<p> Chapter 7: Reporting and Interpreting Cost of Goods Sold and Inventory</p><p>Nature of Inventory and Cost of Goods Sold 1. What is inventory?</p><p>2. What are included in inventory costs?</p><p>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?</p><p>4. How is sales revenue computed for an accounting period?</p><p>5. How is cost of goods sold computed for an accounting period?</p><p>6. What is the cost of goods sold equation?</p><p>7. What are goods available for sale?</p><p>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?</p><p>9. Assume the 2000 ending inventory was understated by $10,000. Explain how this error would affect the 2000 and 2001 pretax income amounts.</p><p>10. Assume the 2000 ending inventory was overstated by $10,000. Explain how this error would affect the 2000 and 2001 pretax income amounts.</p><p>Inventory Costing Methods 1. Is the choice among inventory costing methods based on the physical flow of goods?</p><p>2. What type of inventory costing method is required by GAAP?</p><p>3. What is FIFO?</p><p>4. What is LIFO?</p><p>5. What is the weighted average method? 6. What is the equation to compute the weighted average cost?</p><p>7. What is the specific identification method?</p><p>8. When is the specific identification method appropriate?</p><p>9. Burrito Brothers has the following inventory information:</p><p>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</p><p>A. What is the cost assigned to cost of goods sold using FIFO?</p><p>B. What is cost assigned to ending inventory using FIFO?</p><p>C. What is cost assigned to cost of goods sold using LIFO</p><p>D. What is cost assigned to ending inventory using LIFO? </p><p>E. What is cost assigned to cost of goods sold using weighted average cost?</p><p>F. What is cost assigned to ending inventory using weighted average cost?</p><p>10. What are the effects on cost of goods sold, net income, and ending inventory when prices are rising and FIFO is used?</p><p>11. What are the effects on cost of goods sold, net income, and ending inventory when prices are rising and LIFO is used?</p><p>12. What are the effects on cost of goods sold, net income, and ending inventory when prices are declining and FIFO is used?</p><p>13. What are the effects on cost of goods sold, net income, and ending inventory when prices are declining and LIFO is used?</p><p>14. When prices are falling, which inventory costing alternative usually results in a firm paying the lowest income taxes?</p><p>15. What is the LIFO conformity rule?</p><p>16. What is the LIFO reserve? 17. How is the difference in cost of goods sold, the excess of FIFO over LIFO, computed?</p><p>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?</p><p>Inventory Turnover Ratio 1. What is the equation for the inventory turnover ratio?</p><p>2. What does the inventory turnover ratio measure?</p><p>3. What does a higher inventory turnover ratio indicate?</p><p>Valuation at Lower of Cost or Market 1. What is the lower of cost or market?</p><p>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</p><p>Then compare the market value with the cost of the inventory. Whichever is lower is what inventory should be valued at.</p><p>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?</p><p>2. What entry is written in order to record the purchase of inventory under the perpetual inventory system?</p><p>3. What entry or entries is (are) written to record the sale of inventory under the perpetual inventory system? </p><p>4. Under the perpetual inventory system what entry or entries is (are) recorded when inventory costing $3,600 is sold for $5,000?</p><p>5. What is a periodic inventory system?</p><p>6. What entry is written in order to record the purchase of inventory under the periodic inventory system?</p><p>7. What entry or entries is (are) written to record the sale of inventory under the periodic inventory system? </p>