CH 06

54  Chapter 6/Inventories
Chapter 6
Inventories
OBJECTIVES
Obj 1 Describe the importance of control over inventory.

Obj 2 Describe three inventory cost flow assumptions and how they impact the income
statement and balance sheet.
Obj 3 Determine the cost of inventory under the perpetual inventory system using FIFO,
LIFO, and average cost methods.
Obj 4 Determine the cost of inventory under the periodic inventory system using FIFO,
LIFO, and average cost methods.
Obj 5 Compare and contrast the use of the three inventory costing methods.
Obj 6 Describe and illustrate the reporting of merchandise inventory in the financial
statements.
Obj 7 Estimate the cost of inventory, using the retail method and the gross profit method.
QUESTION GRID
True / False
No. Objective Difficulty No. Objective Difficulty No. Objective Difficulty
1 06-01 Moderate 15 06-04 Easy 29 06-06 Moderate
2 06-01 Moderate 16 06-05 Moderate 30 06-06 Moderate
3 06-01 Moderate 17 06-05 Moderate 31 06-06 Easy
4 06-01 Easy 18 06-05 Difficult 32 06-06 Moderate
5 06-01 Easy 19 06-05 Difficult 33 06-06 Easy
7 06-02 Moderate 21 06-05 Difficult 35 06-07 Moderate
8 06-02 Easy 22 06-05 Difficult 36 06-07 Easy
9 06-02 Moderate 23 06-06 Easy 37 06-07 Easy
12 06-03 Moderate 26 06-06 Difficult 40 06-07 Easy
13 06-03 Easy 27 06-06 Easy 41 06-07 Easy
14 06-04 Easy 28 06-06 Easy
Multiple Choice
1 06-01 Easy 21 06-03 Easy 41 06-06 Moderate
2 06-01 Easy 22 06-03 Moderate 42 06-06 Easy
3 06-01 Moderate 23 06-03 Difficult 43 06-06 Difficult
4 06-01 Easy 24 06-03 Difficult 44 06-06 Difficult
12 06-02 Moderate 32 06-04 Moderate 52 06-07 Difficult
13 06-02 Difficult 33 06-04 Moderate 53 06-07 Difficult
14 06-02 Moderate 34 06-04 Easy 54 06-07 Moderate
17 06-03 Difficult 37 06-05 Moderate 57 06-07 Moderate
18 06-03 Difficult 38 06-05 Difficult 58 06-07 Moderate
19 06-03 Easy 39 06-05 Difficult
20 06-03 Difficult 40 06-05 Difficult
Exercise/Other
3 06-03 Moderate 7 06-06 Difficult 11 06-07 Easy
Problem
1 06-01 Easy 7 06-04 Moderate 13 06-06 Moderate
2 06-03 Difficult 8 06-05 Difficult 14 06-07 Difficult
5 06-04 Moderate 11 06-06 Moderate 17 06-07 Difficult
6 06-04 Difficult 12 06-06 Difficult 18 06-07 Moderate
Chapter 6/Inventories  56
Chapter 6—Inventories
TRUE/FALSE
1. One of the two internal control procedures over inventory is to properly report inventory on
the financial statements.
ANS: T DIF: Moderate OBJ: 06-01
NAT: AACSB Analytic | AICPA FN-Measurement
2. A detective internal control is designed to find an error or misstatement after it has occurred.
3. A perpetual inventory system is an effective means of control over inventory.

4. A subsidiary inventory ledger can be an aid in maintaining inventory levels at their proper
levels.
ANS: T DIF: Easy OBJ: 06-01
5. Safeguarding inventory and proper reporting of the inventory in the books are the reasons
for controlling the inventory.
6. Inventory controls start when the merchandise is shelved in the store area.
ANS: F DIF: Easy OBJ: 06-01
7. The specific identification inventory method should be used when the inventory consists of
identical, low cost units that are purchased and sold frequently.
ANS: F DIF: Moderate OBJ: 06-02
8. The selection of an inventory costing method has no significant impact on the financial
statements.
9. Of the three widely used inventory costing methods (FIFO, LIFO, and average), the LIFO
method of costing inventory is based on the assumption that costs are charged against
revenues in the reverse order in which they were incurred.
10. When using the FIFO inventory costing method, the most recent costs are assigned to the
cost of merchandise sold.
11. FIFO is the inventory costing method that follows the physical flow of the goods.
12. If the perpetual inventory system is used and a physical count disclosed a shortage, the cost
of merchandise sold should be debited and the merchandise inventory account credited.
13. If the perpetual inventory system is used, the account entitled Merchandise Inventory is
debited for purchases of merchandise.
14. Under the periodic inventory system, the merchandise inventory account continuously
discloses the amount of inventory on hand.
15. 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.
16. One difference between the periodic and the perpetual inventory systems is that under the
perpetual system the purchases account is not used.
17. The LIFO cost of ending inventory will be the same for a periodic inventory system and a
perpetual inventory system.
18. During inflationary periods, 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.
ANS: T DIF: Difficult OBJ: 06-05
19. During inflationary periods, the use of the FIFO method of costing inventory will yield an
inventory amount for the balance sheet approximating the current replacement cost.
20. During inflationary periods, the use of the LIFO method of costing inventory will result in a
greater amount of net income than would result from the use of the FIFO method.
ANS: F DIF: Difficult OBJ: 06-05
21. During deflationary periods, the use of the LIFO method of costing inventory will result in a
lower amount of current assets than would result from the use of the FIFO method.
22. During inflationary periods, an advantage of the LIFO inventory cost method is that it
matches more recent costs against current revenues.
23. In valuing damaged merchandise for inventory purposes, net realizable value is the
estimated selling price less any direct costs.
24. Unsold consigned merchandise should be included in the consignee's inventory.

25. If ending inventory for the year is understated, net income for the year is overstated.
26. If ending inventory for the year is overstated, stockholders’ equity reported on the balance
sheet at the end of the year is understated.
27. The lower of cost or market is a method of inventory valuation.

28. "Market," as used in the phrase "lower of cost or market" for valuing inventory, refers to the
price at which the inventory is being offered for sale by its owner.
29. A consignor who has goods out on consignment with an agent should include the goods in
ending inventory even though they are not in the possession of the consignor.
30. The use of the lower-of-cost-or-market method of inventory valuation increases net income
for the period in which the inventory replacement price declined.
31. The lower-of-cost-or-market method of determining the value of ending inventory can be
applied on an item by item, by major classification of inventory, or by the total inventory.
32. When merchandise inventory is shown on the balance sheet, both the method of determining
the cost of the inventory and the method of valuing the inventory should be shown.
33. Most large companies will use only one inventory costing methods for all of its different
segments.
34. Companies having inventory decreases due to lower of cost or market valuations will
disclose the information to stockholders.
35. In the retail inventory method, the cost to retail ratio is equal to the cost of merchandise sold
divided by the retail price of the good sold.
36. If the retail inventory method is used, inventory figures can be provided for interim
statements without the necessity of taking a physical inventory.
37. If a fire destroys the merchandise inventory, the gross profit method can be used to estimate
the cost of merchandise destroyed.
38. If a company uses the periodic inventory system to cost its inventory, the gross profit
method is a method that can be used to check on theft when the actual inventory is taken by
the company.
39. Generally, the lower the number of days' sales in inventory, the better.
40. One negative effect of carrying too much inventory is risk that customers will change their
buying habits.
41. Average inventory is computed by adding the inventory at the beginning of the period to the
inventory at the end of the period and dividing by two.
MULTIPLE CHOICE
1. Under a perpetual inventory system, the amount of each type of merchandise on hand is
available in the
a. customer's ledger
b. creditor's ledger
c. inventory ledger
d. merchandise inventory account
ANS: C DIF: Easy OBJ: 06-01
2. Taking a physical count of inventory

a. is not necessary when a periodic inventory system is used
b. is a detective control
c. has no internal control relevance
d. is not necessary when a perpetual inventory system is used
ANS: B DIF: Easy OBJ: 06-01
3. Control of inventory should begin as soon as the inventory is received. Which of the
following internal control steps is not done to meet this goal?
a. check the invoice to the receiving report
b. check the invoice to the purchase order
c. check the invoice with the person who specifically purchased the item
d. check the invoice extensions and totals
ANS: C DIF: Moderate OBJ: 06-01
4. Which of the following is not an example for safeguarding inventory?

a. Storing inventory in restricted areas.
b. Physical devices such as two-way mirrors, cameras, and alarms.
c. Matching receiving documents, purchase orders, and vendor’s invoice.
d. Returning inventory that is defective or broken.
ANS: D DIF: Easy OBJ: 06-01
5. Which of the following is not true about taking physical inventories?

a. Large variances may require investigations and implementation of corrective actions.
b. Physical inventories are taken when inventory levels are at their lowest.
c. Physical inventories deter employee thefts and inventory misuses.
d. Physical inventories are taken when inventory levels are at their highest.
ANS: D DIF: Moderate OBJ: 06-01
6. Which of the following inventory cost methods is appropriate for a business who has
inventory with a relatively small number of unique items and a high cost per item?
a. FIFO
b. LIFO
c. average
d. specific identification
7. The inventory method that considers the inventory to be composed of the units of
merchandise acquired earliest is called
a. first-in, first-out
b. last-in, first-out
c. average cost
d. retail method
ANS: B DIF: Moderate OBJ: 06-02
8. When merchandise sold is assumed to be in the order in which the expenditures were made,
the inventory method is called
a. first-in, last-out
c. first-in, first-out
d. average cost
9. The two most widely used methods for determining the cost of inventory are
a. FIFO and LIFO
b. FIFO and average
c. LIFO and average
d. gross profit and average
ANS: A DIF: Easy OBJ: 06-02
10. Under which method of cost flows is the inventory assumed to be composed of the most
recent costs?
a. average cost
d. weighted average
11. Under which method of inventory cost flows is the cost flow assumed to be in the reverse
order in which the expenditures were made?
a. weighted average
d. average cost
12. The inventory method that assigns the most recent costs to cost of good sold is
a. FIFO
b. LIFO
c. average
d. specific identification
13. Inventory costing methods place primary emphasis on assumptions about

a. flow of goods
b. flow of costs
c. flow of goods or costs depending on the method
d. flow of values
ANS: B DIF: Difficult OBJ: 06-02
14. The inventory costing method that reflects a cost flow that is in the order in which the costs
were incurred and will report the most current prices in ending inventory is
a. First in first out
b. Specific identification
c. Last in first out
d. Average cost
ANS: A DIF: Moderate OBJ: 06-02
15. The inventory costing method that reflects the cost flow in the reverse order and will report
the earliest costs in ending inventory is
a. First in first out
b. Last in first out
c. Average cost
d. Specific identification
16. Which of the following companies would be more likely to use the specific identification
inventory costing method?
a. Gordon’s Jewelers
b. Lowe’s
c. Best Buy
d. Wal-Mart
17. The inventory data for an item for November are:
Nov. 1 Inventory 20 units at $20

4 Sold 10 units
10 Purchased 30 units at $21
17 Sold 20 units
Using the perpetual system, costing by the first-in, first-out method, what is the cost of the
merchandise inventory of 30 units on November 30?
a. $640
b. $610
c. $620
d. $630
ANS: A DIF: Difficult OBJ: 06-03

4 Sold 10 units
17 Sold 20 units
Using the perpetual system, costing by the last-in, first-out method, what is the cost of the
merchandise inventory of 30 units on November 30?
a. $640
b. $610
c. $620
d. $630
ANS: D DIF: Difficult OBJ: 06-03
19. Under a perpetual inventory system, when a shortage is discovered

a. Merchandise Inventory is debited
b. Cost of Merchandise Sold is credited
c. Inventory Shortages is credited
d. Merchandise Inventory is credited
20. In recording the cost of merchandise sold for cash, based on data available from perpetual
inventory records, the journal entry is
a. debit Cost of Merchandise Sold; credit Sales
b. debit Cost of Merchandise Sold; credit Merchandise Inventory
c. debit Merchandise Inventory; credit Cost of Merchandise Sold
d. debit Accounts Receivable; credit Sales
21. The inventory system employing accounting records that continuously disclose the amount
of inventory is called
a. retail
b. periodic
c. physical
d. perpetual

4 Sold 10 units
17 Sold 20 units
Using the perpetual system, costing by the last-in, first-out method, what is the cost of the
merchandise sold for November?
a. $640
b. $630
c. $620
d. $610
The Baby Company sells blankets for $30 each. The following was taken from the inventory
records during July.
Date Product T Units Cost
July 3 Purchase 5 $15
July 10 Sale 3
July 20 Sale 6
July 23 Sale 3
23. Assuming that the company uses the perpetual inventory system, determine the cost of
merchandise sold for the sale of July 20 using the Lifo inventory cost method.
a. $98
b. $102
c. $120
d. $62
24. Assuming that the company uses the perpetual inventory system, determine the cost of
merchandise sold for the sale of July 20 using the average inventory cost method.
a. $125
b. $80
c. $100
d. $102
ANS: C DIF: Difficult OBJ: 06-03
25. Assuming that the company uses the perpetual inventory system, determine the ending
inventory for the month of July using the Fifo inventory cost method.
a. $132
b. $251
c. $200
d. $395
26. Assuming that the company uses the perpetual inventory system, determine the gross profit
for the sale of July 23 using the Fifo inventory cost method.
a. $39
b. $45
c. $51
d. $90
inventory for the month of July the Lifo inventory cost method.
a. $181
b. $274
c. $260
d. $247
inventory for the month of July using the average inventory cost method.
a. $251
b. $226
c. $250
d. $225
29. Beginning inventory, purchases and sales data for tennis rackets are as follows:
Feb 3 Inventory 12 units @ $15

11 Purchase 13 units @ $17
14 Sale 18 units
25 Sale 10 units
Assuming the business maintains a perpetual inventory system, calculate the cost of
merchandise sold and ending inventory under First-in, first-out:
a. cost of merchandise sold 491; ending inventory 90
b. cost of merchandise sold 120; ending inventory 461
c. cost of merchandise sold 461; ending inventory 120
d. cost of merchandise sold 90; ending inventory 491
ANS: C
a. Cost of merchandise sold = $461 (180+102+119+60)
Ending Inventory = $120 (6 units @ $20)
Cost of
Purchases Merchandise Sold Inventory
Date Qty Unit Total Qty Unit Total Qty Unit Total
Cost Cost Cost Cost Cost Cost
Feb 3 12 15.00 180.00
Feb 11 13 17.00 221.00 12 15.00 180.00
13 17.00 221.00
Feb 14 12 15.00 180.00 7 17.00 119.00
6 17.00 102.00
Feb 21 9 20 180.00 7 17.00 119.00
9 20.00 180.00
Feb 25 7 17.00 119.00 6 20.00 120.00
3 20.00 60.00
DIF: Difficult OBJ: 06-03


14 Sale 18 units
25 Sale 10 units
merchandise sold and ending inventory under Last-in, first-out:
a. cost of merchandise sold 491; ending inventory 90
b. cost of merchandise sold 120; ending inventory 461
c. cost of merchandise sold 461; ending inventory 120
d. cost of merchandise sold 90; ending inventory 491
ANS: A
b. Cost of merchandise sold = $491 (221+75+180+15)
Cost of
Feb 3 12 15.00 180.00
Feb 13 17.00 221.00 12 15.00 180.00
11
13 17.00 221.00
Feb 13 17.00 221.00 7 15.00 105.00
14
5 15.00 75.00
Feb 9 20 180.00 7 15.00 105.00
21
9 20.00 180.00
Feb 9 20.00 180.00 6 15.00 90.00
25
1 15.00 15.00

31. The following lots of a particular commodity were available for sale during the year
Beginning inventory 10 units at $50

First purchase 25 units at $53
Second purchase 30 units at $54
Third purchase 15 units at $60
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 first-
in, first-out method?
a. $1,030
b. $1,140
c. $1,170
d. $1,060
32. The following lots of a particular commodity were available for sale during the year:

end of the year. What is the amount of inventory at the end of the year according to the last-
in, first-out method?
a. $1,230
b. $1,220
c. $1,240
d. $1,340

end of the year. What is the amount of the inventory at the end of the year according to the
average cost method?
a. $1,300
b. $1,305
c. $1,415
d. $1,236
34. Under a periodic inventory system

a. accounting records continuously disclose the amount of inventory
b. a separate account for each type of merchandise is maintained in a subsidiary ledger
c. a physical inventory is taken at the end of the period
d. merchandise inventory is debited when goods are returned to vendors

end of the year. What is the amount of the inventory at the end of the year according to the
lower of cost or market, using the first-in, first-out method, if the current replacement cost is
$64 a unit?
a. $1,200
b. $1,230
c. $1,280
d. $1,370
36. During a period of consistently rising prices, the method of inventory that will result in
reporting the greatest cost of merchandise sold is
a. FIFO
b. LIFO
c. average cost
d. weighted average
37. During times of rising prices, which of the following is not an accurate statement?
a. Average costing will yield results that are between those of fifo and lifo
b. Lifo will result in a higher cost of merchandise sold than Fifo
c. Fifo will result in a higher net income than Lifo
d. Lifo will result in high income taxes than Lifo
38. 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. periodic
b. LIFO
c. FIFO
d. average
39. If merchandise inventory is being valued at cost and the purchase price is steadily falling,
which method of costing will yield the largest net income?
a. average cost
b. LIFO
c. FIFO
d. weighted average
40. During a period of falling prices, which of the following inventory methods generally results
in the lowest balance sheet amount for inventory.
a. average method
b. LIFO method
c. FIFO method
d. can not tell without more information
41. Damaged merchandise that can be sold only at prices below cost should be valued at
a. net realizable value
b. LIFO
c. FIFO
d. average
42. If a manufacturer ships merchandise to a retailer on consignment, the unsold merchandise

should be included in the inventory of the
a. consignee
b. retailer
c. manufacturer
d. shipper
43. 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
stockholders' equity?
a. net income is overstated, assets are overstated, stockholders' equity is understated
b. net income is overstated, assets are overstated, stockholders' equity is overstated
c. net income is understated, assets are understated, stockholders' equity is understated
d. net income is understated, assets are understated, stockholders' equity is overstated
44. Merchandise inventory at the end of the year was understated. Which of the following
statements correctly states the effect of the error?
a. net income is understated
b. net income is overstated
c. cost of merchandise sold is understated
d. merchandise inventory reported on the balance sheet is overstated
45. Merchandise inventory at the end of the year is overstated. Which of the following
statements correctly states the effect of the error?
a. stockholders' equity is overstated
b. cost of merchandise sold is overstated
c. gross profit is understated
d. net income is understated
46. If the cost of an item of inventory is $60 and the current replacement cost is $65, the amount
included in inventory according to the lower of cost or market is
a. $5
b. $60
c. $65
d. $125
ANS: B DIF: Easy OBJ: 06-06
47. Becky’s Boutiques has identified the following items for possible inclusion in its December
31, 2008 inventory. Which of the following would not be included in the year end
inventory?
a. Merchandise purchased FOB shipping point was picked up by the freight company but
had still not arrived at Becky’s Boutique as of December 31, 2008.
b. Becky’s has in its warehouse merchandise on consignment from ABC Co.
c. Becky has sent merchandise to various retailers on a consignment basis
d. Becky has merchandise on hand which has been returned by customers because of wrong
size.
48. During the taking of its physical inventory on December 31, 2008, Albert’s Bike Shop
incorrectly counted its inventory as $210,000 instead of the correct amount of $180,000. The
effect on the balance sheet and income statement would be as follows:
a. assets overstated by $30,000; retained earnings understated by $30,000; net income
statement understated by $30,000.
b. assets overstated by $30,000; retained earnings understated by $30,000; no effect on the
income statement.
c. assets and retained earnings overstated by $30,000; net income overstated by $30,000.
d. assets and retained earnings overstated by $30,000; net income understated by $30,000.
49. If, while taking a physical inventory, the company counts their inventory figures more than
the actual amount. How will the error affect their bottom line?
a. No change to net income.
b. Net income will be overstated
c. Net income will be understated.
d. Only gross profit will be affected.
50. If, while taking a physical inventory, the company counts their inventory figures less than
the actual amount. How will the error affect the cost of merchandise sold?
a. Understated
b. Overstated
c. Only inventory is affected.
d. No change.
51. The method of computing inventory that uses records of the selling prices of the
merchandise is called
a. retail method
d. average cost
52. On the basis of the following data, what is the estimated cost of the merchandise inventory
on October 31 by the retail method?
Cost Retail
Oct. 1 Merchandise Inventory $225,000 $324,500
Oct. 1-31 Purchases (net) 335,000 475,500
Oct. 1-31 Sales (net) 700,000
a. $372,000
b. $140,000
c. $100,000
d. $ 70,000
53. If the estimated rate of gross profit is 40%, what is the estimated cost of the merchandise
inventory on June 30, based on the following data?
June 1 Merchandise inventory $ 75,000

June 1-30 Purchases (net) 150,000
June 1-30 Sales (net) 135,000
a. $144,000
b. $140,000
c. $ 81,000
d. $ 54,500
54. Too much inventory on hand

a. reduces solvency
b. increases the cost to safeguard the assets
c. increases the losses due to price declines
d. all of the above
55. Inventory turnover

a. is computed by dividing average inventory by cost of merchandise sold
b. measures the relationship between the volume of goods sold and amount of inventory
carried
c. increases the risk of loss from damaged merchandise
d. is computed by dividing the beginning inventory plus the ending inventory by two
56. The number of days' sales in inventory

a. measures the length of time it takes to acquire, sell, and replace the inventory
b. is computed by dividing the cost of merchandise sold by 365
c. measures the length of time it takes to sell the merchandise on credit and collect the
account receivable
d. is about the same for all industries
57. A company will most likely use an estimated method of estimating inventory when
a. the company decides not to do a physical inventory.
b. a natural disaster has destroyed most of their inventory.
c. the company has not kept up with their inventory records.
d. trying to determine the amount of theft that has taken place.
58. KoKo Company uses the retail method of inventory costing. They started the year with an
inventory that had a retail cost of $35,000. During the year they purchased an inventory with
a retail cost of $300,000. After performing a physical inventory, they calculated their
inventory at $60,000. The mark up is 100% of cost. Determine the ending inventory at its
estimated cost.
a. $120,000
b. $60,000
c. $30,000
d. $35,000
EXERCISE/OTHER
1. List three different security measures taken by stores to safeguard inventory.

ANS:
Answers may vary.
- Inventory should be stored in a warehouse or restricted area.
- Physical devices such as two-way mirrors, cameras, security guards.
- Inventory store under lock and key.
- Sensors at each of the exits which are set off by alarm tags.
DIF: Moderate OBJ: 06-01
2. The three identical units of Product T are purchased during July, as shown below.
Date Product T Units Cost

Total 3 $48
Average cost per unit $16
Assume one unit sells on July 28 for $25.
Determine the gross profit, cost of merchandise sold, and ending inventory on July 31 using
(a) first in first out, (b) last in last out, (c) average cost flow methods.
ANS:
Gross Profit Cost of Ending Inventory
Merchandise Sold
(a) First in first out $25 - $15= $10 $15 $33
(b) Last in first out $25 - $17= $8 $17 $31
(c) Average $25 - $16= $9 $16 $32
DIF: Easy OBJ: 06-03

NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 6-1
3. Beginning inventory, purchases, and sales for Product XCX are as follows:
Oct 1 Beginning Inventory 24 units @ $12

Oct. 5 Sale 17 units
Oct. 17 Purchase 10 units @ $14
Assuming a perpetual inventory system and the first-in, first-out method, determine (a) the
cost of the merchandise sold for the October 30 sale and (b) the inventory on October 31.
ANS:
(a) Cost of merchandise sold:
7 units @ 12 = $84
1 unit @ 14 = $14
8 units $98
(b) Inventory, October 31

9 units @ $14 = $126
4. Beginning inventory, purchases, and sales for Product XCX are as follows:
Oct 1 Beginning Inventory 24 units @ $12

Oct. 17 Purchase 10 units @ $14
Assuming a perpetual inventory system and the last-in, first-out method, determine (a) the
cost of the merchandise sold for the October 30 sale and (b) the inventory on October 31.
ANS:
(a) Cost of merchandise sold:
8 units @ $14 = $112
(b) Inventory October

7 units @ $12 = $84
2 units @ $14 = $28
9 units $112
5. The units of Product YY2 available for sale during the year were as follows:
Apr 1 Inventory 16 units @ $30

Jun 16 Purchase 30 units @ $33
Sep 28 Purchase 45 units @ $37
There are 17 units of the product in the physical inventory at March 31. The periodic
inventory system is used. Determine the inventory cost by (a) fifo, (b) lifo, and (c) average
cost methods.
ANS:
Fifo: 17 units @ $37 = $629
Lifo: 16 units @ $30 = $480

1 unit @ $33 = 33
Total $513
Average: 17 units @ $34.45 = 585.65


inventory system is used. Determine the difference in gross profit between the Lifo and Fifo
inventory cost systems.
ANS:
Fifo Cost of Merchandise Sold = $2,506
Lifo Cost of Merchandise Sold = $2,622
Difference $ 116

7. Using the lower of cost or market, what should the total inventory value be for the following
items:
Item Quantity Unit cost Unit Total cost Total

price market price market
price price
A 200 $5 $4.50 $1000 $900
B 100 $4 $5.00 $400 $500
C 50 $7 $7.50 $350 $375
ANS:
Item Quantity Unit cost Unit Total cost Total Lower of

price market price market cost or
price price market
A 200 $5 $4.50 $1000 $900 $900
B 100 $4 $5.00 $400 $500 $400
C 50 $7 $7.50 $350 $375 $350
$1,650

8. During the taking of its physical inventory on December 31, 2007, Trace Supplies Company
incorrectly counted its inventory as $259,000 instead of the correct amount of $295,000.
Indicate the affect of the misstatement on Trace Supplies Company’s balance sheet and
income statement for the year ended December 31, 2007.
ANS:
Amount of Misstatement
Overstatement (Understatement)
Balance Sheet:
Merchandise inventory understated ($36,000)
Current assets understated ($36,000)
Total assets understated ($36,000)
Owner’s equity understated ($36,000)
Income Statement:
Cost of merchandise sold overstated $36,000
Gross profit understated ($36,000)
Net Income understated ($36,000)

9. If, while taking a physical inventory, the company counts their inventory figures less than
the actual amount. How will the error affect their bottom line?
ANS:
Net income will be understated.
10. KoKo Company uses the retail method of inventory costing. They started the year with an
inventory that had a retail cost of $35,000. During the year they purchased an inventory with
a retail cost of $300,000. After performing a physical inventory, they calculated their
inventory at $46,000. The mark up is 100% of cost. Determine the ending inventory at its
estimated cost.
ANS:
$46,000 / 50% = $23,000
11. A business using the retail method of inventory costing determines that merchandise
inventory at retail is $1,500,000. If the ratio of cost to retail price is 65%, what is the amount
of inventory to be reported on the financial statements?
ANS:
$1,500,000*65% = $975,000
12. Based upon the following data estimate the cost of ending merchandise inventory:
Sales (net) $1,500,000

Estimated gross profit rate 30%
Beginning merchandise inventory $90,000

Purchases (net) $1,110,000
Merchandise available for sale $1,200,000
ANS:
Merchandise available for sale $1,200,000
Less cost of merchandise sold
($1,500,000 * (100% - 30%) $1,050,000
Estimated ending merchandise inventory $ 150,000

PROBLEM
1. List the internal control objectives illustrated by the following:
(a) keeping the inventory storeroom locked

(b) counting the inventory at the end of the accounting period and comparing it with the
inventory ledger clerk's records
(c) using subsidiary ledgers and a perpetual inventory system
ANS:
(a) safeguarding the inventory to prevent theft
(b) separating responsibilities for related operations
(c) properly reporting inventory in the financial statements

2. The following data regarding purchases and sales of a commodity were taken from the
related perpetual inventory account:
May 1 Balance 25 units at $40

6 Sale 20 units
8 Purchase 20 units at $41
16 Sale 10 units
23 Sale 25 units
(a) Determine the cost of the inventory balance at May 31, using (1) the first-in, first-
out method and (2) the last-in, first-out method. Identify the quantity, unit price, and
total cost of each lot in the inventory.
(b) Present the journal entry to record a shortage (shrinkage) of $53 discovered by the
physical count on May 31.
ANS:
(a)
(1) May 20 10 units at $42 $ 420
30 15 units at $43 645
Total $1,065
(2) May 1 5 units at $40 $ 200

8 5 units at $41 205
30 15 units at $43 645
Total $1,050
(b)
Inventory Shrinkage (or Cost of Merchandise Sold) 53
Merchandise Inventory 53


14 Sale 18 units
25 Sale 10 units
merchandise sold and ending inventory under the following assumptions:
(a) First-in, first-out
(b) Last-in, first-out
ANS:
(a) Cost of merchandise sold = $461 (180+102+119+60)
Cost of
Feb 3 12 15.00 180.00
Feb 13 17.00 221.00 12 15.00 180.00
11
13 17.00 221.00
Feb 12 15.00 180.00 7 17.00 119.00
14
6 17.00 102.00
Feb 9 20 180.00 7 17.00 119.00
21
9 20.00 180.00
Feb 7 17.00 119.00 6 20.00 120.00
25
3 20.00 60.00
(b) Cost of merchandise sold = $491 (221+75+180+15)

Cost of
Feb 3 12 15.00 180.00
Feb 13 17.00 221.00 12 15.00 180.00
11
13 17.00 221.00
Feb 13 17.00 221.00 7 15.00 105.00
14
5 15.00 75.00
Feb 9 20 180.00 7 15.00 105.00
21
9 20.00 180.00
Feb 9 20.00 180.00 6 15.00 90.00
25
1 15.00 15.00

4. The units of an item available for sale during the year were as follows:
Jan. 1 Inventory 20 units at $50

Feb. 4 Purchase 10 units at $52
July 7 Purchase 30 units at $55
Oct. 15 Purchase 15 units at $60
There are 30 units of the item in the physical inventory at December 31. The periodic
inventory system is used. Determine the inventory cost using the first-in, first-out costing
method.
ANS:
$1,725 (15 units at $60 and 15 units at $55)
5. The units of an item available for sale during the year were as follows:
Jan. 1 Inventory 20 units at $25

Mar. 4 Purchase 10 units at $24
Aug. 20 Purchase 30 units at $28
Nov. 30 Purchase 25 units at $30
There are 25 units of the item in the physical inventory at December 31. The periodic
inventory system is used. Determine the inventory cost by the last-in, first-out method.
ANS:
$620 (20 units at $25 and 5 units at $24)
6. The beginning inventory and purchases of an item for the period were as follows:
Beginning inventory 6 units at $73 each

First purchase 10 units at $72 each
Second purchase 18 units at $74 each
Third purchase 10 units at $75 each
The company uses the periodic system, and there were 15 units in the inventory at the end of
the period. Determine the cost of the 15 units in the inventory by each of the following
methods, presenting details of your computations: (a) first-in, first-out; (b) last-in, first-out;
(c) average cost.
ANS:
(a)
10 units @ $75 $ 750
5 units @ $74 370
Total $1,120
(b)
6 units @ $73 $ 438
9 units @ $72 648
Total $1,086
(c)
Average unit cost = $ 73.64
$3,240/44
15 units @ $73.64 = $1,104.60


14 Sale 18 units
25 Sale 10 units
Assuming the business maintains a periodic inventory system, calculate the cost of
merchandise sold and ending inventory under the following assumptions:
(a) First-in, first-out
(b) Last-in, first-out
ANS:
(a) Cost of Merchandise Sold = $461.00
Feb 3 Inventory 12 units @ 15 $180.00
Feb 11 Purchase 13 units @ 17 221.00
Available for Sale 34 $581.00
Feb 4 Sale 12 units @ 15 $180.00

6 units @ 17 102.00
Feb 25 Sale 7 units @ 17 119.00
3 units @ 20 60.00
Cost of Merchandise 28 $461.00
Sold
Ending Inventory 6 units @ 20 $120.00

(b) Cost of Merchandise Sold = $491.00
Feb 3 Inventory 12 units @ 15 $180.00
Available for Sale 34 $581.00
Feb 4 Sale 9 units @ 20 $180.00

9 units @ 17 153.00
Feb 25 Sale 4 units @ 17 68.00
6 units @ 20 90.00
Cost of Merchandise 28 $491.00
Sold
Ending Inventory 6 units @ 15 $90.00

8. Dynamic Sales, which uses periodic inventory, has a beginning balance in men’s shirts of 14
at $14.75 each. Dynamic Sales purchases men’s shirts in the order of:
Jan 7th, 24 shirts at $15.00 each,
Jan 12th, 24 shirts at $15.50 each,
Jan 18th, 24 shirts at $16.00 each, and
Jan 24th, 24 shirts at $16.00 each.
Dynamic’s sales are in the order of:
for the week ending January 7th, 6 at $29.50,
for the week ending January 14th, 15 at $29.50,
for the week ending January 21st, 12 at $29.50,
For the week ending January 28th, 14 at $22.50, and
for the partial week ending January 31st, 6 at $29.50.
(a) For the month of January, compute the quantity and value of inventory
available for sale.
(b) For the month of January, compute the quantity and value of sales, assume that
all sales are cash, journalize that value as of January 31st.
(c) For the month of January, compute the cost of merchandise sold using LIFO
and journalize that value as of January 31st.
ANS:
(a) For the month of January, compute the quantity and value of inventory available for sale.
Beginning balance 14 shirts at $14.75 each = 206.50
Jan 7th 24 shirts at $15.00 each = 360.00
Cost of goods available for sale 110 shirts 706.50
(b) For the month of January, compute the quantity and value of sales, assume that all sales are
cash, journalize that value as of January 31st.
For the week ending January 7th 6 at $29.50 = $177.00
For the week ending January 14th 15 at $29.50 = 442.50
For the week ending January 21st 12 at $29.50 = 354.00
For the week ending January 28th 14 at $22.50 = 315.00
For the partial week ending January 31st 6 at $29.50 = 177.00
Total of 53 men’s shirts at a value of sales for $1,465.50
January
Jan 31 Cash 1,465.50

Sales 1,465.00
(c) For the month of January, compute the cost of goods sold using LIFO and journalize that
value as of January 31st.
Total number of men’s shirts available for sale = 110
Total number of men’s shirts sold = 53
Total number of men’s shirts remaining in inventory = 57
These 57 shirts are the first 57 shirts purchased - LIFO,
Jan 24th 24 shirts at $16.00 each=

384.00
Jan 18th 24 shirts at $16.00 each
=384.00
Jan 12th 5 shirts at $15.50 each =
77.50
Total of 53 shirts sold Cost of merchandise
sold = $845.50
Jan 31 Cost of Merchandise Sold 845.50

Inventory 845.50

inventory system is used. Determine the cost of merchandise sold by (a) fifo, (b) lifo, and (c)
average cost methods.
ANS:
Fifo 16 units @ $30 = $480
30 units @ $33 = $990
28 units @ $37 = $1,036
Total $2,506
Lifo 45 units @ $37 = $1,665

29 units @ $33 = $957
Total $2,622
Average 74 units @ $34.45 = $2,549.30

10. Basic inventory data for June 30 are presented below for a business that employs the lower
of cost or market basis of inventory valuation.
Unit Unit Total

Cost Market Lower of
Commodity Quantity Price Price Cost C or M
A 20 $ 52 $ 55 __________ __________
B 10 255 250 __________ __________
C 20 82 85 __________ __________
D 30 58 55 __________ __________
(a) Complete the table.

(b) Determine the amount of reduction in the inventory at June 30 attributable to market
decline.
ANS:
(a)
Total
Lower of
Commodity Cost C or M
A $1,040 $1,040
B 2,550 2,500
C 1,640 1,640
D 1,740 1,650
Total $6,970 $6,830
(b)
$140 ($6,970 - $6,830)
11. JAY Co. took a physical count of its inventory on December 31. In addition, it had to decide
whether or not the following items should be added to this count.
(a) Merchandise on hand had been sold earlier in the year but had been returned by
customers for various warranty repairs.
(b) JAY Co. sent merchandise on a consignment basis on December 31 just prior to the
physical count.
(c) On December 22, JAY Co. ordered merchandise on FOB destination terms. The
merchandise was shipped by the supplier on December 30 but had not been received
by December 31.
(d) On December 27, JAY Co. ordered merchandise on FOB shipping point terms. The
merchandise was shipped on December 29 but had not been received by December
31.
(e) Merchandise sold FOB shipping point on December 31 was picked up by the freight
company just before closing on December 31.
(f) Merchandise shipped to a customer FOB shipping point was picked up by the
freight company on December 28 but had not arrived at its destination as of
December 31.
Indicate which items should be added to (answer: yes) and which items should not be added
to (answer: no) the December 31 inventory count.
ANS:
(a) no
(b) yes
(c) no
(d) yes
(e) no
(f) no

12. On December 31st, Mega Sales conducts a wall-to-wall inventory. The Merchandise
Inventory account has a debit balance of $625,000.00. They determine that they have
$145,000.00 in their inventory count. Cost of merchandise sold indicate $476,000.00. There
are two sheets at the service desk of interest. One sheet indicates the items removed from
Merchandise Inventory for use within the store, these items should be part of the Store
Supplies account. This sheet shows a value of $2,500.00. The other sheet shows known
shrinkages identified during the period. This sheet shows $1,250.00. Neither of these sheets
has been journalized.
Identify the unknown, and previously unidentified shrinkage value. Journalize the transfer to
Store Supplies and the recognition of all shrinkages (known and unknown).
ANS:
Calculation of unknown and previously unidentified shrinkage:
Merchandise beginning balance $625,000

Less cost of merchandise sold 476,000
149,000
Less items transferred to store supplies 2,500
146,500
Less known shrinkage 1,250
Calculated ending balance 145,250
Actual inventory 145,000
Previously unidentified shrinkage $250
Transfer to office supplies:

Dec 31 Office Supplies 2,500.00
Merchandise Inventory 2,500.00
Dec 31 Cost of Merch. Sold (Shrinkage) 1,500.00

Merchandise Inventory 1,500.00
13. On the basis of the following data for BNG Motors as of December 31, 2006, determine the
value of the inventory at the lower of cost or market. Also, show how the merchandise
inventory would appear on the balance sheet (assume that the cost was determined by the
FIFO method).
Commodity Inventory Unit Cost Unit Market

Quantity Price Price
Size 4 8 $15 $17
Size 5 12 17 10
Size 6 14 25 20
Size 7 6 28 33
ANS:
Inventory valuation = $688
Inventory Unit Unit Lower

Commodity Quantity Cost Market Cost Market of C or M
Price Price
Size 4 8 $15 $17 $120 $136 $120
Size 5 12 17 10 204 120 120
Size 6 14 25 20 350 280 280
Size 7 6 28 33 168 198 168
$842 $734 $688
BNG Motors
Balance Sheet
December 31, 2006
Assets
Current assets:
Merchandise inventory - at lower of cost
(first-in,first-out) or market $688.00

14. During July, the first month of the fiscal year, sales totaled $900,000 and the cost of
merchandise available for sale totaled $800,000. Estimate the cost of the merchandise
inventory as of July 31, based on an estimated gross profit rate of 40%.
ANS:
Merchandise available for sale in July $800,000
Sales in July $900,000
Less estimated gross profit
($900,000  40%) 360,000
Estimated cost of merchandise sold 540,000
Estimated merchandise inventory $260,000

15. Based on the following information: compute (a) Inventory turnover; (b) Average daily cost
of merchandise sold; and (c) Number of days' sales in inventory. Use a 365-day year. (d) If
an inventory turnover of 12 is average for the industry, how is this company doing?
Item 12/31/01 Amount 12/31/02 Amount

Cost of merchandise sold $172,900 $150,600
Inventory 16,000 12,000
ANS:
(a) $150,600 ÷ $14,000 = 10.76 times
(b) $150,600 ÷ 365 = $412.60
(c) $12,000 ÷ $412.60 = 29.08 days
(d) This company is fairly close to average, but is doing worse than the industry.

16. On the basis of the following data, estimate the cost of the merchandise inventory at March
31 by the retail method:
Cost Retail
March 1 Merchandise Inventory $150,000 $250,000
March 1-31 Purchases (net) 950,000 1,750,000
March 1-31 Sales (net) 750,000
ANS:
Estimated cost of merchandise inventory, March 31 = $687,500
Cost Retail
March 1 Merchandise Inventory $150,000 $250,000
March 1-31 Purchases (net) 950,000 1,750,000
$1,100,000 $2,000,000
Ratio of cost to retail price: 55% (1,100,000/2,000,000)
March 1 - 31 Sales (net) 750,000

Merchandise Inventory, $1,250,000
March 31 at retail
Merchandise Inventory, $687,500
March 31 at est. cost
($1,250,000  55%)

17. On the basis of the following data, determine the estimated cost of the inventory as of
February 28 by the retail method, presenting details of the computation in good order.
Cost Retail
Feb. 1 Merchandise inventory $300,000 $450,000
1-28 Purchases (net) 327,250 515,000
1-28 Sales (net) 350,000
ANS:
Cost Retail
Merchandise inventory, Feb. 1 $300,000 $450,000
Purchases in February (net) 327,250 515,000
Merchandise available for sale $627,250 $965,000
Ratio of cost to retail price:

$627,250 ÷ $965,000 = 65%
Sales in February (net) 350,000
Merchandise inventory, February 28,
at retail price $615,000
Merchandise inventory, February 28, at
estimated cost price ($615,000  65%) $399,750

18. The following data were taken from BKG Inc.
2006
Cost of Merchandise Sold $432,000
Inventory, end of year 67,000
Inventory, beginning of the year 82,000
Determine the inventory turnover ratio and the number of days’ sales in inventory for BKG
Inc. Round to two decimal places.
ANS:
Inventory turnover = Cost of merchandise sold / Average inventory
Inventory turnover = 432,000 / ((67,000 + 82,000),2)
Inventory turnover = 432,000 / 74,500
Inventory turnover = 5.80
Number of days’ sales in inventory = Inventory, end of year / Ave daily cost of merch sold
Number of days’ sales in inventory = 67,000 / (432,000/365)
Number of days’ sales in inventory = 67,000 / 1,183.56
Number of days’ sales in inventory = 56.61 days

CH 06

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CH 06

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54  Chapter 6/Inventories

Obj 1 Describe the importance of control over inventory.

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

24. Unsold consigned merchandise should be included in the consignee's inventory.

27. The lower of cost or market is a method of inventory valuation.

2. Taking a physical count of inventory

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

5. Which of the following is not true about taking physical inventories?

13. Inventory costing methods place primary emphasis on assumptions about

17. The inventory data for an item for November are:

Nov. 1 Inventory 20 units at $20

18. The inventory data for an item for November are:

Nov. 1 Inventory 20 units at $20

19. Under a perpetual inventory system, when a shortage is discovered

22. The inventory data for an item for November are:

Nov. 1 Inventory 20 units at $20

Feb 3 Inventory 12 units @ $15

DIF: Difficult OBJ: 06-03

Feb 3 Inventory 12 units @ $15

DIF: Difficult OBJ: 06-03

Beginning inventory 10 units at $50

Beginning inventory 10 units at $60

Beginning inventory 10 units at $61

34. Under a periodic inventory system

Beginning inventory 10 units at $60

42. If a manufacturer ships merchandise to a retailer on consignment, the unsold merchandise

June 1 Merchandise inventory $ 75,000

54. Too much inventory on hand

55. Inventory turnover

56. The number of days' sales in inventory

1. List three different security measures taken by stores to safeguard inventory.

Date Product T Units Cost

Average cost per unit $16

Assume one unit sells on July 28 for $25.

(b) Last in first out $25 - $17= $8 $17 $31

(c) Average $25 - $16= $9 $16 $32

DIF: Easy OBJ: 06-03

Oct 1 Beginning Inventory 24 units @ $12

(b) Inventory, October 31

Oct 1 Beginning Inventory 24 units @ $12

(b) Inventory October

Apr 1 Inventory 16 units @ $30

Lifo: 16 units @ $30 = $480

Average: 17 units @ $34.45 = 585.65

DIF: Moderate OBJ: 06-05

Apr 1 Inventory 16 units @ $30

DIF: Difficult OBJ: 06-05

Item Quantity Unit cost Unit Total cost Total

Item Quantity Unit cost Unit Total cost Total Lower of

DIF: Difficult OBJ: 06-06

DIF: Moderate OBJ: 06-06

Sales (net) $1,500,000

Beginning merchandise inventory $90,000

DIF: Moderate OBJ: 06-07

1. List the internal control objectives illustrated by the following:

(a) keeping the inventory storeroom locked

DIF: Easy OBJ: 06-01

May 1 Balance 25 units at $40

(2) May 1 5 units at $40 $ 200

DIF: Difficult OBJ: 06-03

Feb 3 Inventory 12 units @ $15

(b) Cost of merchandise sold = $491 (221+75+180+15)

DIF: Moderate OBJ: 06-03