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Exam 7: Reporting and Interpreting Cost of Goods Sold and Inventory

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Question 51

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Under the FIFO cost flow assumption during a period of rising costs, which of the following is false?

A) Income tax expense will be higher under FIFO than under LIFO.
B) Net income will be higher under FIFO than under LIFO.
C) Ending inventory will be lower under FIFO than under LIFO.
D) Cost of goods sold will be lower under FIFO than under LIFO.

E) All of the above
F) A) and D)

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Question 52

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Dows Company prepared income statements that reflected pretax income of $21,000 for 2013 and $30,000 for 2014. An audit has determined that there were two errors in the inventory amounts as follows: Required: Determine the correct pretax income amount for each year (show computations; assume the errors were not corrected):

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2013: $21,000 - $1,0...

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Question 53

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Lauer Corporation uses the periodic inventory system and has provided the following information about one of its laptop computers: $\begin{array}{clrr}\text { Date }&\text { Transaction } &\text { Number of Units }&\text { Cost per Unit }\\\hline1 / 1 & \text { Beginning Inventory } & 100 & \$ 800 \\5 / 5 & \text { Purchase } & 200 & \$ 900 \\8 / 10 & \text { Purchase } & 300 & \$ 1,000 \\10 / 15 & \text { Purchase } & 200 & \$ 1,100\end{array}$ During the year, Lauer sold 750 laptop computers. What was ending inventory using the FIFO cost flow assumption?

Inventory inspection costs are reported as operating expenses on the income statement.

The average days to sell inventory decreases as inventory turnover increases.

Given a particular set of facts and assumptions, the following pairs of amounts were computed using FIFO and LIFO. For each pair of amounts, indicate which amount resulted from applying FIFO, and which amount resulted from applying LIFO.

Prepare the journal entries for the transactions listed below under each of the two inventory systems. A. Purchased merchandise for cash, $1,000. B. Sold merchandise for $600 cash that had cost $480 (cost is 80% of the sales price. C. Accepted a sales return from a customer: sales price $30. A cash refund was given to the customer. The goods were returned to regular inventory. D. Returned goods to the vendor because they did not meet our specification; $50 cash refund was received.

RJ Corporation has provided the following information about one of its inventory items: $\begin{array}{clrr}\text { Date }&\text { Transaction } &\text { Number of Units }&\text { Cost per Unit }\\\hline1 / 1 & \text { Beginning Inventory } & 400 & \$ 3,200 \\6 / 6 & \text { Purchase } & 800 & \$ 3,600 \\9 / 10 & \text { Purchase } & 1,200 & \$ 4,000 \\11 / 15 & \text { Purchase } & 800 & \$ 4,200\end{array}$ During the year, RJ sold 3,000 units. What was cost of goods sold using the FIFO cost flow assumption under a periodic inventory system?

Which of the following statements is correct when inventory unit costs are decreasing?

Which of the following statements is incorrect?

Which of the following statements is false?

RJ Corporation has provided the following information about one of its inventory items: $\begin{array}{clrr}\text { Date }&\text { Transaction } &\text { Number of Units }&\text { Cost per Unit }\\\hline1 / 1 & \text { Beginning Inventory } & 400 & \$ 3,200 \\6 / 6 & \text { Purchase } & 800 & \$ 3,600 \\9 / 10 & \text { Purchase } & 1,200 & \$ 4,000 \\11 / 15 & \text { Purchase } & 800 & \$ 4,200\end{array}$ During the year, RJ sold 3,000 units. What was ending inventory using the LIFO cost flow assumption under a periodic inventory system?

How much were inventory purchases when cost of goods sold was $250,000, beginning inventory was $20,000, and ending inventory was $25,000?

Which of the following statements is correct when inventory unit costs are increasing?

RJ Corporation has provided the following information about one of its inventory items: $\begin{array}{clrr}\text { Date }&\text { Transaction } &\text { Number of Units }&\text { Cost per Unit }\\\hline1 / 1 & \text { Beginning Inventory } & 400 & \$ 3,200 \\6 / 6 & \text { Purchase } & 800 & \$ 3,600 \\9 / 10 & \text { Purchase } & 1,200 & \$ 4,000 \\11 / 15 & \text { Purchase } & 800 & \$ 4,200\end{array}$ During the year, RJ sold 3,000 units. What was ending inventory using the FIFO cost flow assumption under a periodic inventory system?

Which of the following statements does not accurately describe the lower of cost or market (LCM) valuation method?

Goods available for sale are allocated to both ending inventory and cost of goods sold.

During periods of increasing unit costs, the LIFO inventory method will result in a higher inventory amount on the balance sheet and a lower net income than will the FIFO inventory method.

A $25,000 overstatement of the 2013 ending inventory was discovered after the financial statements for 2013 were prepared. Which of the following describes the effect of the inventory error on the 2014 financial statements?

During the audit of Montane Company's 2014 financial statements, the auditors discovered that the 2014 ending inventory had been overstated by $8,000 and that the 2014 beginning inventory was overstated by $5,000. Before the effect of these errors, 2014 pretax income had been computed as $100,000. What should be reported as the correct 2014 pretax income before taxes?