO inventory cost flow method is
LO7 used, a perpetual inventory system would
a. not be permitted.
b. result in a higher ending inventory than a periodic inventory system.
c. result in the same ending inventory as a periodic inventory system.
d. result in a lower ending inventory than a periodic inventory system.

d 36. The dollar-value LIFO inventory cost flow method involves computations
based
LO10 on
Inventory Pools A Specific Price
of Similar Items Index for Each Year
a. No Yes
b. No No
c. Yes No
d. Yes Yes

c 37. Which of the inventory cost flow assumptions provides the best measure of
LO7 earnings, where best means most appropriate for predicting future
earnings, when prices have been declining?
a. FIFO
b. Specific identification
c. LIFO
d. Average cost

c 38. In the dollar-value LIFO method, what does the ending inventory for any
period
LO10 represent?
a. The ending inventory at current cost
b. The ending inventory at base-year dollars
c. The sum of inventory layers each costed at the current cost index in effect
the year the layer was added
d. The sum of inventory layers each costed at historical cost
22 Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

a 39. Assume that a company records purchases net of discount. If the company
LO4 bought merchandise valued at $10,000 on credit terms 3/15, net 30, the entry
to record a payment for half of the purchase within the discount period would
include a debit to
a. Accounts Payable for $4,850 and a credit to Cash for $4,850.
b. Accounts Payable for $5,000 and a credit to Cash for $5,000.
c. Accounts Payable for $4,850 and to Interest Expense for $150, and a
credit to Cash for $5,000.
d. Accounts Payable for $5,000 and to Interest Revenue for $150 and to
Cash for $5,000.

c 40. On August 1, Stephan Company recorded purchases of inventory of $80,000

LO4 and $100,000 under credit terms of 2/15, net 30. The payment due on the
$80,000 purchase was remitted on August 14. The payment due on the
$100,000 purchase was remitted on August 29. Under the net method and
the gross method, these purchases should be included at what respective net
amounts in the determination of cost of goods available for sale?
Net Method Gross Method
a. $178,400 $176,400
b. $176,400 $176,400
c. $176,400 $178,400
d. $180,000 $176,400

b 41. Ami Retailers purchased merchandise with a list price of $100,000, subject to
LO4 a trade discount of 20 percent and credit terms of 2/10, n/30. At what amount
should Ami record the cost of this merchandise if the gross method is used?
a. $100,000
b. $80,000
c. $98,000
d. $78,400

c 42. With LIFO, cost of goods sold is $195,000, and ending inventory is $45,000.
If
LO6 FIFO ending inventory is $65,000, how much is FIFO cost of goods sold?
Test Bank, Intermediate Accounting, 14th ed. 23

a. $215,000
b. $195,000
c. $175,000
d. $65,000

b 43. Holdaway Co., a manufacturer, had inventories at the beginning and end of
its
LO4 current year as follows:
Beginning End
Raw materials.......................................................... $11,000 $15,000
Work in process....................................................... 20,000 24,000
Finished goods........................................................ 12,500 9,000

During the year the following costs and expenses were incurred:
Raw materials purchased......................................................... $150,000
Direct labor cost....................................................................... 60,000
Indirect factory labor................................................................ 30,000
Taxes and depreciation on factory building............................. 10,000
Taxes and depreciation on sales room and office................... 7,500
Sales salaries........................................................................... 20,000
Office salaries.......................................................................... 12,000
Utilities (60% applicable to factory, 20% to sales room,
and 20% to office)............................................................... 25,000

Holdaways cost of goods sold for the year is

a. $257,000.
b. $260,500.
c. $261,000.
d. $269,500.

a 44. Barlow Companys Accounts Payable balance at December 31, 2002, was
LO3 $1,800,000 before considering the following transactions:

Goods were in transit from a vendor to Barlow on December 31, 2002.

The invoice price was $100,000, and the goods were shipped FOB
shipping point on December 29, 2002. The goods were received on
January 4, 2003.
Goods shipped to Barlow FOB shipping point on December 20, 2002,
from a vendor were lost in transit. The invoice price was $50,000. On
January 5, 2003, Barlow filed a $50,000 claim against the common
carrier.
24 Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

In its December 31, 2002, balance sheet, Barlow should report Accounts
Payable of
a. $1,950,000.
b. $1,900,000.
c. $1,850,000.
d. $1,800,000.

d 45. Miller Inc. is a wholesaler of office supplies. The activity for Model III
calculators
LO5 during August is shown below:

Balance/
Date Transaction Units Cost
August 1 Inventory 2,000 $36.00
7 Purchase 3,000 37.20
12 Sales 3,600
21 Purchase 4,800 38.00
22 Sales 3,800
29 Purchase 1,600 38.60

If Miller Inc. uses a FIFO periodic inventory system, the ending inventory of
Model III calculators at August 31 is reported as
a. $150,080.
b. $150,160.
c. $152,288.
d. $152,960.
Test Bank, Intermediate Accounting, 14th ed. 25

a 46. Miller Inc. is a wholesaler of office supplies. The activity for Model III
calculators
LO5 during August is shown below:

Balance/
Date Transaction Units Cost
August 1 Inventory 2,000 $36.00
7 Purchase 3,000 37.20
12 Sales 3,600
21 Purchase 4,800 38.00
22 Sales 3,800
29 Purchase 1,600 38.60

If Miller Inc. uses a LIFO periodic inventory system, the ending inventory of
Model III calculators at August 31 is reported as
a. $146,400.
b. $150,080.
c. $150,160.
d. $152,960.

c 47. Miller Inc. is a wholesaler of office supplies. The activity for Model III
calculators
LO5 during August is shown below:

Balance/
Date Transaction Units Cost
August 1 Inventory 2,000 $36.00
7 Purchase 3,000 37.20
12 Sales 3,600
21 Purchase 4,800 38.00
22 Sales 3,800
29 Purchase 1,600 38.60

If Miller Inc. uses a LIFO cost perpetual inventory system, the ending
inventory of Model III calculators at August 31 is reported as
a. $146,400.
b. $150,080.
c. $150,160.
d. $152,960.
26 Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

d 48. Miller Inc. is a wholesaler of office supplies. The activity for Model III
calculators
LO5 during August is shown below:

Balance/
Date Transaction Units Cost
August 1 Inventory 2,000 $36.00
7 Purchase 3,000 37.20
12 Sales 3,600
21 Purchase 4,800 38.00
22 Sales 3,800
29 Purchase 1,600 38.60

If Miller Inc. uses a FIFO cost perpetual inventory system, the ending
inventory of Model III calculators at August 31 is reported as
a. $150,080.
b. $150,160.
c. $152,232.
d. $152,960.

b 49. Stephens Inc. is a wholesaler of photography equipment. The activity for the
LO5 VTC cameras during July is shown below:

Balance/
Date Transaction Units Cost
July 1 Inventory 2,000 $36.00
7 Purchase 3,000 37.00
12 Sales 3,600
21 Purchase 5,000 37.88
22 Sales 3,800
29 Purchase 1,600 38.11

If Stephens Inc. uses the average cost method to account for inventory, the
ending inventory of VTC cameras at July 31 is reported as
a. $153,400.
b. $156,912.
c. $158,736.
d. $159,464.
Test Bank, Intermediate Accounting, 14th ed. 27

c 50. Stephens Inc. is a wholesaler of photography equipment. The activity for the
LO5 VTC cameras during July is shown below:

Balance/
Date Transaction Units Cost
July 1 Inventory 2,000 $36.00
7 Purchase 3,000 37.00
12 Sales 3,600
21 Purchase 5,000 37.88
22 Sales 3,800
29 Purchase 1,600 38.11

If Stephens Inc. uses a moving average perpetual inventory system, the

ending inventory of the VTC cameras at July 31 is reported as
a. $153,400.
b. $156,912.
c. $158,736.
d. $159,464.
 c 51. The following information is available for Lyman Company:
LO8
Cost of goods sold for 2002............................................... $1,200,000
Inventories at December 31, 2001..................................... 350,000
Inventories at December 31, 2002..................................... 310,000

Assuming that a business year consists of 360 days, the number of days
sales in average inventories for 2002 was
a. 49.5.
b. 93.
c. 99.
d. 105.

a 52. Following are the account balances from Fulton Companys income
statement:
LO4
Inventory, January 1, 2002................................................. $30,000
Purchases........................................................................... 40,000
Purchase Returns and Allowances..................................... 5,000
Purchase Discounts............................................................ 4,000
Freight-In............................................................................ 5,000
Inventory, December 31, 2002........................................... 15,000
Freight-Out.......................................................................... 6,000

Given this information, the cost of goods sold during 2002 is

a. $51,000.
b. $46,000.
c. $56,000.
d. $66,000.

c 53. Following are the account balances from Jackson Companys income
statement:
LO4
Inventory, January 1, 2002................................................. $35,000
Purchases........................................................................... 35,000
Purchase Returns and Allowances..................................... 2,000
Purchase Discounts............................................................ 4,000
Freight-In............................................................................ 5,000
Inventory, December 31, 2002........................................... 10,000
Freight-Out.......................................................................... 6,000

Given this information, the cost of merchandise available for sale during 2002
is
a. $65,000.
 b. $59,000.
c. $69,000.
d. $61,000.

b 54. Cannon Company adopted the dollar-value LIFO inventory method on

December
LO7 31, 2001. Cannons entire inventory constitutes a single pool. On December
31, 2002, the inventory was $300,000 under the dollar-value LIFO method.
Inventory data for 2002 are as follows:

December 31, 2002, inventory at year-end prices........................$390,000

Relevant price index at year-end (base = 1.00 for 2001).................... 1.20

Using dollar-value LIFO, Cannons inventory at December 31, 2002, is

a. $325,000.
b. $330,000.
c. $360,000.
d. $468,000.

c 55. Young Corporation adopted the dollar-value LIFO method of inventory

valuation
LO10 on December 31, 2001. Information concerning that inventory is presented
below:
Inventory at
Date Current Prices
December 31, 2001 $600,000 1.00
December 31, 2002 759,000 1.15
December 31, 2003 864,000 1.20
December 31, 2004 787,500 1.25

What is the cost of the ending inventory to be reported by Young Corporation

at December 31, 2002, under dollar-value LIFO?
a. $600,000
b. $660,000
c. $669,000
d. $690,000
 b 56. Young Corporation adopted the dollar-value LIFO method of inventory
valuation
LO10 on December 31, 2001. Information concerning that inventory is presented
below:
Inventory at
Date Current Prices
December 31, 2001 $600,000 1.00
December 31, 2002 759,000 1.15
December 31, 2003 864,000 1.20
December 31, 2004 787,500 1.25

What is the cost of the ending inventory to be reported by Young Corporation

at December 31, 2003, under dollar-value LIFO?
a. $720,000
b. $741,000
c. $744,000
d. $828,000

b 57. Young Corporation adopted the dollar-value LIFO method of inventory

valuation
LO10 on December 31, 2001. Information concerning that inventory is presented
below:
Inventory at
Date Current Prices
December 31, 2001 $600,000 1.00
December 31, 2002 759,000 1.15
December 31, 2003 864,000 1.20
December 31, 2004 787,500 1.25

What is the cost of the ending inventory to be reported by Young Corporation

at December 31, 2004, under dollar-value LIFO?
a. $630,000
b. $634,500
c. $637,500
d. $720,000
 d 58. From the following information, determine the amount of freight-in.
LO4
Beginning Inventory............................................................... $20,000
Purchases.............................................................................. 41,000
Purchase Returns and Allowances....................................... 3,000
Purchase Discounts.............................................................. 4,000
Freight-In............................................................................... ?
Cost of Goods Available for Sale.......................................... 55,000
Ending Inventory................................................................... ?
Cost of Goods Sold............................................................... 22,000

a. $3,000
b. $4,000
c. $2,000
d. $1,000

c 59. From the following information, determine the amount of ending inventory.
LO4
Beginning Inventory............................................................... $20,000
Purchases.............................................................................. 41,000
Purchase Returns and Allowances....................................... 3,000
Purchase Discounts.............................................................. 4,000
Freight-In............................................................................... ?
Cost of Goods Available for Sale.......................................... 55,000
Ending Inventory................................................................... ?
Cost of Goods Sold............................................................... 22,000

a. $23,000
b. $32,000
c. $33,000
d. $22,000

c 60. The following information was obtained from the accounts of McKay
Company:
LO4
Inventory, January 1.............................................................. $ 30,000
Purchases.............................................................................. 45,000
Purchase Returns and Allowances....................................... 5,000
Purchase Discounts.............................................................. 4,000
Freight-In............................................................................... 5,000
Inventory, December 31........................................................ 20,000
Freight-Out............................................................................ 6,000
 Given this information, the cost of goods sold during the year is
a. $46,000.
b. $41,000.
c. $51,000.
d. $61,000.

c 61. During the year, The Hill Company purchased $1,920,000 of inventory. The
cost
LO8 of goods sold for the year was $1,800,000 and the ending inventory at
December 31 was $360,000. What was the inventory turnover for the year?
a. 5.0
b. 5.3
c. 6.0
d. 6.4

b 62. The following information was obtained from the accounts of Cox Company:
LO4
Beginning Inventory............................................................... $ 20,000
Purchases.............................................................................. 40,000
Purchase Returns and Allowances....................................... 2,000
Purchase Discounts.............................................................. 4,000
Freight-In............................................................................... 5,000
Ending Inventory................................................................... 10,000
Freight-Out............................................................................ 6,000

Given this information, the cost of goods available for sale is

a. $65,000.
b. $59,000.
c. $69,000.
d. $61,000.

d 63. Selected information from the accounting records of Thayer Company is as

follows:
LO8
Net sales for 2002.................................................................... $900,000
Cost of goods sold for 2002..................................................... 600,000
Inventory at December 31, 2001.............................................. 180,000
Inventory at December 31, 2002.............................................. 156,000
 Thayer's inventory turnover for 2002 is
a. 5.36 times.
b. 3.85 times.
c. 3.67 times.
d. 3.57 times.

c 64. The following information applied to Landon Company for 2002:

LO4
Merchandise purchased for resale.......................................... $300,000
Freight-in.................................................................................. 7,500
Interest on notes payable to vendors...................................... 3,000
Purchase returns...................................................................... 1,500

Landons inventoriable cost for 2002 was

a. $309,000.
b. $307,500.
c. $306,000.
d. $301,500.

c 65. At the end of year 1, Clinton Company adopted the dollar -value LIFO
method,
LO10 and the end-of-year 1 inventory cost was calculated to be $20,000.

Ending Inventory Price Index

Year at End-of-Year Prices (Year 1 = 1.00)
2 $38,400 1.2
3 $45,500 1.3
4 $35,000 1.4
5 $51,000 1.5

Under the dollar-value LIFO inventory method, what would be the value of
the inventory at the end of year 2?
a. $46,080
b. $38,400
c. $34,400
d. $32,000
 b 66. At the end of year 1, Clinton Company adopted the dollar -value LIFO
method,
LO10 and the end-of-year 1 inventory cost was calculated to be $20,000.

Ending Inventory Price Index

Year at End-of-Year Prices (Year 1 = 1.00)
2 $38,400 1.2
3 $45,500 1.3
4 $35,000 1.4
5 $51,000 1.5

Under the dollar-value LIFO method, what would be the value of the
inventory at the end of year 3?
a. $35,000
b. $38,300
c. $45,500
d. None of the above

b 67. At the end of year 1, Clinton Company adopted the dollar -value LIFO
method,
LO10 and the end-of-year 1 inventory cost was calculated to be $20,000.

Ending Inventory Price Index

Year at End-of-Year Prices (Year 1 = 1.00)
2 $38,400 1.2
3 $45,500 1.3
4 $35,000 1.4
5 $51,000 1.5

Under the dollar-value LIFO method, what would be the value of the
inventory at the end of year 4?
a. $25,000
b. $26,000
c. $30,000
d. None of the above
 c 68. At the end of year 1, Clinton Company adopted the dollar -value LIFO
method,
LO10 and the end-of-year 1 inventory cost was calculated to be $20,000.
Ending Inventory Price Index
Year at End-of-Year Prices (Year 1 = 1.00)
2 $38,400 1.2
3 $45,500 1.3
4 $35,000 1.4
5 $51,000 1.5

Under the dollar-value LIFO method, what would be the value of the
inventory at the end of year 5?
a. $34,000
b. $37,400
c. $39,500
d. $51,000

c 69. Purchases and sales during a recent period for Coleman, Inc. were:
LO5
Purchases During the Period Sales During the Period
1st Purchase 500 units @ $2 1st Sale 600 units @ $7
2nd Purchase 1,000 units @ $3 2nd Sale 750 units @ $8
3rd Purchase 500 units @ $4 3rd Sale 500 units @ $9
4th Purchase 500 units @ $5 4th Sale 500 units @ $10
2,500 units 2,350 units

Beginning inventory was 100 units at $1 each. Given this information, what
is the ending inventory if the periodic FIFO costing alternative is used?
a. $400
b. $500
c. $1,250
d. $3,100

a 70. Purchases and sales during a recent period for Coleman, Inc. were:
LO5
Purchases During the Period Sales During the Period
1st Purchase 500 units @ $2 1st Sale 600 units @ $7
2nd Purchase 1,000 units @ $3 2nd Sale 750 units @ $8
3rd Purchase 500 units @ $4 3rd Sale 500 units @ $9
4th Purchase 500 units @ $5 4th Sale 500 units @ $10
2,500 units 2,350 units

Beginning inventory was 100 units at $1 each. Given this information, what
is the ending inventory if the periodic LIFO costing alternative is used?
a. $400
b. $500
 c. $1,250
d. $3,100

c 71. Purchases and sales during a recent period for Coleman, Inc. were
LO5
Purchases During the Period Sales During the Period
1st Purchase 500 units @ $2 1st Sale 600 units @ $7
2nd Purchase 1,000 units @ $3 2nd Sale 750 units @ $8
3rd Purchase 500 units @ $4 3rd Sale 500 units @ $9
4th Purchase 500 units @ $5 4th Sale 500 units @ $10
2,500 units 2,350 units

Beginning inventory was 100 units at $1 each. Given this information, what
is the cost per unit available for sale during the year when using the average
cost method (rounded to the nearest cent)?
a. $2.61
b. $3.10
c. $3.31
d. $3.53

d 72. The following information was taken from Frandsen Companys accounting
LO4 records:

Increase in raw materials inventory....................................$ 7,500

Decrease in finished goods inventory................................ 17,500
Raw materials purchase..................................................... 215,000
Direct-labor payroll............................................................. 100,000
Factory overhead................................................................ 150,000
Freight-out.......................................................................... 22,500

There was no work-in-process inventory at the beginning or end of the year.

Frandsens cost of goods sold is
a. $497,500.
b. $487,500.
c. $482,500.
d. $475,000.

a 73. The following information is available for Hudson Company:

LO4
Disbursements for purchases............................................. $290,000
Increase in trade accounts payable................................... 25,000
Decrease in merchandise inventory................................... 10,000

Cost of goods sold was

a. $325,000.
b. $305,000.
 c. $275,000.
d. $255,000.

a 74. The following information is available for Carter Corporation for the month of
LO4 June:

Beginning Inventory 8 units @ $20.00 = $160

Purchased, June 3 5 units @ $22.00 = $110
Purchased, June 5 7 units @ $24.00 = $168
Sold, June 9 9 units
Purchased, June 15 8 units @ $26.00 = $208
Sold, June 19 7 units

Given this information, the ending inventory balance using the average cost
method is
a. $276.
b. $302.
c. $368.
d. $386.

d 75. Janices Sporting Goods had the following inventory records for one line of
skis
LO4 for the month of January:

Beginning Inventory...................... 70 pairs @ $100 per pair = $7,000

Sales (Jan. 1 Jan. 7)................. 50 pairs
Purchase (Jan. 8)......................... 46 pairs @ $104 per pair = $4,784
Sales (Jan. 9 Jan. 16)............... 49 pairs
Purchase (Jan. 17)....................... 62 pairs @ $110 per pair = $6,820
Sales (Jan. 18 Jan. 29)............. 56 pairs
Purchase (Jan. 30)....................... 18 pairs @ $112 per pair = $2,016
 Assuming the periodic LIFO inventory method is used, what is the cost of
Janices ending inventory?
a. $4,124
b. $4,268
c. $4,376
d. $4,100

c 76. Gordon Companys inventory at June 30, 2002, was $75,000 based on a
LO3 physical count of goods priced at cost, and before any necessary year-end
adjustment relating to the following:

Included in the physical count were goods billed to a customer FOB

shipping point on June 30, 2002. These goods had a cost of $1,500
and were picked up by the carrier on July 10, 2002.
Goods shipped FOB destination on June 28, 2002, from a vendor to
Gordon were received on July 3, 2002. The invoice cost was $2,500.

What amount should Gordon report as inventory on its June 30, 2002,
balance sheet?
a. $73,500
b. $74,000
c. $75,000
d. $76,500

c 77. The balance in Master Companys accounts payable account at December

31,
LO3 2002, was $1,100,000 before considering the following information:

Goods shipped FOB shipping point on December 20, 2002, from a

vendor
to Master were lost in transit. The invoice cost of $20,000 was not
recorded by Master. On January 6, 2003, Master filed a $20,000 claim
against the common carrier.
On December 27, 2002, a vendor authorized Master to return, for full
credit, goods shipped and billed at $35,000 on December 2, 2002. The
returned goods were shipped by Master on December 27, 2002. A
$35,000 credit memo was received and recorded by Master on January
6, 2003.
 What amount should Master report as accounts payable in its December 31,
2002, balance sheet?
a. $1,120,000
b. $1,115,000
c. $1,085,000
d. $1,065,000

b 78. The balance in Stockwell Companys accounts payable account on

December
LO3 31, 2002, was $1,225,000 before the following information was considered:

Goods shipped FOB destination on December 21, 2002, from a vendor to

Stockwell were lost in transit. The invoice cost of $45,000 was not
recorded by Stockwell. On December 28, 2002, Stockwell notified the
vendor of the lost shipment.
Goods were in transit from a vendor to Stockwell on December 31, 2002.
The invoice cost was $60,000, and the goods were shipped FOB shipping
point on December 28, 2002. Stockwell received the goods on January 6,
2003.

What amount should Stockwell report as accounts payable in its December

31, 2002, balance sheet?
a. $1,330,000
b. $1,285,000
c. $1,270,000
d. $1,225,000

a 79. The following information is available from Preston Companys 2002

accounting
LO4 records:
Purchases..................................................................................... $530,000
Purchase discounts...................................................................... 10,000
Beginning inventory...................................................................... 160,000
Ending inventory........................................................................... 215,000
Freight-out.................................................................................... 40,000

Prestons 2002 cost of goods sold is

a. $465,000.
b. $475,000.
c. $505,000.
d. $585,000.
 b 80. Campbells Clothing Store sells jeans. During January 2002, its inventory
LO4 records for one brand of designer jeans were as follows:
Beginning Inventory.................................... 10 pairs @ $ 20 = $ 200
January 6 Purchase................................... 4 pairs @ 25 = 100
January 10 Sale......................................... 5 pairs
January 15 Purchase................................. 7 pairs @ 30 = 210
January 20 Sale......................................... 10 pairs
January 25 Purchase................................. 4 pairs @ 30 = 120

Using this information, periodic FIFO cost of goods sold is

a. $330.
b. $300.
c. $430.
d. $250.

d 81. Campbells Clothing Store sells jeans. During January 2002, its inventory
LO4 records for one brand of designer jeans were as follows:
Beginning Inventory.................................... 10 pairs @ $ 20 = $ 200
January 6 Purchase................................... 4 pairs @ 25 = 100
January 10 Sale......................................... 5 pairs
January 15 Purchase................................. 7 pairs @ 30 = 210
January 20 Sale......................................... 10 pairs
January 25 Purchase................................. 4 pairs @ 30 = 120

Using this information, periodic LIFO cost of goods sold is

a. $360.
b. $300.
c. $330.
d. $430.

a 82. Campbells Clothing Store sells jeans. During January 2002, its inventory
LO4 records for one brand of designer jeans were as follows:
Beginning Inventory.................................... 10 pairs @ $ 20 = $ 200
January 6 Purchase................................... 4 pairs @ 25 = 100
January 10 Sale......................................... 5 pairs
January 15 Purchase................................. 7 pairs @ 30 = 210
January 20 Sale......................................... 10 pairs
January 25 Purchase................................. 4 pairs @ 30 = 120
 Using this information, the cost of goods sold using the average cost method
is
a. $378.
b. $358.
c. $265.
d. $236.

b 83. Henry Company adopted the dollar-value LIFO inventory method on January
1,
LO10 2002. In applying the LIFO method, Henry uses internal price indexes and
the multiple-pools approach. The following data were available for inventory
Pool No. 1 for the two years following the adoption of LIFO:

Current Inventory Internal

At Current- At Base- Price
Year Cost Year Cost Index
01/01/01 $300,000 $300,000 1.00
12/31/02 378,000 360,000 1.05
12/31/03 422,400 384,000 1.10

Under the dollar-value LIFO method, the inventory at December 31, 2003,
should be
a. $384,000.
b. $389,400.
c. $392,400.
d. $422,400.

c 84. Selected information from the 2002 and 2001 financial statements of BN
LO8 Company is presented below:
(in thousands)
As of December 31
2002 2001
Cash $ 21 $ 35
Accounts receivable (net) 27 22
Inventory 60 98
Prepaid expenses 105 142

Cash sales 750 675

Credit sales (percent of cash sales) 82% 85%
Cost of goods sold (percent of total sales 60% 58%
Net income 30 38
 BN Companys merchandise inventory turnover for 2002 is
a. 3.43.
b. 5.68.
c. 6.63.
d. 6.79.

PROBLEMS
Problem 1
The inventory account of Duke Company at December 31, 2002, included the
following items:
Inventory Amount
Merchandise out on consignment at sales price (including
markup of 35% on selling price).............................................................. $15,000
Goods purchased, in transit (shipped FOB shipping point)....................... 6,000
Goods held by Duke on consignment.............................................. 4,500
Goods out on approval (sales price $6,000, cost $4,000).......................... 6,000

Based on this information, the inventory account at December 31, 2002, should be
reduced by what amount?

Solution 1
LO1

Amounts that should not be included in the inventory are:

Markup on goods out on consignment (35% of $15,000)...................... $ 5,250
Goods held by Duke on consignment.............................................. 4,500
Markup on goods out on approval................................................... 2,000
Reduction of inventory account........................................................ $11,750

Problem 2
The following data relate to the first three years of operation for the Lewis
Company:
2002 2003 2004
Net income under FIFO........................ $30,000 $45,000 $16,000
Net income under LIFO........................ 12,000 32,000 12,000
Ending inventory under FIFO............... 55,000 67,000 71,000

Compute the ending inventory under LIFO for each year. (Ignore income taxes.)
Solution 2
LO5
2002 2003 2004
Net income under FIFO........................ $30,000 $45,000 $16,000
Net income under LIFO........................ 12,000 32,000 12,000
Decrease under LIFO........................... $18,000 $13,000 $ 4,000
Ending inventory under FIFO............... $55,000 $67,000 $71,000
Change in year-end inventory based
on change in net income under LIFO
as compared with FIFO:
Increase in cost of sales............ $18,000 $13,000 $ 4,000
Decrease in beginning
inventory under LIFO........... 0 18,000 31,000
Decrease in ending
inventory............................... $18,000 $31,000 $35,000
Ending inventory under LIFO.... $37,000 $36,000 $36,000

Problem 3
The following information is available for the Fister Company for 2002:
Freight-in.................................................................................. $ 50,000
Purchase returns......................................................................... 185,000
Selling expenses......................................................................... 357,000
Ending inventory......................................................................... 117,000

The cost of goods sold is equal to 400% of selling expenses. Compute the cost of
goods available for sale.

Solution 3
LO4

Cost of goods sold (400% x $357,000)............................................. $1,428,000

Add: Ending inventory................................................................ 117,000
Cost of goods available for sale................................................. $1,545,000

Problem 4
At the close of its fiscal year on March 31, 2002, Gren Industries, Inc. was in the
process of relocating its plant. This resulted in some confusion relating to the
inventory cutoff, as indicated by the following:
(1) Merchandise on hand costing $1,794 was included in the inventory although
the purchase invoice was not recorded until April 12, 2002.
(2) Merchandise shipped on April 1, 1999, was included in inventory--the cost of
this merchandise was $2,219, and the sale was recorded as $3,138 on
March 31, 2002.
(3) Merchandise costing $12,150 was included in the inventory although it was
shipped to a customer on March 31, 2002, FOB shipping point; the company
recorded the sale of $19,246 on that date.
(4) Merchandise costing $1,820 was not counted.
(5) Merchandise in transit (shipped to the company FOB destination) was
recorded as a purchase as of April 2, 2002, and its cost of $17,287 was not
included in the March 31, 2002, inventory.

Assuming that the company does not maintain a perpetual inventory system and
that the books for the fiscal year have been closed, provide the necessary
correcting entries. (Ignore income taxes.)

Solution 4
LO3

(1) Retained Earnings....................................................... 1,794

Purchases............................................................. 1,794
(2) Retained Earnings....................................................... 3,138
Sales..................................................................... 3,138
(3) Retained Earnings....................................................... 12,150
Inventory................................................................ 12,150
(4) Inventory...................................................................... 1,820
Retained Earnings................................................ 1,820
(5) No entry required. Transaction handled correctly.

Problem 5
The data below relate to Raw Material F, which is stocked by Dixon Inc. in its
warehousing operation:
Raw Material F
Units Dollars
Date Received Issued Balance Price Received Issued Balance
Jan. 1 1,600 $16 $25,600
Jan. 11 2,000 14 $28,000
Feb. 16 960
Mar. 20 680
June 22 580 15 8,700
Aug. 18 950
Sept. 10 810
Oct. 8 1,510 17 25,670
Dec. 9 930
Dec. 21 400 18 7,200
From these data, provide answers for the following [show computations for (1)]:
(1) Assuming a perpetual inventory system is used, compute the ending inventory
under (a) FIFO and (b) LIFO.
(2) If a perpetual inventory of Raw Material F is kept on a moving average basis,
the ending inventory will be:
(a) lower than the LIFO basis.
(b) higher than the FIFO basis.
(c) lower than the FIFO basis.
(d) impossible to determine.

Solution 5
LO5

(1) (a) FIFO: 400 units @ $18 = $ 7,200

1,360 units @ $17 = 23,120
1,760 units $30,320

(b) LIFO: 780 units @ $16 = $12,480

580 units @ $17 = 9,860
400 units @ $18 = 7,200
1,760 units $29,540

(2) (c) Lower than the FIFO basis.

Problem 6
On December 31, 2000, The Davis Company adopted the dollar-value LIFO
inventory method. The inventory on that date using the dollar-value LIFO inventory
method was determined to be $500,000. Inventory data for following years are
listed below:

Inventory at Year-End
Year Ended Respective Price Index
December 31 Year-End Prices (Base Year 2000)
2000 $500,000 1.00
2001 572,000 1.10
2002 603,750 1.15
2003 756,250 1.20
2004 702,000 1.30
2005 612,000 1.20
Compute the inventory amounts for Davis at December 31, 2000, 2001, 2002,
2003, 2004, and 2005, using the dollar-value LIFO inventory method for each year.
Use the year-end price index as the incremental layer index.
Solution 6
LO10

Inventory at Inventory at Layers in

End-of-Year Year-End Base Year Base Year Price Dollar-Value
Date Prices Index Prices Prices Index LIFO Cost
12/31/00 $500,000 1.00 = $500,000 $500,000 1.00 $ 500,000

12/31/01 $572,000 1.10 = $520,000 $500,000 1.00 $ 500,000

20,000 1.10 22,000
$ 522,000

12/31/02 $603,750 1.15 = $525,000 $500,000 1.00 $ 500,000

20,000 1.10 22,000
5,000 1.15 5,750
$ 527,750

12/31/03 $756,250 1.25 = $605,000 $500,000 1.00 $ 500,000

20,000 1.10 22,000
5,000 1.15 5,750
80,000 1.20 96,000
$ 623,750

12/31/04 $702,000 1.30 = $540,000 $500,000 1.00 $ 500,000

20,000 1.10 22,000
5,000 1.15 5,750
15,000 1.20 18,000
$ 545,750

12/31/05 $612,000 1.20 = $510,000 $500,000 1.00 $ 500,000

10,000 1.10 11,000
$ 511,000
Problem 7
Edwards Sporting Goods began operations February 1, 2002. Edwards sells
footballs to high schools and colleges throughout the country. The company uses
a periodic system. A summary of inventory records for the month of February
appears below:

Inventory Records--Footballs
Terms of Units Gross Price
Date Purchase Received on Invoice
February 2 3/10, net 30 800 $30,000
February 17 net 30 600 22,560
February 26 2/10, net 45 550 20,490

All footballs are sold for $47.50. Edwards takes all discounts that are offered and
uses the net method for recording purchases. On February 28, 470 footballs were
on hand.

(1) Compute the ending inventory cost under FIFO.

(2) Compute the gross margin on sales under LIFO.
(3) Compute the ending inventory cost under LIFO.
(4) Give the journal entry to record the February 2 purchase.

Solution 7
LO5
Units Cost
Beginning Inventory.................... 0 0
Purchases: February 2............ 800 @ $36.375 = $29,100 ($30,000 - $900)
February 17.......... 600 @ 37.600 = 22,560
February 26.......... 550 @ 36.510 = 20,080 ($20,490 - $410)
Goods available.......................... 1,950 $71,740
Less ending inventory................. 470
Sales........................................... 1,480

(1) Ending Inventory--FIFO

(470 @ $36.51)............................. $17,160

(2) Sales (1,480 @ $47.50)........................................... $70,300

Cost of goods sold:
(550 @ $36.51).................................................. $20,080
(600 @ $37.60).................................................. 22,560
(330 @ $36.375)................................................ 12,004 54,644
Gross margin on sales--LIFO.................................. $15,656
(3) Ending inventory--LIFO
(470 @ $36.375).......................... $17,096

(4) Feb. 2 Purchases (Inventory)............ 29,100

Accounts Payable.............. 29,100

Problem 8
The Clayton Music Company was formed on December 1, 2001. The following
information is available from Claytons inventory records:
Units Unit Cost
Balance at January 1, 2002............................................. 4,800 $14.25
Purchases:
January 17, 2002........................................................ 9,000 15.00
March 12, 2002........................................................... 7,200 16.50
June 23, 2002............................................................. 3,600 15.75
November 15, 2002.................................................... 5,400 17.25

The company uses a periodic inventory system, and a physical inventory on

November 30, 2002, shows 9,600 units on hand. Prepare schedules to compute
the ending inventory at November 30, 2002, under each of the following inventory
methods:

(1) FIFO.
(2) LIFO.
(3) Average cost.

Solution 8
LO5

(1) Computation of inventory under FIFO method

Units Unit Cost Total Cost
November 15, 2002......................... 5,400 $17.25 $ 93,150
June 23, 2002.................................. 3,600 15.75 56,700
March 12, 2002............................... 600 16.50 9,900
9,600 $ 159,750

(2) Computation of inventory under LIFO method

Units Unit Cost Total Cost
January 1, 2002............................... 4,800 $14.25 $ 68,400
January 17, 2002............................ 4,800 15.00 72,000
9,600 $ 140,400
(3) Computation of inventory under the average cost method
Units Unit Cost Total Cost
January 1, 2002............................... 4,800 $14.25 $ 68,400
January 17, 2002............................ 9,000 15.00 135,000
March 12, 2002............................... 7,200 16.50 118,800
June 23, 2002.................................. 3,600 15.75 56,700
November 15, 2002......................... 5,400 17.25 93,150
30,000 $ 472,050

Average Cost: $472,050/30,000 = $15.735

November 30, 2002, inventory: 9,600 units @ $15.735 = $151,056

Problem 9
The following data are from the inventory records of the Dennis Corporation, which
adopted LIFO effective January 1, 2002:
Jan. 1, 2002 Dec. 31, 2002
Inventory at base prices............................. $320,000
Inventory at current prices......................... $436,800
Inventory at base prices............................. 420,000

(1) Using the dollar-value LIFO procedures, compute the inventory on December
31, 2002, from the above data.
(2) Prepare a schedule showing the inventory layers included in ending inventory
at December 31, 2002.

Solution 9
LO10

(1) December 31, 2002:

Inventory at current prices.......................................................... $436,800
Inventory at base prices.............................................................. 420,000
January 1, 2002, inventory at base prices....................................... 320,000
Inventory increase at base prices ($420,000 - $320,000)....................... 100,000
Price index applying to increase ($436,800/$420,000).......................... 104%
Layer increase ($100,000 x 1.04).......................................................... 104,000
December 31, 2002, inventory at dollar-value LIFO
($320,000 + $104,000)....................................................................... 424,000
(2) Inventory layers at December 31:

Base Price Inventory

Price Index Balance
Base-year layer........................... $320,000 100 $320,000
Current layer............................... 100,000 104 104,000
$420,000 $424,000

Problem 10
Shown below are the inventory records for the Sundance Camera Store for 2002,
the first year in which dollar-value LIFO was used:

January 1 December 31
Inventory at base-year price $108,000
Inventory at year-end prices $141,900
External price index 100.0 110.0

Inventory records contained the following data for 2003 and 2004:

December 31
2003 2004
Inventory at year-end prices $147,736 $159,505
External price index 118.0 115.0

Using the dollar-value LIFO method, calculate the ending inventory for each of the
following dates:

(1) December 31, 2002.

(2) December 31, 2003.
(3) December 31, 2004.
 Solution 10
LO10

Inventory at Inventory at Layers in

End-of-Year Year-End Base-Year Base-Year Price Dollar-Value
Date Prices Index Prices Prices Index LIFO Cost
12/31/01 $108,000 1.00 = $108,000 $108,000 1.00 $ 108,000

(1) 12/31/02 $141,900 1.10 = $129,000 $108,000 1.00 $ 108,000

21,000 1.10 23,100
$ 131,100

(2) 12/31/03 $147,736 1.18 = $125,200 $108,000 1.00 $ 108,000

17,200 1.10 18,920
$ 126,920

(3) 12/31/04 $159,505 1.15 = $138,700 $108,000 1.00 $ 108,000

17,200 1.10 18,920
13,500 1.15 15,525
$ 142,445

Problem 11
The following information was available from the inventory records of the Brooks
Company for January 2002:
Units Unit Cost Total Cost
Balance at January 1, 2002................... 3,000 $19.55 $ 58,650
Purchases:
January 6, 2002............................... 2,250 20.60 46,350
January 26, 2002............................ 10,200 21.50 219,300
Sales:
January 7, 2002............................... 2,700
January 31, 2002............................ 7,200
Balance at January 31, 2002................. 5,550

(1) Assuming that Brooks maintains perpetual inventory records, what should be
the inventory at January 31, 2002, using the FIFO inventory method, rounded
to the nearest dollar?
(2) Assuming that Brooks maintains perpetual inventory records, what should be
the inventory at January 31, 2002, using the LIFO inventory method, rounded
to the nearest dollar?
(3) Assuming that Brooks does not maintain perpetual inventory records, what
should be the inventory at January 31, 2002, using the average cost inventory
method, rounded to the nearest dollar?

Solution 11
LO5
(1) Computation of ending inventory using perpetual FIFO method:

Units Unit Cost Total Cost

January 26, 2002............................ 5,550 $21.50 $ 119,325.00

(2) Computation of ending inventory using perpetual LIFO method:

Units Unit Cost Total Cost

Beginning Inventory........................ 2,550 $19.55 $ 59,852.50
January 26, 2002............................ 3,000 21.50 64,500.00
5,550 $ 114,352.50

(3) Computation of inventory under the average cost method:

Units Unit Cost Total Cost

3,000 @ $19.55 = $ 58,650
2,250 @ 20.60 = 46,350
10,200 @ 21.50 = 219,300
15,450 $ 324,300

$324,300/15,450 = $ 20.99
5,550 x $20.99 = $116,495 (rounded)
Problem 12
The Murphy Company manufactures a single product. On December 31, 2001,
Murphy adopted the dollar-value LIFO inventory method. The inventory on that
date using the dollar-value LIFO inventory method was determined to be $325,000.
Inventory data for succeeding years are as follows:

Inventory at Relevant
Year Ended Respective Price Index
December 31 Year-End Prices (Base-Year 2001)
2002 $363,000 1.10
2003 420,000 1.20
2004 430,000 1.25
2005 480,000 1.20
2006 348,000 1.16

Compute the inventory amounts at December 31, 2002, 2003, 2004, 2005, and
2006, using the dollar-value LIFO inventory method for each year.

Solution 12
LO10

Inventory at Inventory at Layers in

End-of-Year Year-End Base-Year Base-Year Price Dollar-Value
Date Prices Index Prices Prices Index LIFO Cost
12/31/01 $325,000 1.00 = $325,000 $325,000 1.00 $ 325,000

12/31/02 $363,000 1.10 = $330,000 $325,000 1.00 $ 325,000

5,000 1.10 5,500
$ 330,500

12/31/03 $420,000 1.20 = $350,000 $325,000 1.00 $ 325,000

5,000 1.10 5,500
20,000 1.20 24,000
$ 354,500

12/31/04 $430,000 1.25 = $344,000 $325,000 1.00 $ 325,000

5,000 1.10 5,500
14,000 1.20 16,800
$ 347,300
12/31/05 $480,000 1.20 = $400,000 $325,000 1.00 $ 325,000
5,000 1.10 5,500
14,000 1.20 16,800
56,000 1.20 67,200
$ 414,500

12/31/06 $348,000 1.16 = $300,000 $300,000 1.00 $ 300,000

Problem 13
The following data are from the inventory records of the DDT Chemical Co. for the
years 2001 and 2002:
Inventory Quantity
(in Units) Inventory Prices
Commodity 2001 2002 2001 2002
A 200 200 $ 5.00 $ 5.40
B 50 80 20.00 23.00
C 300 400 15.00 17.00
D 160 192 25.00 24.00

From these data, compute the price index for 2002 using the double-extension
method.

Solution 13
LO9
At 2001 Inventory Prices At 2002 Inventory Prices
Commodity Quantity Cost Total Quantity Cost Total
A 200 $ 5.00 $ 1,000 200 $ 5.40 $ 1,080
B 80 20.00 1,600 80 23.00 1,840
C 400 15.00 6,000 400 17.00 6,800
D 192 25.00 4,800 192 24.00 4,608
$13,400 $ 14,328

2002 inventory at 2002 prices = $14,328 = 106.9 price index for 2002
2002 inventory at 2001 prices $13,400
56 Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

Problem 14
On January 1, 2001, Fawcett Distributors, Inc. adopted the dollar-value LIFO
inventory method for income tax and external financial reporting purposes.
However, Fawcett continued to use the FIFO inventory method for internal
accounting and management purposes. In applying the LIFO method, Fawcett
uses the double-extension method for determining price indexes and the multiple-
pools approach under which substantially identical inventory items are grouped
into LIFO inventory pools. The following data were available for Inventory Pool No.
1, which is comprised of products X and Y, for the two years following the adoption
of LIFO:

FIFO Basis per Records

Units Unit Cost Total Cost

Inventory, 1/1/01
Product X................................... 20,000 $30 $ 600,000
Product Y................................... 7,000 25 175,000
$ 775,000
Inventory, 12/31/01
Product X................................... 23,000 $35 $ 805,000
Product Y................................... 5,000 28 140,000
$ 945,000
Inventory, 12/31/02
Product X................................... 16,000 $40 $ 640,000
Product Y................................... 6,000 32 192,000
$ 832,000

(1) Prepare a schedule to compute the price indexes for 2001 and 2002 using the
double-extension method.

(2) Prepare a schedule to compute the inventory amounts at December 31, 2001
and 2002, using the dollar-value LIFO inventory method.
Solution 14
LO9, LO10

(1)
Fawcett Distributors, Inc.
Computation of Internal Price Index for Inventory Pool No. 1
Double-Extension Method

December 31, 2001 December 31, 2002

Current inventory at current year cost:
Product X...................... 23,000 x $35 = $805,000 16,000 x $40 = $640,000
Product Y...................... 5,000 x $28 = 140,000 6,000 x $32 = 192,000
$945,000 $832,000
Current inventory at base cost:
Product X...................... 23,000 x $30 = $690,000 16,000 x $30 = $480,000
Product Y...................... 5,000 x $25 = 125,000 6,000 x $25 = 150,000
$815,000 $630,000
Conversion price index:
2001: $945,000/$815,000 = 1.16
2002: $832,000/$630,000 = 1.32

(2)
Fawcett Distributors, Inc.
Computation of Inventory Amounts Under Dollar-Value LIFO Method
at December 31, 2001 and 2002

Current Inventory Conversion Inventory at

at Base Cost Price Index LIFO Cost
December 31, 2001
Base inventory................... $775,000 1.00 $775,000
2001 layer.......................... 40,000 1.16 46,400
$815,000 $821,400

December 31, 2002

Base inventory................... $630,000 1.00 $630,000
2001 layer.......................... 0 1.16 0
2002 layer.......................... 0 1.32 0
$630,000 $630,000
58 Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

Problem 15
Two reasons often advanced for the adoption of LIFO inventory costing for financial
reporting are the improved matching of current costs with current revenue during
periods of rising prices and the reduction of income tax payments. Nonetheless, the
number of companies using LIFO has not increased over the last several years. Some
companies actually have switched from LIFO to FIFO over the last several years.

Identify reasons why a company would change from LIFO to FIFO for financial
reporting purposes.

Solution 15
LO7
There are at least four reasons why a company might change from LIFO to FIFO for
financial reporting purposes.

The first reason relates to the existence of contractual arrangements, such as debt
covenants, that require that certain ratios (e.g., current ratio, debt-to-equity ratio) be
maintained at specified levels. The use of FIFO during periods of rising prices
increases the value of inventory and produces more favorable ratios.

A second reason is that some management compensation plans are based on some
form of reported income. The use of FIFO during periods of rising prices raises
reported income and thus increases management compensation.

A third reason again relates to the fact that the use of FIFO results in a higher net
income. Managers may believe that this higher reported net income will result in higher
prices for the companys stock. Empirical research suggests that the choice of
accounting methods for inventory costing is viewed by professional investors and
analysts as nothing more than a gimmick. Unless the change results in increases in
cash flows, it is likely to be disregarded by the market.

The fourth reason is that managers may be anticipating future declines or liquidations.
LIFO would result in higher taxable income than FIFO in years in which inventory costs
decline or older layers of inventory costed at lower prices are liquidated.
Problem 16
The following data are available for Castle Gate Company:
Unit
Units Cost Total Cost
Beginning inventory (base layer of LIFO inventory) 20,000 $1.00 $ 20,000
Purchases 80,000 $1.50 120,000
Total available for sale 100,000 $140,000
Sales (88,000 units, costed on LIFO basis) from:
Purchases 80,000 $1.50 $120,000
Base inventory layer 8,000 $1.00 8,000
Cost of goods sold 88,000 $128,000

Ending inventory 12,000 $1.00 $ 12,000

The company has experienced a temporary LIFO liquidation by not maintaining the
base year inventory of 20,000 units. The company uses a perpetual inventory system.

Prepare the entries to account for the temporary liquidation and the replacement of the
liquidated units assuming that 8,000 units will be replaced at $1.60 per unit

Solution 16
LO6

Entry to record liquidation:

Cost of Goods Sold.......................................................................132,800

(80,000 x $1.50) + (8,000 x $1.60)
Inventory
(80,000 x $1.50) + (8,000 x $1.00)........................................ 128,000
Excess of Replacement Cost of LIFO Inventory
Temporarily Liquidated (8,000 x $.60)................................... 4,800

Entry to record replacement:

Inventory (8,000 x $1.00).............................................................. 8,000

Excess of Replacement Cost of LIFO Inventory
Temporarily Liquidated (8,000 x $.60).......................................... 4,800
Accounts Payable (8,000 x $1.60)......................................... 12,800

CHAPTER 8 -- QUIZ A
Name _________________________
 Section ________________________

T F 1. Activity-based cost (ABC) systems are designed to allocate direct labor costs
to manufacturing activities.

T F 2. Work in process inventories include only the costs of direct materials and
direct labor.

T F 3. When a perpetual inventory system is used, physical counts should be made

periodically to confirm the inventory balances on the books.

T F 4. Abnormal shortages or thefts of inventory should be reported separately as

operating expenses.

T F 5. Normal inventory adjustments for shrinkage and breakage are reported as

adjustments to cost of goods sold.

T F 6. When the terms of a sale are FOB shipping point, goods in transit at year-
end should be included in the inventory of the seller.

T F 7. Title to goods shipped FOB destination remains with the seller from the
shipping point to the destination point.

T F 8. Goods held by customers on approval should be excluded from the sellers

inventory.

T F 9. Consigned goods are reported by the consignor in inventory at the sum of

their cost, handling and shipping costs, and the estimated gross profit.

T F 10. The LIFO conformity rule (IRS Regulations) does not permit companies to
report inventory values using any method other than LIFO in the financial
statements or in the attached notes.

60
CHAPTER 8 -- QUIZ B
Name _________________________
Section ________________________

T F 1. In a period of rising prices, the use of FIFO relates the current high costs of
acquiring goods with rising sales prices. As a result, FIFO tends to have a
stabilizing effect on gross profit margins.

T F 2. In dollar-value LIFO applications, when a specific layer is reduced or

eliminated, it can be restored when quantities increase in future periods.

T F 3. The gross method of accounting for purchase discounts is theoretically

preferable to the net method.

T F 4. The gross method of accounting for purchase discounts reflects the fact that
discounts not taken are in effect credit-related expenditures incurred for
failure to pay within the discount period.

T F 5. The specific identification method is a highly objective approach to matching

historical costs with revenues.

T F 6. Specific identification as an inventory method matches the flow of recorded

costs to the physical flow of goods.

T F 7. LIFO assumes a cost flow that closely parallels the usual physical flow of
goods sold.

T F 8. With FIFO, inventories are reported on the balance sheet at or near their
current value.

T F 9. Unlike other inventory cost methods, the average cost approach provides the
same unit cost for items of equal utility.

T F 10. FIFO provides income tax savings during periods of falling prices.

CHAPTER 8 -- QUIZ C

61
 Name______________________
Section_____________________
A. Product costs
B. Consigned goods L. FOB destination
C. LIFO reserve M. Gross method
D. Net method N. Work in process
E. Dollar-value LIFO inventory method O. LIFO conformity rule
F. Factory overhead P. LIFO inventory pools
G. Double extension Q. Specific identification
H. Trade discount R. Periodic inventory system
I. Perpetual inventory system S. Raw materials
J. FIFO T. Period costs
K. LIFO U. FOB shipping point

Select the term that best fits each of the following definitions and descriptions:

____ 1. Terms under which title to merchandise transfers to the purchaser when the
goods are received.
____ 2. A method of inventory valuation that reports inventory after consideration of
any purchase discounts.
____ 3. A discount that converts a list price to the price a purchaser is actually
charged.
____ 4. A technique used with dollar-value LIFO to compute the ending inventory at
base-year prices.
____ 5. The classification of inventory into items having common characteristics. The
LIFO historical cost method is then applied to each grouping.
____ 6. All manufacturing costs except direct materials and direct labor.
____ 7. Inventory that is partially processed and requires additional work before it can
be sold.
____ 8. A cost flow assumption that normally approximates the actual physical flow of
the merchandise.
____ 9. A regulation that requires the use of LIFO for financial reporting purposes if
LIFO is used for income tax purposes.
____10. The inventory method that matches the cost flow to the physical flow of the
asset.
____11. A valuation method that reports the inventory cost before the consideration of
purchase discounts.
____12. Records that provide a continuous summary of inventory activity.
____13. Costs that are recognized as expenses during the period in which they are
incurred.
____14. The historical cost flow assumption that best matches current cost to current
revenues.
____15. Inventory that is physically located at a dealer, but the title is retained by the
shipper until the merchandise is sold.

62
CHAPTER 8 -- QUIZ SOLUTIONS

Quiz A Quiz B Quiz C

1. F 1. F 1. L
2. F 2. F 2. D
3. T 3. F 3. H
4. T 4. F 4. G
5. T 5. T 5. P
6. F 6. T 6. F
7. T 7. F 7. N
8. F 8. T 8. J
9. F 9. T 9. O
10. F 10. T 10. Q
11. M
12. I
13. T
14. K
15. B
64 Chapter 8 Cost of Goods Sold and Inventory: Identification and
Valuation

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