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

Nature of Inventory and Cost of Goods Sold 1. What is inventory?

2. What are included in inventory costs?

3. Jason Alligators purchased 100 Alligators paying $50 each. Jason paid $500 shipping costs and $200 for shots that are required by state law before alligators can be sold. Jason also had to pay $200 to the bureau of Alligator Inspectors (BAI) in order to get a certificate that authorizes them to sell the alligators. Jason also paid $50 to advertise the alligators. The purpose of this advertising is to inform the public that these alligators are a special breed from Ocala. What is the cost of Jason’s inventory of alligators?

4. How is sales revenue computed for an accounting period?

5. How is cost of goods sold computed for an accounting period?

6. What is the cost of goods sold equation?

7. What are goods available for sale?

8. The 2001 the records of Kofi Company showed beginning inventory, $6,000; cost of goods sold, $14,000; and ending inventory, $8,000. How much inventory did Kofi purchase during 2001?

9. Assume the 2000 ending inventory was understated by $10,000. Explain how this error would affect the 2000 and 2001 pretax income amounts.

10. Assume the 2000 ending inventory was overstated by $10,000. Explain how this error would affect the 2000 and 2001 pretax income amounts.

Inventory Costing Methods 1. Is the choice among inventory costing methods based on the physical flow of goods?

2. What type of inventory costing method is required by GAAP?

3. What is FIFO?

4. What is LIFO?

5. What is the weighted average method? 6. What is the equation to compute the weighted average cost?

7. What is the specific identification method?

8. When is the specific identification method appropriate?

9. Burrito Brothers has the following inventory information:

Beginning Inventory 100 units at $30 per unit Purchase #1 60 units at $35 per unit Purchase #2 40 units at $40 per unit Units sold 170 units

A. What is the cost assigned to cost of goods sold using FIFO?

B. What is cost assigned to ending inventory using FIFO?

C. What is cost assigned to cost of goods sold using LIFO

D. What is cost assigned to ending inventory using LIFO?

E. What is cost assigned to cost of goods sold using weighted average cost?

F. What is cost assigned to ending inventory using weighted average cost?

10. What are the effects on cost of goods sold, net income, and ending inventory when prices are rising and FIFO is used?

11. What are the effects on cost of goods sold, net income, and ending inventory when prices are rising and LIFO is used?

12. What are the effects on cost of goods sold, net income, and ending inventory when prices are declining and FIFO is used?

13. What are the effects on cost of goods sold, net income, and ending inventory when prices are declining and LIFO is used?

14. When prices are falling, which inventory costing alternative usually results in a firm paying the lowest income taxes?

15. What is the LIFO conformity rule?

16. What is the LIFO reserve? 17. How is the difference in cost of goods sold, the excess of FIFO over LIFO, computed?

18. Landings Company reports pretax earnings of $120,000 for 2002. The inventory footnote to the financial statements indicated “if the FIFO method had been used inventories would have been $2,000 and $3,000 higher than reported at the end of the current and prior years, respectively.” What is the 2002 pretax earnings under FIFO?

Inventory Turnover Ratio 1. What is the equation for the inventory turnover ratio?

2. What does the inventory turnover ratio measure?

3. What does a higher inventory turnover ratio indicate?

Valuation at Lower of Cost or Market 1. What is the lower of cost or market?

2. How is the lower of cost or market determined? First determine the market value Net Realizable Value = Sales price – selling costs Net Realizable Value – Normal Profit = Sales price - selling costs – profit Replacement Cost Pick the middle value of the three as the market value

Then compare the market value with the cost of the inventory. Whichever is lower is what inventory should be valued at.

3. Kuffor Company is writing its inventory down to the lower of cost or market. It has determined the following per unit costs and market prices for its products: Original Cost $52 Selling Price 60 Selling Costs 10 Normal Profit 9 Replacement Cost 39 Given this data, what should the inventory be valued at? Keeping Track of Inventory Quantities and Costs 1. What is a perpetual inventory system?

2. What entry is written in order to record the purchase of inventory under the perpetual inventory system?

3. What entry or entries is (are) written to record the sale of inventory under the perpetual inventory system?

4. Under the perpetual inventory system what entry or entries is (are) recorded when inventory costing $3,600 is sold for $5,000?

5. What is a periodic inventory system?

6. What entry is written in order to record the purchase of inventory under the periodic inventory system?

7. What entry or entries is (are) written to record the sale of inventory under the periodic inventory system?