Question 1

A company normally sells its product for $20 per unit. However, the selling price has fallen to $15 per unit. This company's current inventory consists of 200 units purchased at $16 per unit. Replacement cost has now fallen to $13 per unit. Calculate the value of this company's inventory at the lower of cost or market.
A) $2,550.
B) $2,600.
C) $2,700.
D) $3,000.
E) $3,200.

Accepted Answer

The answer of A company normally sells its product for...

Question 2

On December 31, a company needed to estimate its ending inventory to prepare its fourth quarter financial statements. The following information is currently available: Inventory as of October 1: $12,500
Net sales for fourth quarter: $40,000
Net purchases for fourth quarter: $27,500
This company typically achieves a gross profit ratio of 15%. Ending Inventory under the gross profit method would be:
A) $4,000.
B) $6,000.
C) $10,000.
D) $16,000.
E) $34,000.

Accepted Answer

Using the gross profit method, we can calculate the estimated ending inventory as follows:

Beginning inventory + net purchases - cost of goods sold = estimated ending inventory

Cost of goods sold can be calculated by multiplying net sales by the gross profit ratio:

Net sales x gross profit ratio = cost of goods sold

Plugging in the given numbers:

Beginning inventory = $12,500
Net purchases = $27,500
Net sales = $40,000
Gross profit ratio = 15%

Cost of goods sold = $40,000 x 15% = $6,000

$12,500 + $27,500 - $6,000 = estimated ending inventory

Therefore, the answer is B) $6,000.

Question 3

On July 24 of the current year, The Georgia Peach Company experienced a natural disaster that destroyed the company's entire inventory. At the beginning of July, the company reported beginning inventory of $226,750. Inventory purchased during July (until the date of the disaster) was $197,800. Sales for the month of July through July 24 were $642,500. Assuming the company's typical gross profit ratio is 50%, estimate the amount of inventory destroyed in the natural disaster.
A) $212,275
B) $103,300
C) $217,950
D) $321,250
E) $157,788

Accepted Answer

The answer of On July 24 of the current year,...

Question 4

A company reported the following information regarding its inventory. Beginning inventory: cost is $70,000; retail is $130,000
Net purchases: cost is $65,000; retail is $120,000
Sales at retail: $145,000
The year-end inventory showed $105,000 worth of merchandise available at retail prices. What is the cost of the ending inventory?
A) $48,300.
B) $56,700.
C) $56,441.
D) $78,300.
E) $105,000.

Accepted Answer

The answer of A company reported the following information regarding...

Question 5

Georgia Peach Company reported net sales in June of the current year of $1,000,000. At the beginning of June, the company reported beginning inventory of $368,000. Cost of goods purchased during June amounted to $217,500. The company reported ending inventory at the end of June of $226,750. The company's gross profit rate for June of the current year was:
A) 35.9%
B) 18.8%
C) 81.2%
D) 64.1%
E) Impossible to determine from the information provideD.Combining beginning inventory of $368,000 with purchases for the period of $217,500 yields cost of goods available for sale of $585,500. If we then subtract the ending inventory of $226,750, we get cost of goods sold of $358,750. Subtracting cost of goods sold ($358,750) from sales ($1,000,000) yields gross profit of $641,250. Dividing gross profit of $641,250 by sales of $1,000,000 yields a gross profit percentage of 64.125% or 64.1% rounded.

Accepted Answer

By using the formula of gross profit rate, we can calculate it as follows:
Gross Profit = Net Sales - Cost of Goods Sold
Cost of Goods Sold = Beginning Inventory + Purchases - Ending Inventory
Cost of Goods Sold = $368,000 + $217,500 - $226,750
Cost of Goods Sold = $358,750
Gross Profit = $1,000,000 - $358,750
Gross Profit = $641,250
Gross Profit Rate = (Gross Profit / Net Sales) x 100%
Gross Profit Rate = ($641,250 / $1,000,000) x 100%
Gross Profit Rate = 64.125% or 64.1% rounded
Therefore, the correct answer is D, 64.1%.

Question 6

A company's warehouse was destroyed by a tornado on March 15. The following information was the only information that was salvaged:  The company's average gross profit ratio is 35%. What is the estimated cost of the lost inventory?
A) $9,705.
B) $25,995.
C) $29,250.
D) $44,000.
E) $45,000.

Accepted Answer

The answer of A company's warehouse was destroyed by a...

Question 7

A company has the following per unit original costs and replacement costs for its inventory: Part A: 50 units with a cost of $5, and replacement cost of $4.50
Part B: 75 units with a cost of $6, and replacement cost of $6.50
Part C: 160 units with a cost of $3, and replacement cost of $2.50
Under the lower of cost or market method, the total value of this company's ending inventory is:
A) $1,180.00.
B) $1,075.00.
C) $1,075.00 or $1,112.50, depending upon whether LCM is applied to individual items or the inventory as a whole.
D) $1,112.50.
E) $1,180.00 or $1,075.00, depending upon whether LCM is applied to individual items or to the inventory as a wholE.

Accepted Answer

Under the lower of cost or market (LCM) method, inventory is valued at the lower of its cost or current replacement cost. The current replacement cost is the cost of replacing the inventory with new inventory at the current market price.

For Part A, the original cost per unit is $5 and the replacement cost per unit is $4.50. Thus, the inventory will be valued at the replacement cost of $4.50 per unit since it is lower than the original cost. The total value of Part A inventory will be 50 units x $4.50 = $225.

For Part B, the original cost per unit is $6 and the replacement cost per unit is $6.50. The inventory will be valued at its original cost since it is lower than the replacement cost. The total value of Part B inventory will be 75 units x $6 = $450.

For Part C, the original cost per unit is $3 and the replacement cost per unit is $2.50. Thus, the inventory will be valued at the replacement cost of $2.50 per unit since it is lower than the original cost. The total value of Part C inventory will be 160 units x $2.50 = $400.

The total value of the inventory under LCM method will be $225 + $450 + $400 = $1,075.

Note: Since the LCM method can be applied to individual items or the inventory as a whole, some confusion can arise. If the LCM method is applied to individual items, the total value of the inventory will be $1,112.50, which is the sum of the replacement costs of Part A and Part C inventories ($4.50 x 50 + $2.50 x 160) and the original cost of Part B inventory ($6 x 75).

Question 8

Interim statements:
A) Are required by the Congress.
B) Are necessary to achieve full disclosure about a business's operations.
C) Are usually monthly or quarterly statements prepared for periods of less than one year.
D) Require the use of the perpetual method for inventories.
E) Cannot be prepared if the company follows the conservatism principle.

Accepted Answer

Interim statements are usually prepared for periods of less than one year and are used to provide timely information about a company's financial performance to its stakeholders. Typically, interim statements are prepared on a monthly or quarterly basis. While the Congress may require certain financial disclosures from companies, this is not specific to interim statements. The use of the perpetual method for inventories is not a requirement for interim statements, and following the conservatism principle does not preclude the preparation of interim statements.

Question 9

Generally accepted accounting principles require that the inventory of a company be reported at:
A) Market value.
B) Historical cost.
C) Lower of cost or market.
D) Replacement cost.
E) Retail value.

Accepted Answer

Generally accepted accounting principles require that the inventory of a company be reported at the lower of cost or market. This means that if the market value of the inventory falls below its original cost, the inventory should be reported at the lower market value. This ensures that the inventory is reported at a conservative value, reflecting any potential loss in value.

Question 10

In applying the lower of cost or market method to inventory valuation, market is defined as:
A) Historical cost.
B) Current replacement cost.
C) Current sales price.
D) FIFO.
E) LIFO.

Accepted Answer

The lower of cost or market method involves comparing the cost of inventory to its market value and valuing it at the lower amount. Market is defined as the current replacement cost, which is the cost to replace the inventory at its current state. Historical cost (A) is the original cost of acquiring the inventory and does not reflect current market conditions. Current sales price (C) may not accurately reflect the cost of replacing the inventory, as it may be affected by factors such as supply and demand. FIFO (D) and LIFO (E) refer to inventory valuation methods and do not relate to the valuation of market value.

Question 11

Flaxco purchases inventory from overseas and incurs the following costs: the cost of the merchandise is $50,000, credit terms are 2/10, n/30 that apply only to the $50,000; FOB shipping point freight charges are $1,500; insurance during transit is $500; and import duties are $1,000. Flaxco paid within the discount period and incurred additional costs of $1,200 for advertising and $5,000 for sales commissions. Compute the cost that should be assigned to the inventory.
A) $50,000
B) $53,000
C) $52,000
D) $51,500
E) $53,200

Accepted Answer

The answer of Flaxco purchases inventory from overseas and incurs...

Question 12

A company uses the periodic inventory system and had the following activity during the current monthly period.  In a periodic inventory system, using the weighted-average inventory method, the company's ending inventory would be:
A) $2,000.
B) $2,200.
C) $2,250.
D) $2,400.
E) $4,400.

Accepted Answer

The answer of A company uses the periodic inventory system...

Question 13

Jackson Company has sales of $300,000 and cost of goods available for sale of $270,000. If the gross profit ratio is typically 30%, the estimated cost of the ending inventory under the gross profit method would be:
A) $60,000
B) $180,000
C) $30,000
D) $90,000
E) Impossible to determine from the information provideD.If sales for the period were $300,000 and the company's typical gross profit ratio is 30%, gross profit would be approximately $90,000. That means that cost of goods sold must have been $210,000. Subtracting cost of goods sold of $210,000 from the $270,000 of cost of goods available for sale yields ending inventory of $60,000.

Accepted Answer

To calculate the estimated cost of the ending inventory under the gross profit method, we need to first calculate the cost of goods sold using the gross profit ratio. Given that the gross profit ratio is typically 30%, gross profit can be calculated as ($300,000 x 30%) = $90,000. To get the cost of goods sold, we subtract the gross profit from sales, i.e., ($300,000 - $90,000) = $210,000. Therefore, the cost of ending inventory can be calculated as ($270,000 - $210,000) = $60,000. Hence, the correct answer is option A.

Question 14

A company that has operated with a 30% average gross profit ratio for a number of years had $100,000 in sales during the first quarter of this year. If it began the quarter with $18,000 of inventory at cost and purchased $72,000 of inventory during the quarter, its estimated ending inventory by the gross profit method is:
A) $30,000.
B) $21,000.
C) $20,000.
D) $18,000.
E) $27,000.

Accepted Answer

First, we need to calculate the cost of goods sold (COGS):
Beginning inventory = $18,000
Purchases = $72,000
Cost of goods available for sale = $18,000 + $72,000 = $90,000
COGS = (1 - Gross Profit Ratio) x Sales = (1 - 0.30) x $100,000 = $70,000

Next, we can use the gross profit method formula to estimate ending inventory:
Ending inventory = Cost of goods available for sale - COGS
= $90,000 - $70,000
= $20,000

Therefore, the estimated ending inventory by the gross profit method is $20,000, which is answer choice C.

Question 15

A company has inventory of 10 units at a cost of $10 each on June 1. On June 3, it purchased 20 units at $12 each. 12 units are sold on June 5. Using the FIFO periodic inventory method, what is the cost of the 12 units that were sold?
A) $120.
B) $124.
C) $128.
D) $130.
E) $140.

Accepted Answer

According to the FIFO method, the first units purchased are assumed to be sold first. Therefore, the cost of goods sold will be calculated using the cost of the first 10 units purchased on June 1 and 2 units purchased on June 3 at a cost of $10 each and $12 each, respectively. 
Total cost of goods sold = (10 * $10) + (2 * $12) = $100 + $24 = $124.

Question 16

A company had inventory of 10 units at a cost of $20 each on November 1. On November 2, it purchased 10 units at $22 each. On November 6 it purchased 6 units at $25 each. On November 8, it sold 22 units for $54 each. Using the FIFO perpetual inventory method, what was the cost of the 22 units sold?
A) $470.
B) $490.
C) $450.
D) $570.
E) $520.

Accepted Answer

The answer of A company had inventory of 10 units...

Question 17

On September 30 a company needed to estimate its ending inventory to prepare its third quarter financial statements. The following information is available: Beginning inventory, July 1: $4,000
Net sales: $40,000
Net purchases: $41,000
The company's gross margin ratio is 15%. Using the gross profit method, the cost of goods sold would be:
A) $4,000.
B) $5,000.
C) $21,000.
D) $25,000.
E) $34,000.

Accepted Answer

The answer of On September 30 a company needed to...

Question 18

The conservatism constraint:
A) Prescribes that when multiple estimates of amounts to be received or paid in the future are equally likely, then the least optimistic amount should be used.
B) Prescribes that a company use the same accounting methods period after period.
C) Prescribes that revenues and expenses be reported in the period in which they are earned or incurred.
D) Prescribes that all items of a material nature be included in financial statements.
E) Prescribes that all inventory items be reported at full cost.

Accepted Answer

The conservatism constraint is also known as the "principle of prudence" or "principle of conservatism." It prescribes that when multiple estimates of amounts to be received or paid in the future are equally likely, then the least optimistic amount should be used. This means that a company should be cautious in its estimates and should err on the side of understating assets and income, and overstating liabilities and expenses. This helps to avoid overstatement of the company's financial position and performance, and promotes a more cautious and prudent approach to financial reporting.

Question 19

A company has inventory of 15 units at a cost of $12 each on August 1. On August 5, it purchased 10 units at $13 per unit. On August 12 it purchased 20 units at $14 per unit. On August 15, it sold 30 units. Using the FIFO periodic inventory method, what is the value of the inventory at August 15 after the sale?
A) $140.
B) $160.
C) $210.
D) $380.
E) $590.

Accepted Answer

The answer of A company has inventory of 15 units...

Question 20

A company sells a climbing kit and uses the periodic inventory system to account for its merchandise. The beginning balance of the inventory and its transactions during January were as follows:  If the ending inventory is reported at $357, what inventory method was used?
A) LIFO.
B) FIFO.
C) Weighted average.
D) Specific identification.
E) Retail inventory methoD.

Accepted Answer

The ending inventory balance of $357 suggests that the company used the FIFO method because this method assumes that the first items purchased are the first ones sold, leaving the most recent purchases (and their cost) in ending inventory. Therefore, the cost of the ending inventory reflects the most recent purchases, resulting in a higher ending inventory balance than other methods.

Quiz 6: Inventories and Cost of Sales

A company's warehouse was destroyed by a tornado on March 15. The following information was the only information that was salvaged: The company's average gross profit ratio is 35%. What is the estimated cost of the lost inventory?

Interim statements:

Generally accepted accounting principles require that the inventory of a company be reported at:

In applying the lower of cost or market method to inventory valuation, market is defined as:

A company uses the periodic inventory system and had the following activity during the current monthly period. In a periodic inventory system, using the weighted-average inventory method, the company's ending inventory would be:

Jackson Company has sales of $300,000 and cost of goods available for sale of $270,000. If the gross profit ratio is typically 30%, the estimated cost of the ending inventory under the gross profit method would be:

A company has inventory of 10 units at a cost of $10 each on June 1. On June 3, it purchased 20 units at $12 each. 12 units are sold on June 5. Using the FIFO periodic inventory method, what is the cost of the 12 units that were sold?

A company had inventory of 10 units at a cost of $20 each on November 1. On November 2, it purchased 10 units at $22 each. On November 6 it purchased 6 units at $25 each. On November 8, it sold 22 units for $54 each. Using the FIFO perpetual inventory method, what was the cost of the 22 units sold?

The conservatism constraint:

A company sells a climbing kit and uses the periodic inventory system to account for its merchandise. The beginning balance of the inventory and its transactions during January were as follows: If the ending inventory is reported at $357, what inventory method was used?