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Exam 5: Accounting for Inventories

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Question 91

Multiple Choice

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What effect will an overstatement of ending inventory at the end of Year 1 have on the amounts reported on the Year 1 financial statements?

A) Overstatement of cost of goods sold
B) Overstatement of total assets
C) Understatement of net income
D) Understatement of retained earnings

E) B) and D)
F) None of the above

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Question 92

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In a period of rising inventory prices, use of the FIFO cost flow method would cause a company to pay more income taxes than would use of LIFO.

A) True
B) False

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Question 93

Multiple Choice

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Stubbs Company uses the perpetual inventory method and the weighted-average cost flow method. On January 1, Year 2, Stubbs purchased 1,350 units of inventory that cost $11.50 each. On January 10, Year 2, the company purchased an additional 600 units of inventory that cost $7.00 each. If the company sells 1,500 units of inventory for $23 each, what is the amount of gross margin reported on the income statement? (Round your intermediate calculations to two decimal places.)

Generally accepted accounting principles often allow companies to account for the same types of events in different ways.

An analysis of the inventory owned by Owens Company as of the Company's fiscal closing date is shown in the following table. Assuming Owens applies the lower-of-cost-or-market rule on an individual basis, the Company would be required to recognize an expense amounting to

Define the terms FIFO and LIFO.

The accountant for the Bay Company made an error, which understated the ending inventory for Year 1 by $7,000. Bay Company uses the perpetual inventory system. Assuming that this error is not caught and corrected, indicate the effect of the error on each of the following items. Write U (understated), O (overstated)or N (not affected)next to each item.Year 2 Beginning Inventory: ________Year 2 Purchases: ________Year 1 Goods Available for Sale: ________Year 1 Net Income: ________Year 1 Retained Earnings ending balance: ________Year 1 Total Assets at end of year: ________Year 2 Net Income: ________Year 2 Retained Earnings ending balance: ________Year 1 Cost of Goods Sold: ________Year 1 Gross Margin: ________

Indicate whether each of the following statements related to inventory is true or false.________ a)The higher a company's inventory turnover ratio, the higher its cost of financing inventory.________ b)The selling price a company charges for its goods probably will not be affected by the inventory cost flow method it uses.________ c)Other things being equal, if inventory prices are rising, a company that uses the LIFO inventory method will have a higher amount of total assets than if it had used FIFO.________ d)A company that plans to offer a higher level of customer service than its competitors probably will have a higher gross margin percentage than its competitors.________ e)The lower-of-cost-or-market rule may decrease a company's net income, but it will never increase net income.

Curtis Company had the following transactions for the month of January: Assume that Curtis uses the perpetual inventory method and that all transactions were for cash. Required:a)Determine the inventory balance and the cost of goods sold after each transaction.b)Determine the amount of ending inventory using the FIFO cost flow method.