University of Maryland - ECON 103

True/False Questions

1)Under FIFO, LIFO, and average cost, the cost flow of a product does not depend on the physical flow.

2. Physical counts of inventory are not needed with perpetual inventory systems.

3. The main difference between perpetual and periodic inventory systems is the timing of allocating costs between inventory and cost of goods sold.

4. Cost of goods on consignment is included in the consignee's inventory until sold.

5. Net purchases are reduced for discounts taken whether the net method is used or the gross method is used.

6. Inventory costing methods are merely means by which costs are allocated between ending inventory and cost of goods sold.

7. LIFO periodic and LIFO perpetual usually produce the same amounts for ending inventory.

8. FIFO periodic and FIFO perpetual produce the same amounts for cost of goods sold.

9. During periods of falling prices, LIFO ending inventory will be less than FIFO ending inventory.

10. LIFO always provides a better match of revenue and expense than does FIFO.                  
11. Unit LIFO is more costly to implement than dollar-value LIFO.                          

12. Dollar-value LIFO eliminates the risk of LIFO liquidations.

Matching Pair Questions

Use the following to answer questions 13-17:

13-17. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

Terms:

1. Finished goods
2. Freight-in
3. Cost of Goods available for sale
4. LIFO conformity rule
5. LIFO liquidation
6. LIFO pools
7. Net purchases
8. Periodic inventory system
1. Perpetual inventory system
10. Physical flow

Phrases:

13.           Adjusts inventory at the end of the period.
14.           Allocated between ending inventory and cost of goods sold.
15.           Reduced by discounts taken under both gross and net methods.
16.           Inventory ready for sale.
17.           Must be used for financial reporting if elected for taxes.

Use the following to answer questions 18-22:

18-22. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

Terms:

1. Finished goods
2. Freight-in
3. Cost of Goods available for sale
4. LIFO conformity rule
5. LIFO liquidation
6. LIFO pools
7. Net purchases
8. Periodic inventory system
1. Perpetual inventory system
10. Physical flow

Phrases:

18.           Considered a product cost.
19.           Continuously records changes in inventory.
20.           Captured by FIFO for a fruit stand.
21.           Reduces the quality of current period earnings information.
22.           May dry up as product mix changes.

23-27. Use the following to answer questions 23-27:

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase.

Terms:

1. Average cost
2. Consignment
3. Cost flow assumption
4. Cost of goods sold
5. F.o.b. destination
6. F.o.b. shipping point
7. FIFO
8. Inventory cut-off
1. Inventory turnover
10. LIFO

Phrases:

23.           Goods are transferred to another party but title remains with transferor.
24.           Cost of goods available for sale less ending inventory.
25.           Items sold are assumed to come from a mixture of goods acquired during the period.
26.           Items sold are assumed to be those acquired first.
27.           Items sold are assumed to be those acquired last.

Use the following to answer questions 28-32:

28-32. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase.

Terms:

1. Average cost
2. Consignment
3. Cost flow assumption
4. Cost of goods sold
5. F.o.b. destination
6. F.o.b. shipping point
7. FIFO
8. Inventory cut-off
1. Inventory turnover
10. LIFO

Phrases:

28.           Legal title passes when goods are delivered to common carrier.
29.           Legal title passes when goods arrive at location.
30.           Not required to correspond to match actual product movement.
31.           Goods in transit can pose a problem in computing this.
32.           Probably higher at Wal-Mart than at Maytag.

Use the following to answer questions 33-37:

33-37. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

Terms:

1. Consumer Price Index
2. Cost index
3. FIFO layers
4. Gross method
5. Gross profit ratio
6. LIFO layers
7. Net method
8. Raw materials
1. Specific identification
10. Work-in-process

Phrases:

33.           Purchase discounts not taken are considered interest expense.
34.           Purchase discounts not taken are included in inventory.
35.           One minus (Cost of goods sold/Net sales).
36.           Reduced by the cost of finished product.
37.           Reflect most recent purchases.

Use the following to answer questions 38-42:

38-42. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

Terms:

1. Consumer Price Index
2. Cost index
3. FIFO layers
4. Gross method
5. Gross profit ratio
6. LIFO layers
7. Net method
8. Raw materials
1. Specific identification
10. Work-in-process

Phrases:

38.           Reflect oldest units or dollar costs.
39.           Could be used instead of an internally generated index in dollar-value LIFO computations.
40.           The least liquid manufacturing inventory.
41.           Used to convert ending inventory at year-end cost to base year cost.
42.           Cost flow assumption probably used by fine antique shops.

Multiple Choice Questions

43. Inventory does not include:
    1. Materials used in the production of goods to be sold.
    2. Assets intended to be sold in the normal course of business.
    3. Equipment used in the manufacturing of assets for sale.
    4. Assets currently in production for normal sales.

44. The largest expense on a retailer's income statement is typically:
    1. Salaries and wages.
    2. Cost of goods sold.
    3. Income tax expense.
    4. Depreciation expense.

45. In a perpetual average cost system:
    1. A new weighted-average unit cost is calculated each time additional units are purchased.
    2. The cost allocated to ending inventory is generally the same as it would be in a periodic inventory system.
    3. The moving-average unit cost is determined following each sale.
    4. The average is determined by dividing the total number of units sold by the cost of units purchased during the period.

46. In a perpetual inventory system, the cost of purchases is debited to:
    1. Purchases.
    2. Cost of goods sold.
    3. Inventory.
    4. Accounts payable.

47. In a periodic inventory system, the cost of purchases is debited to:
    1. Purchases.
    2. Cost of goods sold.
    3. Inventory.
    4. Accounts payable.

48. In a perpetual inventory system, the cost of inventory sold is:
    1. Debited to accounts receivable.
    2. Credited to cost of goods sold.
    3. Debited to cost of goods sold.
    4. Not recorded at the time.

49. In a periodic inventory system, the cost of inventories sold is:
    1. Debited to accounts receivable.
    2. Credited to cost of goods sold.
    3. Debited to cost of goods sold.
    4. Not recorded at the time of sale.

50. Cost of goods sold is given by:
    1. Beginning inventory - net purchases + ending inventory.
    2. Beginning inventory + accounts payable – net purchases.
    3. Net purchases + ending inventory - beginning inventory.
    4. Net Purchases + beginning inventory - ending inventory.

51. Ending inventory is equal to the cost of items on hand plus:
    1. Items in transit sold f.o.b. shipping point.
    2. Purchases in transit f.o.b. destination.
    3. Items in transit sold f.o.b. destination.
    4. None of the above.

52. Purchases equal the invoice amount:
    1. Plus freight-in, plus discounts lost.
    2. Less purchase returns, plus purchase allowances.
    3. Plus freight-in, less purchase discounts.
    4. Plus discounts, less purchase returns.

53. Using the gross method, purchase discounts lost are:
    1. Included in purchases.
    2. Added to accounts payable.
    3. Included in interest expense.
    4. Deducted from discount income.

54. Under the net method, purchase discounts lost are:
    1. Included in purchases.
    2. Added to accounts payable.
    3. Included in interest expense.
    4. Deducted from discount income.

55. Under the gross method, purchase discounts taken are:
    1. Deducted from interest expense.
    2. Added to net purchases.
    3. Added to interest income.
    4. Deducted from purchases.

56. The inventory method that will always produce the same amount for cost of goods sold in a periodic inventory system as in a perpetual inventory system would be:
    1. FIFO.
    2. LIFO.
    3. Weighted average.
    4. None of the above.

57. In a period when prices are rising and inventory quantities are stable, the inventory method that would result in the highest ending inventory is:
    1. Weighted average.
    2. Moving average.
    3. FIFO.
    4. LIFO.

58. In a period when prices are falling and inventory quantities are stable, the lowest taxable income would be reported by using the inventory method of:
    1. Weighted average.
    2. LIFO.
    3. Moving average.
    4. FIFO.

59. During periods when prices are rising and inventory quantities are stable, cost of goods sold will be:
    1. Higher under FIFO than LIFO.
    2. Higher under FIFO than average cost.
    3. Lower under average cost than LIFO.
    4. Lower under LIFO than FIFO.

60. During periods when prices are rising and inventory quantities are stable, ending inventory will be:
    1. Greater under LIFO than FIFO.
    2. Greater under average cost than LIFO.
    3. Lesser under average cost than FIFO.
    4. Greater under FIFO than LIFO.

61. The LIFO Conformity Rule states that if LIFO is used for:
    1. One class of inventory, it must be used for all classes of inventory.
    2. Tax purposes, it must be used for financial reporting.
    3. One company in an affiliated group, it must be used by all companies in an affiliated group.
    4. Domestic companies, it must be used by foreign partners.

62. The primary reason for the popularity of LIFO is that it gives:
    1. Better matching of physical flow and cost flow.
    2. A deferral of income tax.
    3. Simplified recordkeeping.
    4. A permanent reduction of income taxes.

63. In periods when prices are rising LIFO liquidations:
    1. Cannot occur.
    2. Are used to reduce tax liabilities.
    3. Are a source of off-balance-sheet financing.
    4. Distort the income statement.

64. The use of LIFO during a long inflationary period can result in:
    1. A net increase in income tax expense.
    2. An inflated balance sheet.
    3. Significant cash flow advantages over FIFO.
    4. A reduction in inventory turnover over FIFO. Answer: C   
65. When reported in financial statements, a LIFO Allowance account usually:
    1. Is shown in the firm's income statement.
    2. Is added to LIFO cost to indicate what the inventory would cost on a FIFO basis.
    3. Indicates the effect on income if LIFO were not used.
    4. Shows the current rate of inflation for that asset.

66. The use of LIFO in accounting for a firm's inventory:
    1. Usually matches the physical flow of goods through the business.
    2. Is usually used for internal management purposes.
    3. Usually requires price-indexing conversion at the end of each accounting period.
    4. None of the above is correct.

67. Dollar-value LIFO:
    1. Starts with ending inventory measured in current prices and recreates LIFO layers for measuring inventory costs.
    2. Measures inventory in dollars rather than units.
    3. Only is allowed for internal reporting purposes.
    4. None of the above is correct.

68. The change in the amount of the LIFO reserve disclosed at a particular balance sheet date tells you:
    1. The amount by which net income for that period would change if the company used another method (e.g., FIFO) instead of LIFO for measuring inventory.
    2. The amount by which cost of goods sold for that period would change if the company used another method (e.g., FIFO) instead of LIFO for measuring inventory.
    3. The amount by which the inventory balance on that date would change if the company used another method (e.g., FIFO) instead of LIFO for measuring inventory.
    4. None of the above is correct.

69. If a company uses LIFO for financial statement and income tax purposes, a LIFO liquidation is problematic for a company's income taxes:
    1. When inventory purchase prices are rising.
    2. When inventory purchase prices are declining.
    3. Whether inventory purchase process are declining or rising.
    4. LIFO liquidations are not problematic for a company's income taxes.

70. GG Inc. uses FIFO accounting for its internal inventory records and then reports on a LIFO basis in its financial statement and tax returns. GG disclosed an increase in its LIFO reserve of $15 million for 2006. Assuming GG has a 40% income tax rate:
    1. Its reported cost of goods sold for 2006 would have been $9 million more if it had used FIFO rather than LIFO for its financial statements.
    2. Its reported cost of goods sold for 2006 would have been $15 million more if it had used FIFO rather than LIFO for its financial statements.
    3. Its reported net income for 2006 would have been $9 more million if it had used FIFO rather than LIFO for its financial statements.
    4. Its reported net income for 2006 would have been $15 million more if it had used FIFO rather than LIFO for its financial statements.

71. HH Company uses FIFO accounting for its internal inventory records and then reports on a LIFO basis in its financial statement and tax returns. Gatsby disclosed a decrease in its LIFO reserve of $20 million for 2006. Assuming HH has a 30% income tax rate:
    1. Its reported cost of goods for 2006 would have been $14 million less if it had used FIFO rather than LIFO for its financial statements.
    2. Its reported cost of goods for 2006 would have been $20 million less if it had used FIFO rather than LIFO for its financial statements.
    3. Its reported cost of goods sold for 2006 would have been $14 million more if it had used FIFO rather than LIFO for its financial statements.
    4. Its reported cost of goods sold for 2006 would have been $20 million more if it had used FIFO rather than LIFO for its financial statements.

72. During 2006, WW Inc. reduced its LIFO eligible inventory quantities due to a problem with its major supplier. The effect of this liquidation was to increase its cost of goods sold by approximately $50 million. WW has a 40% income tax rate. If WW had not experienced these supplier problems and the resulting liquidation,
    1. Its 2006 net income would have been $30 million lower because inventory purchase prices were rising.
    2. Its 2006 net income would have been $30 million lower because inventory purchase prices were declining.
    3. Its 2006 net income would have been $30 million higher because inventory purchase prices were rising.
    4. Its 2006 net income would have been $30 million higher because inventory purchase prices were declining.

Use the following to answer questions 73-75:

On January 1, 2006, Badger Inc. adopted the dollar-value LIFO method. The inventory cost on this date was $100,000. The 2006 ending inventory, valued at year-end costs, was $126,000. The relative cost index for this inventory in 2006 was 1.05.

73. What inventory balance should Badger report on its 12/31/06 balance sheet? A) $126,000

B)   $121,000

C)   $120,000

D) $100,000

74. Suppose that Badger's 2007 ending inventory, valued at year-end costs, was $143,000 and that the relative cost index for this inventory in 2007 was 1.10. In determining the inventory balance should Badger report on its 12/31/07 balance sheet,:
    1. An additional layer of $23,000 is added to the 1/1/07 balance.
    2. An additional layer of $22,000 is added to the 1/1/07 balance.
    3. An additional layer of $11,000 is added to the 1/1/07 balance.
    4. None of the above is correct.

75. Suppose that Badger's 2008 ending inventory, valued at year-end costs, was $153,600 and that the relative cost index for this inventory in 2008 was 1.20. What inventory balance would Badger report on its 12/31/08 balance sheet?

A) $128,000

B)   $129,800

C)   $153,600

D) None of the above is correct.

76. Company A is identical to Company B in every regard except that Company A uses FIFO and Company B uses LIFO. In an extended period of rising prices, Company A's gross profit and inventory turnover, compared to Company B's, would be:

gross profit       inventory turnover

1. 1. lesser                     lesser
   2. greater                   greater
   3. greater                   lesser
   4. lesser                     greater

77. Company C is identical to Company D in every respect except that Company C uses LIFO and Company D uses average costs. In an extended period of rising prices, Company C's gross profit and inventory turnover, compared to Company D's, would be:

gross profit       inventory turnover

1. 1. greater                   greater
   2. greater                   lesser
   3. lesser                     lesser
   4. lesser                    greater

78. Compared to dollar-value LIFO, unit LIFO is:
    1. Less costly to implement.
    2. Less susceptible to LIFO liquidation.
    3. Less commonly used.
    4. More concerned with cost indexes.

Use the following to answer questions 79-81:

Nu Company reported the following pretax data for its first year of operations.

79. What is Nu's gross profit percentage if it elects LIFO? A) 80%.

B)   49%.

C)   40%.

D) 5%.

80. What is Nu's net income if it elects FIFO? A) $480.

B) $288.

C) $1,360.

D) $144.

81. What is Nu's net income if it elects LIFO?

Use the following to answer questions 82-84:

Nueva Company reported the following pretax data for its first year of operations.

82. What is Nueva's gross profit percentage if it elects FIFO? A) 30%.

B) 32%.

C) 10.7%.

D) 60%.

83. What is Nueva's net income if it elects FIFO?

84. What is Nueva's net income if it elects LIFO?

85. Ramen Inc. adopted dollar-value LIFO (DVL) as of January 1, 2006, when it had a cost inventory of $600,000. Its inventory as of December 31, 2006, was $667,800 at year-end prices and the cost index was 1.06. What was DVL inventory on December 31, 2006? A) $630,000.

B)   $631,800.

C)   $636,000.

D) None of the above is correct.

86. Udon Inc. adopted dollar-value LIFO (DVL) as of January 1, 2006, when it had an inventory of $700,000. Its inventory as of December 31, 2006, was $777, 000 at year-end prices and the cost index was 1.05. What was DVL inventory on December 31, 2006?

A) $735,000.

B)   $740,000.

C)   $742,000.

D) $777,000.

87. Linguini Inc. adopted dollar-value LIFO (DVL) as of January 1, 2006, when it had an inventory of $800,000. Its inventory as of December 31, 2006, was $811,200 at year-end prices and the cost index was 1.04. What was DVL inventory on December 31, 2006? A) $780,000

B)   $800,000.

C)   $811,200.

D) $832,000.

Use the following to answer questions 88-89:

Northwest Fur Co. started 2006 with $94,000 of merchandise inventory on hand. During 2006,

$400,000 in merchandise was purchased on account with credit terms of 1/15 n/45. All discounts were taken. Purchases were all made f.o.b. shipping point. Northwest paid freight charges of $7,500.

Merchandise with an invoice amount of $5,000 was returned for credit. Cost of goods sold for the year was $380,000. Northwest uses a perpetual inventory system.

88. What is ending inventory assuming Northwest uses the gross method to record purchases? A) $112,490.

B)   $112,550.

C)   $116,500.

D) $120,300.

89. Assuming Northwest uses the gross method to record purchases, what is the cost of goods available for sale?

A) $492,500.

B)   $496,500.

C)   $490,500.

D) $492,550.

Use the following to answer questions 90-91:

Cinnamon Buns Co. (CBC) started 2006 with $52,000 of merchandise on hand. During 2006,

$280,000 in merchandise was purchased on account with credit terms of 2/10 n/30. All discounts were taken. Purchases were all made f.o.b. shipping point. CBC paid freight charges of $9,000.

Merchandise with an invoice amount of $4,000 was returned for credit. Cost of goods sold for the year was $316,000. CBC uses a perpetual inventory system.

90. Assuming CBC uses the gross method to record purchases, ending inventory would be: A) $6,480.

B)   $15,400.

C)   $15,480.

D) $21,000.

91. What is cost of goods available for sale, assuming CBC uses the gross method? A) $312,480.

B)   $326,000.

C)   $331,480.

D) $337,000.

Use the following to answer questions 92-95:

Inventory records for Herb's Chemicals revealed the following: March 1, 2006, inventory - 1,000 gallons @ $7.20 = $7,200

92. Ending inventory assuming LIFO in a periodic inventory system would be: A) $5,040.

B)   $5,055.

C)   $5,075.

D) $5,135.

93. Ending inventory assuming LIFO in a perpetual inventory system would be: A) $4,960.

B)   $5,060.

C)   $5,080.

D) $5,140.

94. The ending inventory assuming FIFO is: A) $5,140.

B)   $5,080.

C)   $5,060.

D) $5,050.

95. The ending inventory under a periodic inventory system assuming average cost is: A) $5,087.

B)   $5,107.

C)   $5,077.

D) $5,005.

Use the following to answer questions 96-97:

Texas Petrochemical reported the following April activity for its VC-30 lubricant, which had a balance of 300 qts. @ $2.40 on April 1.

96. The ending inventory assuming LIFO and a periodic inventory system is: A) $1,580.

B)   $1,510.

C)   $1,575.

D) $1,470.

97. The ending inventory assuming LIFO and a perpetual inventory system is:

Use the following to answer questions 98-100:

Anthony Thomas Candies (ATC) reported the following financial data for 2006 and 2005:

98. ATC's gross profit ratio in 2006 is: A) 53.4%.

B)   51.9%.

C)   50.3%.

D) None of the above is correct.

99. ATC's inventory turnover ratio for 2006 is: A) 2.42.

B)   2.76.

C)   3.21.

D) None of the above is correct.

100. The average days inventory for ATC for 2006 is:
     1. Less than 100 days.
     2. 114 days
     3. 132 days.
     4. 151 days.

101. Buckeye Corporation adopted dollar-value LIFO on January 1, 2006, when the inventory value was $500,000 and the cost index was 1.0. On December 31, 2006, the inventory value at year-end costs was $535,000 and the cost index was 1.06. Buckeye would report a LIFO inventory of:

A) $504,717.

B)   $530,000.

C)   $505,000.

D) $533,019.

102. Tiger Inc. adopted dollar-value LIFO on January 1, 2006, when the inventory value was

$360,000 and the cost index was 1.25. On December 31, 2006, the inventory was valued at year-end cost of $395,000 and the cost index was 1.30. Tiger would report a LIFO inventory of:

A) $410,800.

B)   $374,400.

C)   $379,808.

D) $380,600.

Problems

103. Bascomb Company purchased $420,000 in merchandise on account during the month of April, and merchandise costing $350,000 was sold on account for $425,000.

Required:

(a.) Prepare journal entries to record the purchases and sales assuming Bascomb uses a perpetual inventory system.

(b.) Prepare journal entries to record the purchases and sales assuming Bascomb uses a periodic inventory system.

104. Meteor Co. purchased merchandise on March 4, 2006, at a price of $30,000, subject to credit terms of 2/10, n30. Meteor uses the net method for recording purchases and uses a periodic inventory system.

Required:

(a.) Prepare the journal entry to record the purchase.

(b.) Prepare the journal entry to record the appropriate payment if the entire invoice is paid on March 11, 2006.

(c.) Prepare the journal entry to record the appropriate payment if the entire invoice is paid on April 2, 2006.

105. Slinky Company purchased merchandise on June 10, 2006, at a price of $20,000, subject to credit terms of 2/10, n30. Slinky uses the net method for recording purchases and uses a perpetual inventory system.

Required:

(a.) Prepare the journal entry to record the purchase.

(b.) Prepare the journal entry to record the appropriate payment if the entire invoice is paid on June 18, 2006.

(c.) Prepare the journal entry to record the appropriate payment if the entire invoice is paid on July 8, 2006.

106. Bunker Auto Supply purchased merchandise on January 4, 2006, at a price of $70,000, subject to credit terms of 2/10, n30. Bunker uses the gross method for recording purchases and uses a periodic inventory system.

Required:

(a.) Prepare the journal entry to record the purchase.

(b.) Prepare the journal entry to record the payment of one-half the invoice amount on January 11, 2006.

(c.) Prepare the journal entry to record the balance of the amount due on February 2, 2006. Answer:

107. Patty's Pet Store purchased merchandise on October 10, 2006, at a price of $35,000, subject to credit terms of 2/10, n30. Patty's uses the gross method for recording purchases and uses perpetual inventory system.

Required:

(a.) Prepare the journal entry to record the purchase.

(b.) Prepare the journal entry to record the payment of one-half the invoice amount on October 18, 2006.

(c.) Prepare the journal entry to record the payment of the balance of the amount due on November 8, 2006.

108. Boston Dollar Store uses the gross method to record purchase discounts, and uses a perpetual inventory system. Boston engaged in the following transactions during April:

4/12        Purchased $15,000 in merchandise subject to terms of 2/10, n30. The goods were shipped f.o.b. shipping point.

4/13        Received a billing from Orange Freight Lines for $300 for the 4/12 purchase. 4/15          Returned $1,000 of merchandise from the 4/12 purchase.

4/20        Paid balances due from 4/12 purchase.

Required:

Prepare journal entries to record the above transactions.

Use the following to answer questions 109-113:

Shown below is the activity for one of the products of Random Creations: January 1 balance, 80 units @ $50         $4,000

Purchases:

January 18: 40 units @ $51

January 28: 40 units @ $52 Sales:

January 12: 30 units

January 22: 30 units

January 31: 45 units

109. Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses FIFO.

110. Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses LIFO and perpetual inventory system.

111. Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses LIFO and a periodic inventory system.

112. Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses average cost and a periodic inventory system.

113. Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses average cost and a perpetual inventory system.

Use the following to answer questions 114-118:

Shown below is activity for one of the products of Denver Office Equipment: January 1 balance, 500 units @ $55  $27,500

Purchases:

January 10: 500 units @ $60

January 20: 1,000 units @ $63 Sales:

January 12: 800 units

January 28: 750 units

114. Required: Compute the ending inventory and cost of goods sold assuming Denver uses FIFO. Answer:

115. Required: Compute the ending inventory and cost of goods sold assuming Denver uses LIFO and a perpetual inventory system.

116. Required: Compute the ending inventory and cost of goods sold assuming Denver uses average cost and a periodic inventory system.

117. Required: Compute the ending inventory and cost of goods sold assuming Denver uses average cost and a perpetual inventory system.

118. Required: Compute the ending inventory and cost of goods sold assuming Denver uses LIFO and a periodic inventory system.

119. Selected financial statement data from Western Colorado Stores is shown below.

Required:

(a.) Compute the gross profit ratio for 2006.

(b.) Compute the inventory turnover ratio for 2006.

120. Appleton Inc. adopted dollar-value LIFO on January 1, 2006, when the inventory value was

$1,200,000. The December 31, 2006, ending inventory at year-end costs was $1,430,000 and the cost index for the year is 1.1.

Required:

Compute the dollar-value LIFO inventory valuation for the December 31, 2006, inventory.

121. Chavez Inc adopted dollar-value LIFO on January 1, 2006, when the inventory value was

$850,000. The December 31, 2006, ending inventory at year-end cost was $950,000 and the cost index for the year is 1.08.

Required:

Compute the dollar-value LIFO inventory valuation for the December 31, 2006, inventory.

122. Liquidated Corporation had a DVL inventory of $800,000 at the beginning of the current year when it adopted DVL. Its year-end inventory at year-end prices was $850,000. The index for the current year was 1.08.

Required:

Compute the DVL inventory to be reported at the end of the year.

Use the following to answer questions 123-127:

The following information is taken from the accounting records of Rapid Runner Inc. for the year 2006. Missing information has been left blank.

Required: Compute the missing amounts.

Cost of

Ending

Gross

Sales    Purchase

Beginning

Gross

Purchase

  Use the following to answer questions 128-132:

The following information is taken from the accounting records of Madeline Inc. for the year 2006. Missing information has been left blank. Inventory is the only supply that Madeline purchases on credit.

Required: Compute the missing amounts.

132.

Jan. 1 accounts payable

Jan. 1 inventory

Dec. 31 accounts payable

Dec. 31

inventory   Cash paid to

inventory suppliers

Cost of goods sold

Net purchases

80                                                 72                606                583                621

80              34              95              72                606                583                621

133. The following information comes from the 2004 General Motors (GM) Corporation annual report to shareholders:

Inventories included the following for Automotive and Other Operations (dollars in millions):

December 31,

Inventories are stated generally at cost, which is not in excess of market. The cost of approximately 92% of U.S. inventories is determined by the last-in, first-out (LIFO) method. Footnote 6 to the GM financial statements indicated that the LIFO Allowance (Reserve) decreased by $139 million during 2004. GM's Income from continuing operations before income taxes for 2004 was $2,805 million.

Required:

If GM used only FIFO for its inventories instead of its current policy, what would its Income from continuing operations before income taxes have been for 2004?

134. The following information comes from the 2004 Occidental Petroleum Corporation annual report to shareholders:

NOTE 5    INVENTORIES

Inventories of approximately $137 million and $171 million were valued under the LIFO method at December 31, 2004 and 2003, respectively. Inventories (in millions) were:

Also, the footnote indicated that the LIFO Reserve increased from $22 million to $54 million during 2004.

Required:

If Occidental Petroleum did not use LIFO for any of its inventory, but used FIFO instead, How would its 2004 pre-tax income be affected?

135. On January 1, 2005, ECT Co. adopted the dollar-value LIFO method for its one inventory pools. The pool's value on this date was $600 million. The 2005 and 2006 ending inventory valued at year-end costs were $702 million and $840 million, respectively. The appropriate cost indexes are 1.08 for 2005 and 1.20 for 2006.

Required:

Calculate the inventory balance that ECT Co. would report on its year-end balance sheets for 2005 and 2006, using the dollar-value LIFO method.

136. On January 1, 2005, RAY Co. adopted the dollar-value LIFO method for its one inventory pools. The pool's value on this date was $300 million. The 12/31/05 inventory valued at year- end costs were $385 million. The 12/31/05 inventory, using dollar-value LIFO was $355 million.

Required:

Calculate 2005 cost index for RAY's inventory.

Use the following to answer questions 137-138:

A note to the 2005 financial statements for H.T. Horton Inc. reveals the following:

"Substantially all inventories owned by H.T. Horton Inc. and its U.S. subsidiaries are valued at cost on the last-in, first-out (LIFO) method. During the fourth quarter, the company's inventories declined due to a lower level of production. As a result, lower costs which prevailed in prior years were matched against current year's revenues, the effect of which was to increase net income by $42 million or 48 cents per share. If all of the company's inventories had been valued on a current cost basis, which approximates FIFO, inventories at year-end were $3,628 million, compared with $3,712 million at the beginning of the year." The income tax rate is 40%.

Required:

137. The footnote indicates an inventory liquidation during the fourth quarter. By how much did the costs of the older inventories matched against current revenues differ from current costs? Indicate the amount and whether it was larger or smaller.

138. What additional income tax payments did the 2005 liquidation cost Horton?

Essay

Instructions:

The following answers point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be.

139. Briefly describe why companies that use perpetual inventory systems must still perform physical inventories.

140. It is the end of the accounting period, and your boss asks you to help determine the inventory balance to place in the company's balance sheet. Explain which physical quantities of inventory that you will include, and which you will exclude.

141. Briefly explain when there would be a tax benefit from electing LIFO rather than FIFO.

142. Briefly explain the advantages of dollar-value LIFO (DVL).

143. Briefly explain how companies that use LIFO can both increase and decrease reported earnings by "managing" ending inventories.