Question 1

A purchase on credit is recorded twice and not corrected during the year-end physical inventory. Which of the following statements correctly describes the impact of this error?

Accepted Answer

Recording a purchase on credit twice and not correcting it before the year-end physical inventory count will lead to both purchases and ending inventory being overstated. This error does not affect the accuracy of the current year's income on the income statement because the overstatement in purchases (an expense) is offset by an equal overstatement in ending inventory (an asset), which is part of the cost of goods sold calculation.

Question 2

Barry Corp. reported 2016 net income of $40,000. However, the ending inventory in 2015 had been understated by $3,000, and 2016's ending inventory had been overstated by $6,000. Barry's correct net income for 2016 was

Accepted Answer

The answer of Barry Corp. reported 2016 net income of...

Question 3

The accountant for Suzanne Company made the following errors related to inventory in 2017:
1) The beginning inventory for 2017 was overstated by $1,375 due to an error in the physical count.
2) A $1,650 purchase of merchandise on credit in 2017 was not recorded or included in the ending inventory.
Assuming a periodic inventory system, how would Sue's cost of goods sold, gross profit, and net income be affected in 2017 by these errors?

Accepted Answer

The answer of The accountant for Suzanne Company made the...

Question 4

The accountant for Lee Company made the following errors related to merchandise inventory in 2016:
1) The beginning inventory for 2016 was overstated by $750 due to an error in the physical count.
2) A $1,300 purchase of merchandise on credit was not recorded and was not included in the ending inventory.
Assuming a periodic inventory system, Lee Company's 2016 cost of goods sold will be

Accepted Answer

The answer of The accountant for Lee Company made the...

Question 5

What is the effect on net income if a company fails to record a purchase in transit FOB shipping point) and also fails to include the purchase in physical inventory?

Accepted Answer

The answer of What is the effect on net income...

Question 6

If in the current year a purchase was not recorded but the purchased item was included in ending physical inventory, which one of the following situations occurs for the current year?

Accepted Answer

The answer of If in the current year a purchase...

Question 7

The dollar-value LIFO retail method

Accepted Answer

The dollar-value LIFO retail method indeed combines the principles of retail LIFO, where inventory is accounted for at retail prices, with dollar-value LIFO, which adjusts inventory layers for inflation or deflation, thereby integrating both approaches.

Question 8

The accountant for the Daneen Company made the following errors related to purchases of merchandise and ending inventory in 2016:
1) A $3,100 purchase of merchandise on credit early in 2015 was recorded and included in ending inventory at December 31, 2016.
2) A $2,750 purchase of merchandise on credit in 2014 was recorded, but it was not included in the end-of-year physical inventory count.
Assuming a periodic inventory system, Daneen Company's 2016 net income will be

Accepted Answer

The net effect of the errors is an overstatement of net income by $350. The first error overstates ending inventory by $3,100, which would decrease the cost of goods sold and overstate net income. The second error, by not including the $2,750 purchase in inventory, understates ending inventory, which increases the cost of goods sold and understates net income. The net effect is an overstatement of net income by the difference between the two errors, which is $350 ($3,100 - $2,750).

Question 9

Exhibit 8-3
The J. Love Company uses a periodic inventory accounting system and values its inventory by using the lower of cost or NRV rule. The allowance method is used in applying the lower of cost or NRV rule. The company adjusts and closes its books annually on December 31. Below are the cost and market values of the company's year-end inventories for a three-year period: 
-Refer to Exhibit 8-3. Which of the following journal entries would be correct as of December 31, 2020, to apply the lower of cost or market rule?

Accepted Answer

The answer of Exhibit 8-3
The J. Love Company uses a...

Question 10

What is the effect on net income for the current year if a company fails to record a purchase of materials in transit FOB shipping point) but includes the materials in physical inventory at year-end?

Accepted Answer

Since the materials were not recorded as a purchase, the related expense will not be recognized, leading to an understatement of expenses and an overstatement of net income. However, including the materials in physical inventory at year-end will overstate inventory and further overstate net income.

Question 11

Bennett Company's accountant made the following errors related to merchandise inventory in 2016:
1) The beginning inventory for 2016 was overstated by $1,900 due to an error in the physical count.
2) A $1,150 purchase of merchandise on credit was not recorded, but the items were included in the ending inventory.
Assuming a periodic inventory system, Bennett Company's 2016 cost of goods sold will be

Accepted Answer

The beginning inventory overstatement increases COGS by $1,900, while the unrecorded purchase decreases COGS by $1,150. The net effect is an overstatement of $750 in COGS.

Question 12

If purchases are recorded correctly but ending physical inventory is understated, which one of the following situations occurs for the current year?

Accepted Answer

The answer of If purchases are recorded correctly but ending...

Question 13

The accountant for Frieda Company did not record a purchase of merchandise on credit or include the items in the ending inventory. Assuming a periodic inventory system, the balance sheet effects of these omissions on assets, liabilities, and retained earnings would be

Accepted Answer

The answer of The accountant for Frieda Company did not...

Question 14

The dollar-value LIFO cost-to-cost retail ratio does not include

Accepted Answer

The answer of The dollar-value LIFO cost-to-cost retail ratio does...

Question 15

The correct net income for Sarah Corp. was $53,500. However, the company reported incorrect net income because beginning inventory was understated by $2,500, purchases were overstated by $2,000, and ending inventory was overstated by $2,000. What net income did Sarah Corp. report?

Accepted Answer

The correct net income was $53,500. The errors in inventory and purchases affect the cost of goods sold (COGS) calculation. Beginning inventory being understated by $2,500 would increase COGS, reducing net income. Purchases being overstated by $2,000 would also increase COGS, further reducing net income. Ending inventory being overstated by $2,000 would decrease COGS, increasing net income. Correcting these errors: decrease COGS by $2,500 (beginning inventory) + $2,000 (ending inventory) = $4,500, and increase COGS by $2,000 (purchases), net effect = decrease in COGS by $2,500. Therefore, the reported net income was $53,500 + $2,500 = $56,000.

Question 16

Exhibit 8-3
The J. Love Company uses a periodic inventory accounting system and values its inventory by using the lower of cost or NRV rule. The allowance method is used in applying the lower of cost or NRV rule. The company adjusts and closes its books annually on December 31. Below are the cost and market values of the company's year-end inventories for a three-year period: 
-Refer to Exhibit 8-3. Which of the following journal entries would be correct as of December 31, 2019, to apply the lower of cost or market rule to the valuation of inventory?

Accepted Answer

The answer of Exhibit 8-3
The J. Love Company uses a...

Question 17

The accountant for the Hilga Company recorded a purchase of merchandise on credit for the current year, but the merchandise was shipped FOB destination and did not arrive until after current year-end. Assuming a periodic inventory system, how would assets, liabilities, and retained earnings be affected on the year-end balance sheet?

Accepted Answer

The answer of The accountant for the Hilga Company recorded...

Question 18

The accountant for Angie Company made the following errors related to purchases of merchandise and ending inventory in 2016:
1) A $2,200 purchase of merchandise on credit was not recorded or included in ending inventory.
2) A $3,180 purchase of merchandise on credit was recorded, but it was inadvertently omitted from the end-of-year physical inventory count.
Assuming a periodic inventory system, Angie's Company's 2016 net income will be

Accepted Answer

The answer of The accountant for Angie Company made the...

Question 19

The accountant for Ella Company made the following errors related to the inventory in 2016:
1) The beginning inventory for 2016 was understated by $1,350 due to an error in the physical count.
2) A $1,500 purchase of merchandise in transit was not recorded as a purchase and was not included in ending inventory.
Assuming a periodic inventory system, Ella Company's 2016 net income will be

Accepted Answer

The answer of The accountant for Ella Company made the...

Question 20

The accountant for the Issenock Company did not record a purchase of merchandise on credit for the current year, but the merchandise was correctly included in the ending inventory. Assuming a periodic inventory system, how would assets, liabilities, and retained earnings be affected on the year-end balance sheet?

Accepted Answer

The answer of The accountant for the Issenock Company did...

Quiz 8: Inventories: Special Valuation Issues