Merchandise Inventory

1. Merchandise Inventory Chapter 6

2. Which cost flow assumption assigns the oldest costs of purchases to its inventory? • FIFO • LIFO • Average • Specific Units Cost

3. Answer: 2 The most recent costs are assigned to cost of goods sold. The oldest costs remain in inventory.

4. Chez Company uses FIFO perpetual inventory. It had 6 units of inventory in beginning inventory that cost $1 each. It then purchased 4 units for $2 each. Next, it sold 5 units. How much was assigned to cost of goods sold?

5. FIFO: First units in are the first units sold5 units x $1 = $5

6. Chez Company uses LIFO perpetual inventory. It had 6 units of inventory in beginning inventory that cost $1 each. It then purchased 4 units for $2 each. Next, it sold 5 units. How much was assigned to cost of goods sold?

7. LIFO: Last units in are the first units sold4 units x $2 = $81 unit x $1 = 1 $9

8. Chez Company uses the average perpetual inventory. It had 6 units of inventory in beginning inventory that cost $1 each. It then purchased 4 units for $2 each. Next, it sold 5 units. How much was assigned to cost of goods sold?

9. Average cost:[(6 units x $1) + (4 units x $2)] ÷ 10 units = $1.40$1.40 x 5 = $7

10. Companies that seek a “middle-ground” solution to inventory valuation would use which inventory costing method? • FIFO • LIFO • Average

11. Answer: 3

12. The accounting principal that states that businesses should use the same accountingmethods from period to period. • Conservatism • Consistency • Materiality • Disclosure

13. Answer: 2

14. The accounting principle that states that a company should report enough information for outsiders to make wise decisions about the company. • Conservatism • Consistency • Materiality • Disclosure

15. Answer: 4

16. The accounting principle thatstates that a company must perform strictly proper accounting only for significant items is • Conservatism • Consistency • Materiality • Disclosure

17. Answer: 3

18. Which inventory costing method lets companies pay the lowest income taxes when inventory costs are rising? • FIFO • LIFO • Average

19. Answer: 2 Higher costs are assigned to cost of goods sold, results in a lower operating income and lower income tax liability.

20. When inventory costs are rising, net income is also the highest under which inventory costing method? • FIFO • LIFO • Average

21. Answer: 1 With FIFO, the earlier costs are assigned to cost of goods sold, resulting in a higher gross profit and net income.

22. The lower-of-cost-or-market rule is an example of which accounting principle? • Conservatism • Consistency • Materiality • Disclosure

23. Answer: 1

24. Inglis Company paid $500 for inventory. By the end of the accounting period, the market value is $460. The entry to apply the LCM rule is: • Debit Inventory, credit Cost of Goods Sold, $460 • Debit Inventory, credit Cost of Goods Sold, $40 • Debit Cost of Goods Sold, credit Inventory $40 • Debit Inventory Loss, credit Cost of Goods Sold, $460

25. Answer: 3

26. Alfred Company uses the gross profit method to estimate ending inventories. Historically, the company has had a 40% gross profit rate. The following information is available:Net sales $9,000Beginning inventory 1,000Cost of goods purchased 7,000What is the estimated cost of Alfred Company's inventory at the end of the month?

27. Answer: Net sales $9,000Estimated gross profit ($9,000 x 40%) 3,600Estimated cost of goods sold $5,400Beginning inventory $1,000Cost of goods purchased 7,000 Goods available for sale $8,000Less estimated cost of goods sold 5,400 Estimated ending inventory $2,600