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CHAPTER 8
VALUATION OF INVENTORIES:
A COST BASIS APPROACH
MULTIPLE CHOICE—Conceptual
Answer No. Description
d 1. Entries under perpetual inventory system. b 2. Classification of goods in transit. a 3. Classification of goods in transit. d 4. Identify inventory ownership. d 5. Identify a product financing arrangement. a 6. Identify ownership under product financing arrangement. b 7. Classification of goods on consignment. b 8. Effect of recording merchandise on consignment. a 9. Effect of ending inventory overvaluation. a 10. Effect of inventory errors on income. d 11. Effect of understating purchases and ending inventory. b 12. Identification of product costs. d 13. Determine product costs. b 14. Interest capitalization in manufacturing inventory. a 15. Classification of factory overhead costs. b 16. Classification of fixed overhead costs. b 17. Absorption and variable costing. d 18. Determine cost of purchased inventory, using net method. a 19. Determine cost of purchased inventory, using gross method. a 20. Recording inventory purchases at gross or net amounts. c 21. Recording inventory purchases at gross or net amounts. a 22. Nature of trade discounts. a 23. Average cost inventory valuation. b 24. Weighted-average inventory method. a 25. Nature of FIFO valuation of inventory. b 26. Flow of costs in a manufacturing situation. a 27. FIFO and decreasing prices. b 28. FIFO and increasing prices. a 29. FIFO and increasing prices. b 30. FIFO and LIFO inventory assumptions. c 31. LIFO and increasing prices. d 32. Knowledge of inventory valuation methods. d 33. Periodic and perpetual inventory methods. d 34. LIFO reserve account classification. d 35. LIFO for tax purposes and external reporting. c 36. LIFO advantages. d 37. Effect of inventory and depreciation errors on income.
MULTIPLE CHOICE—Computational
Answer No. Description
a 38. Effect of inventory and depreciation errors on retained earnings. a 39. Effect of inventory errors on working capital. d 40. Calculate cost of goods available for sale. d 41. Accounting for a purchase return (net method). d 42. Adjust Accounts Payable using the net method. b 43. Calculate ending inventory using weighted-average. d 44. Calculate ending inventory using moving average. b 45. Calculate ending inventory using LIFO. d 46. Calculate cost of goods sold using FIFO. a 47. Effect of using LIFO or FIFO. a 48. Perpetual inventory—LIFO valuation. c 49. Perpetual inventory—LIFO valuation. c 50. Perpetual inventory—FIFO valuation. b 51. Perpetual inventory—average cost valuation. c 52. Calculate ending inventory using dollar-value LIFO. c 53. Calculate ending inventory using dollar-value LIFO. a 54. Calculate ending inventory using dollar-value LIFO. b 55. Calculate price index using double extension method.
MULTIPLE CHOICE—CPA Adapted
Answer No. Description
a 56. Identification of inventory costs. c 57. Determine cost of purchased inventory. b 58. Determine cost of purchased inventory. c 59. Determine cost of purchased inventory. d 60. Determine cost of sales. b 61. Calculate Accounts Payable at year end. d 62. Calculate Accounts Payable at year end. a 63. Calculate Accounts Payable at year end. c 64. Calculate unit cost using moving-average method. a 65. Periodic and perpetual inventory methods. c 66. FIFO and LIFO with increasing prices. c 67. Calculate ending inventory using LIFO. a 68. Dollar-value LIFO and the double extension approach.
b 69. Calculate ending inventory using dollar-value LIFO.
EXERCISES
Item Description
E8-70 Recording purchases at net amounts. E8-71 Recording purchases at net amounts. E8-72 Comparison of FIFO and LIFO. E8-73 FIFO and LIFO inventory methods. E8-74 FIFO and LIFO inventory methods.
Exercises (cont.)
Item Description
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
L.O. 2 L.O. 3 L.O. 4 L.O. 5 L.O. 5
(cont.) No. Type No. Type No. Type No. Type No. Type
- MC 8. MC 12. MC 23. MC 47. MC 2 MC 9. MC 13. MC 24. MC 48. MC
- MC 10. MC 14. MC 25. MC 49. MC
- MC 11. MC 15. MC 26. MC 50. MC
- MC 37. MC 16. MC 27. MC 51. MC
- MC 38. MC 17. MC 28. MC 64. MC
- MC 39. MC 18. MC 29. MC 65. MC
- MC 80. P 19. MC 30. MC 66. MC
- MC 20. MC 31. MC 67. MC
- MC 21. MC 32. MC 72. E
- MC 22. MC 33. MC 73. E
- MC 40. MC 43. MC 74. E
- MC 41. MC 44. MC 75. E
- P 42. MC 45. MC 76. E
- MC 46. MC 82. P
- MC
- MC
- E
- E
- P
L.O. 6 L.O. 7 L.O. 8 L.O. 9 L.O.
No.Type No. Type No. Type No. Type No. Type
- MC 78. E 52. MC 35. MC 72. E
- MC 36. MC
- MC
55. MC
68. MC
69. MC
77. E
83. P
84. P
Note: MC = Multiple Choice E = Exercise P = Problem
MULTIPLE CHOICE—Conceptual
- When using a perpetual inventory system, a. no Purchases account is used. b. a Cost of Goods Sold account is used. c. two entries are required to record a sale. d. all of these.
- Goods in transit which are shipped f.o.b. shipping point should be a. included in the inventory of the seller. b. included in the inventory of the buyer. c. included in the inventory of the shipping company. d. none of these.
- Goods in transit which are shipped f.o.b. destination should be a. included in the inventory of the seller. b. included in the inventory of the buyer. c. included in the inventory of the shipping company. d. none of these.
- Which of the following items should be included in a company's inventory at the balance sheet date? a. Goods in transit which were purchased f.o.b. destination. b. Goods received from another company for sale on consignment. c. Goods sold to a customer which are being held for the customer to call for at his or her convenience. d. None of these.
Use the following information for questions 5 and 6.
During 2001 Elway Corporation transferred inventory to Howell Corporation and agreed to repurchase the merchandise early in 2002. Howell then used the inventory as collateral to borrow from Norwalk Bank, remitting the proceeds to Elway. In 2002 when Elway repurchased the inventory, Howell used the proceeds to repay its bank loan.
- This transaction is known as a(n) a. consignment. b. installment sale. c. assignment for the benefit of creditors. d. product financing arrangement.
- On whose books should the cost of the inventory appear at the December 31, 2001 balance sheet date? a. Elway Corporation b. Howell Corporation c. Norwalk Bank d. Howell Corporation, with Elway making appropriate note disclosure of the transaction
- Goods on consignment are a. included in the consignee's inventory. b. recorded in a Consignment Out account which is an inventory account. c. recorded in a Consignment In account which is an inventory account. d. all of these
- Dane Co. received merchandise on consignment. As of March 31, Dane had recorded the transaction as a purchase and included the goods in inventory. The effect of this on its financial statements for March 31 would be
- Which of the following types of interest cost incurred in connection with the purchase or manufacture of inventory should be capitalized as a product cost? a. Purchase discounts lost b. Interest incurred during the production of discrete projects such as ships or real estate projects c. Interest incurred on notes payable to vendors for routine purchases made on a repetitive basis d. All of these should be capitalized.
- An exception to the general rule that costs should be charged to expense in the period incurred is a. factory overhead costs incurred on a product manufactured but not sold during the current accounting period. b. interest costs for financing of inventories that are routinely manufactured in large quantities on a repetitive basis. c. general and administrative fixed costs incurred in connection with the purchase of inventory. d. sales commission and salary costs incurred in connection with the sale of inventory.
- Under variable costing, fixed manufacturing overhead costs are a. product costs. b. period costs. c. charged to work in process and finished goods. d. part of cost of goods sold.
- Other things being equal, income computed by the variable costing method will exceed that computed by the absorption method if a. units produced exceed units sold. b. units sold exceed units produced. c. fixed manufacturing costs increase. d. variable manufacturing costs increase.
- The use of a Discounts Lost account implies that the recorded cost of a purchased inventory item is its a. invoice price. b. invoice price plus the purchase discount lost. c. invoice price less the purchase discount taken. d. invoice price less the purchase discount allowable whether taken or not.
- The use of a Purchase Discounts account implies that the recorded cost of a purchased inventory item is its a. invoice price. b. invoice price plus any purchase discount lost. c. invoice price less the purchase discount taken. d. invoice price less the purchase discount allowable whether taken or not.
Use the following information for questions 20 and 21.
During 2001, which was the first year of operations, Luther Company had merchandise purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods available had been sold at year end.
- Which of the following recording procedures would result in the highest cost of goods sold for 2001?
- Recording purchases at gross amounts
- Recording purchases at net amounts, with the amount of discounts not taken shown under "other expenses" in the income statement a. 1 b. 2 c. Either 1 or 2 will result in the same cost of goods sold.
d. Cannot be determined from the information provided.
- Which of the following recording procedures would result in the highest net income for 2001?
- Recording purchases at gross amounts
- Recording purchases at net amounts, with the amount of discounts not taken shown under "other expenses" in the income statement a. 1 b. 2 c. Either 1 or 2 will result in the same net income. d. Cannot be determined from the information provided.
- When using the periodic inventory system, which of the following generally would not be separately accounted for in the computation of cost of goods sold? a. Trade discounts applicable to purchases during the period b. Cash (purchase) discounts taken during the period c. Purchase returns and allowances of merchandise during the period d. Cost of transportation-in for merchandise purchased during the period
- In situations where there is a rapid turnover, an inventory method which produces a balance sheet valuation similar to the first-in, first-out method is a. average cost. b. base stock. c. joint cost. d. prime cost.
- The pricing of issues from inventory must be deferred until the end of the accounting period under the following method of inventory valuation: a. moving average. b. weighted-average. c. LIFO perpetual. d. FIFO.
- An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is a. FIFO. b. LIFO. c. base stock. d. weighted-average.
- Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations? a. Average cost b. First-in, first-out c. Last-in, first-out d. Base stock
- Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method? a. Prices decreased. b. Prices remained unchanged. c. Prices increased. d. Price trend cannot be determined from information given.
- Which of the following is true regarding the use of LIFO for inventory valuation? a. If LIFO is used for external financial reporting, then it must also be used for internal reports. b. For purposes of external financial reporting, LIFO may not be used with the lower of cost or market approach. c. If LIFO is used for external financial reporting, then it cannot be used for tax purposes. d. None of these.
- If inventory levels are stable or increasing, an argument which is not an advantage of the LIFO method as compared to FIFO is a. income taxes tend to be reduced in periods of rising prices. b. cost of goods sold tends to be stated at approximately current cost on the income statement. c. cost assignments typically parallel the physical flow of goods. d. income tends to be smoothed as prices change over time.
Multiple Choice Answers—Conceptual
- d 7. b 13. d 19. a 25. a 31. c
- b 8. b 14. b 20. a 26. b 32. d
- a 9. a 15. a 21. c 27. a 33. d
- d 10. a 16. b 22. a 28. b 34. d
- d 11. d 17. b 23. a 29. a 35. d
- a 12. b 18. d 24. b 30. b 36. c
Solutions to those Multiple Choice questions for which the answer is “none of these.”
- Goods in transit which were purchased f.o.b. shipping point.
- Assets and liabilities were understated but stockholders’ equity was not affected.
- If LIFO is used for tax purposes, then it must also be used for external financial reporting.
MULTIPLE CHOICE—Computational
Use the following information for questions 37 through 39.
Dexter, Inc. is a calendar-year corporation. Its financial statements for the years 2002 and 2001 contained errors as follows: 2002 2001 Ending inventory $4,000 overstated $7,000 overstated Depreciation expense $2,000 understated $8,000 overstated
- Assume that the proper correcting entries were made at December 31, 2001. By how much will 2002 income before taxes be overstated or understated? a. $2,000 understated b. $2,000 overstated c. $4,000 overstated d. $6,000 overstated
- Assume that no correcting entries were made at December 31, 2001. Ignoring income taxes, by how much will retained earnings at December 31, 2002 be overstated or understated? a. $2,000 understated b. $6,000 overstated c. $6,000 understated d. $9,000 understated
- Assume that no correcting entries were made at December 31, 2001, or December 31, 2002 and that no additional errors occurred in 2003. Ignoring income taxes , by how much will working capital at December 31, 2003 be overstated or understated? a. $ b. $4,000 overstated c. $4,000 understated d. $3,000 understated
- The following information is available for Kerr Company for 2001:
Freight-in $ 30, Purchase returns 75, Selling expenses 150, Ending inventory 260,
The cost of goods sold is equal to 300% of selling expenses. What is the cost of
goods available for sale?
a. $450,000. b. $740,000. c. $665,000. d. $710,000.
Use the following information for questions 41 and 42.
Pye Co. records purchases at net amounts. On May 5 Pye purchased merchandise on account, $8,000, terms 2/10, n/30. Pye returned $500 of the May 5 purchase and received credit on account. At May 31 the balance had not been paid.
- The amount to be recorded as a purchase return is a. $450. b. $510. c. $500. d. $490.
- By how much should the account payable be adjusted on May 31? a. $0. b. $170. c. $160. d. $150.
Use the following information for questions 43 and 44.
The following information was available from the inventory records of Lear Company for
January:
Units Unit Cost Total Cost Balance at January 1 3,000 $9.77 $29, Purchases: January 6 2,000 10.30 20, January 26 2,700 10.71 28,
Sales: January 7 (2,500) January 31 (4,200) Balance at January 31 1,
- Assuming that perpetual inventory records are kept in units only, the ending inventory on a LIFO basis is a. $1,900. b. $1,920. c. $1,970. d. $2,065.
- Assuming that perpetual inventory records are kept in dollars, the ending inventory on a LIFO basis is a. $1,900. b. $1,920. c. $1,970. d. $2,065.
- Assuming that perpetual inventory records are kept in dollars, the ending inventory on a FIFO basis is a. $1,900. b. $1,920. c. $2,065. d. $2,100.
- Assuming that perpetual inventory records are kept in units only, the ending inventory on an average-cost basis, rounded to the nearest dollar, is a. $1,980. b. $1,956. c. $1,970. d. $1,995.
Use the following information for questions 52 through 54.
Dolan Corporation adopted the dollar-value LIFO method of inventory valuation on December 31, 1999. Its inventory at that date was $210,000 and the relevant price index was 100. Information regarding inventory for subsequent years is as follows:
Inventory at Current Date Current Prices Price Index December 31, 2000 $267,500 107 December 31, 2001 290,000 125 December 31, 2002 338,000 130
- What is the cost of the ending inventory at December 31, 2000 under dollar-value LIFO? a. $250,000. b. $267,500. c. $252,800. d. $224,700.
- What is the cost of the ending inventory at December 31, 2001 under dollar-value LIFO? a. $232,000. b. $237,500. c. $233,540. d. $250,000.
- What is the cost of the ending inventory at December 31, 2002 under dollar-value LIFO? a. $269,940. b. $273,600. c. $260,000. d. $275,000.
- Unruh Company adopted the dollar-value LIFO method on January 1, 2001, at which time its inventory consisted of 6,000 units of Item A @ $5.00 each and 3,000 units of Item B @ $16. each. The inventory at December 31, 2001 consisted of 12,000 units of Item A and 7,000 units of Item B. The most recent actual purchases related to these items were as follows: Quantity Items Purchase Date Purchased Cost Per Unit A 12/7/01 2,000 $ 6. A 12/11/01 10,000 5. B 12/15/01 10,000 17.
Using the double-extension method, what is the price index for 2001 that should
be computed by Unruh Company?
a. 108.33% b. 109.59% c. 111.05% d. 220.51%
Multiple Choice Answers—Computational
- d 40. d 43. b 46. d 49. c 52. c 55. b
- a 41. d 44. d 47. a 50. c 53. c
- a 42. d 45. b 48. a 51. b 54. a
MULTIPLE CHOICE—CPA Adapted
- How should the following costs affect a retailer's inventory valuation? Freight-in Interest on Inventory Loan a. Increase No effect b. Increase Increase c. No effect Increase d. No effect No effect
- The following information applied to Greer, Inc. for 2001: Merchandise purchased for resale $200, Freight-in 8, Freight-out 5, Purchase returns 2,
Greer's 2001 inventoriable cost was a. $200,000. b. $203,000. c. $206,000. d. $211,000.
- Utley Retailers purchased merchandise with a list price of $30,000, subject to trade discounts of 20% and 10%, with no cash discounts allowable. Utley should record the cost of this merchandise as a. $21,000. b. $21,600. c. $23,400. d. $30,000.
- The balance in Judd Co.'s accounts payable account at December 31, 2001 was $600,000 before any necessary year-end adjustments relating to the following:
- Goods were in transit to Judd from a vendor on December 31, 2001. The invoice cost was $50,000. The goods were shipped f.o.b. shipping point on December 29, 2001 and were received on January 4,
- Goods shipped f.o.b. destination on December 21, 2001 from a vendor to Judd was received on January 6, 2002. The invoice cost was $25,000.
- On December 27, 2001, Judd wrote and recorded checks to creditors totaling $30,000 that were mailed on January 10, 2002.
In Judd's December 31, 2001 balance sheet, the accounts payable should be a. $630, b. $650,000. c. $675,000. d. $680,000.
- Howe Co.'s accounts payable balance at December 31, 2001 was $1,200,000 before considering the following transactions:
- Goods were in transit from a vendor to Howe on December 31, 2001. The invoice price was $80,000, and the goods were shipped f.o.b. shipping point on December 29, 2001. The goods were received on January 4, 2002.
- Goods shipped to Howe, f.o.b. shipping point on December 20, 2001, from a vendor were lost in transit. The invoice price was $50,000. On January 5, 2002, Howe filed a $50,000 claim against the common carrier.
In its December 31, 2001 balance sheet, Howe should report accounts payable of a. $1,330,000. b. $1,280,000. c. $1,250,000. d. $1,200,000.
- Dark Co. recorded the following data pertaining to raw material X during January 2001: Units Date Received Cost Issued On Hand 1/1/01 Inventory $4.00 3, 1/11/01 Issue 1,600 1, 1/22/01 Purchase 4,000 $4.70 5,
The moving-average unit cost of X inventory at January 31, 2001 is a. $4.35. b. $4.43. c. $4.50. d. $4.70.
- During periods of rising prices, a perpetual inventory system would result in the same dollar amount of ending inventory as a periodic inventory system under which of the following inventory cost flow methods? FIFO LIFO a. Yes No b. Yes Yes c. No Yes d. No No
- Finn Co. was formed on January 2, 2001, to sell a single product. Over a two-year period, Finn's acquisition costs have increased steadily. Physical quantities held in inventory were equal to three months' sales at December 31, 2001, and zero at December 31, 2002. Assuming the periodic inventory system, the inventory cost method which reports the highest amount of each of the following is Inventory Cost of Sales December 31, 2001 2002 a. LIFO FIFO b. LIFO LIFO c. FIFO FIFO d. FIFO LIFO
- Noll Co. had 150 units of product A on hand at January 1, 2001, costing $42 each. Purchases of product A during January were as follows: Date Units Unit Cost Jan. 10 200 $ 18 250 46 28 100 48
A physical count on January 31, 2001 shows 200 units of product A on hand. The cost of the inventory at January 31, 2001 under the LIFO method is a. $9,400. b. $8,900. c. $8,500. d. $8,200.
- When the double extension approach to the dollar-value LIFO inventory cost flow method is used, the inventory layer added in the current year is multiplied by an index number. How would the following be used in the calculation of this index number? Ending inventory Ending inventory at current year cost at base year cost a. Numerator Denominator b. Numerator Not used c. Denominator Numerator d. Not used Denominator
- Cuyler Co. adopted the dollar-value LIFO inventory method on December 31, 2001. Cuyler's entire inventory constitutes a single pool. On December 31, 2001, the inventory was $400, under the dollar-value LIFO method. Inventory data for 2002 are as follows:
12/31/02 inventory at year-end prices $550, Relevant price index at year-end (base year 2001) 110
Using dollar value LIFO, Cuyler's inventory at December 31, 2002 is a. $440,000. b. $510,000. c. $500,000. d. $550,000.
Multiple Choice Answers—CPA Adapted
- a 58. b 60. d 62. d 64. c 66. c 68. a
- c 59. c 61. b 63. a 65. a 67. c 69. b
DERIVATIONS — Computational (cont.)
6/10 (100 @ 3.3) (100 @ 3.2) (100 @ 3.1) 640 (200 @ 3.1) 940 6/15 (900 @ 3.4) 3,060 (100 @ 3.2) (200 @ 3.1) 4, (900 @ 3.4) 6/18 (700 @ 3.4) 2,380 (100 @ 3.2) (200 @ 3.1) 1, (200 @ 3.4) 6/22 (250 @ 3.5) 875 (250 @ 3.5) 2, 6/25 (150 @ 3.5) 525 (100 @ 3.2) (200 @ 3.1) (200 @ 3.4) 1, (100 @ 3.5)
No. Answer Derivation
- c (250 × $3.5) + (350 × $3.4) = $2,065.
- b $10,605 ÷ 3,250 units = $3. $3.26 × 600 = $1,956.
- c $267,500 ÷ 1.07 = $250, $210,000 + [(250,000 – $210,000) × 1.07] = $252,800.
- c $290,000 ÷ 1.25 = $232, ($210,000 × 1) + ($22,000 × 1.07) = $233,540.
- a $338,000 ÷ 1.30 = $260, ($210,000 × 1) + ($22,000 × 1.07) + ($28,000 × 1.3) = $269,940.
- b [(2,000 × $6) + (10,000 × $5.75) + (7,000 × $17)] ÷ [(12,000 × $5) + (7,000 × $16)] = 1.0959 = 109.59%.
DERIVATIONS — CPA Adapted
No. Answer Derivation
- a Conceptual.
- c $200,000 + $8,000 – $2,000 = $206,000.
- b $30,000 × .8 × .9 = $21,600.
- c $15,000 × .7 × .8 = $8, ($8,400 × .98) + 300 = $8,532.
- d $130,000 + $14,000 + $475,000 + $70,000 + $10,000 + $5,000 – $145,000 – $20,000 = $539,000.
- b $900,000 + $350,000 + $196,000 = $1,446,000.
- d $600,000 + $50,000 + $30,000 = $680,000.
- a $1,200,000 + $80,000 + $50,000 = $1,330,000.
- c [(1,600 × $4.00) + (4,000 × $4.70)] ÷ 5,600 = $4.50.
- a Conceptual.
- c Conceptual.
- c (150 × $42) + (50 × $44) = $8,500.
- a Conceptual.
- b $550,000 ÷ 1 January 6, 2002. The invoice cost was $25,000. 0, $400,000 + ($100,000 × 1.1) = $510,000.
EXERCISES
Ex. 8-70 —Recording purchases at net amounts.
Colaw Co. records purchase discounts lost and uses perpetual inventories. Prepare
journal entries in general journal form for the following:
(a) Purchased merchandise costing $800 with terms 2/10, n/30.
(b) Payment was made thirty days after the purchase.
Solution 8-
(a) Inventory (.98 × $800) ................................................................................... 784 Accounts Payable ............................................................................. 784
(b) Accounts Payable ..................................................................... 784
Purchase Discounts Lost ................................................................................ 16 Cash ................................................................................................. 800
Ex. 8-71 —Recording purchases at net amounts.
Alco Co. records purchases at net amounts and uses periodic inventories. Prepare
entries for the following:
June 11 Purchased merchandise on account, $7,000, terms 2/10, n/30. 15 Returned part of June 11 purchase, $1,000, and received credit on account. 30 Prepared the adjusting entry required for financial statements.
