Essay on Chapter 7 Inventory Review Questions

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Words: 990
Pages: 4

INVENTORY REVIEW QUESTIONS
1. Ringo Starr Company agreed to purchase certain inventory items from John Lennon Corporation. Lennon shipped the goods F.O.B. destination. On December 31, Ringo’s accounting year-end, Ringo was aware that the goods had been shipped and would be received any day. Ringo should:
-Should not be included because the title has not been passed on, since it’s the seller who is paying for the shipping cost
a. include the goods in its inventory calculated on December 31.
b. include the goods in its inventory calculated on December 31, but should not record the obligation to pay for them.
c. not include the goods in its inventory calculated on December 31, but should include the related payable on its balance sheet at December 31.
d. not include the goods in its inventory calculated on December 31, and should not include the related payable on its balance sheet at December 31.

2. George Harrison Company wants to know the effect of different inventory methods on financial statements. Given below is information about beginning inventory and purchases for the current year.
January 2
Beginning Inventory
500 units at $3.00
April 7
Purchased
1,100 units at $3.20
June 30
Purchased
400 units at $4.00
December7
Purchased
1,600 units at $4.40

a). Sales during the year were 2,700 units at $5.00. If Harrison used the first-in, first-out method, ending inventory would be:
500x 3 = 1500
1100x 3.2 = 3520
400x 4 = 1600
700x 4.4 = 5080 // 900 left x 4.40 = 3960
a. $2,780
b. $3,960
c. $9,700
d. $10,880

b). Using same info, what is the Cost of Goods Sold if Harrison used the LIFO method?
Cost of goods
1600 x 4.40 = 2040
400 x 4 = 1600
700 x 3.20 = 2240
= 10,880 ending inventory
400 x 3.2 = 1280
500 x 3 = 1500
= 2780

a. $2,780
b. $3,960
c. $9,700
d. $10,880

c). Again, using above info, now Harrison wants to know what the gross profit would be if he used the weighted-average method, gross profit would be:
13,660/3600 = 3.79 the average cost sales are 2700 x 5 =13500 cost of goods 2700 x 3.79 = <10,233>
Gross profit 3267
a. $3,267
b. $3,415
c. $10,245
d. $13,500

3. Yellow Submarine Corporation failed to record the purchase of merchandise on account. The merchandise and related accounts payable should have been recorded but were not. What is the effect of these errors on assets, liabilities, retained earnings, and net income, respectively?
a. Understated, understated, no effect, no effect <----
b. Understated, understated, understated, understated
c. Understated, overstated, overstated, understated
d. Overstated, overstated, understated, overstated

7. The inventory cost flow assumption where the cost of the most recent purchase is matched first against sales revenues is:
a. FIFO
b. Average Cost
c. LIFO 
d. Gross profit %

8. Calculate the inventory turnover if:
Beg. Inventory = 25,000
Purchases = 12,000
Closing Inventory = 31,000
Cost of goods sold / Avg Inventory = 6000/28000

a. 50%
b. 12%
c. 21% 
d. 13%

9. If Lennon & Brothers is experiencing continuous cost increases for the merchandise that it purchases, which cost flow assumption will result in the least amount of profit and the least amount of income tax expense?
a. LIFO 
b. FIFO
c. Average
d. All of above

10. Paul McCartney owns an art gallery; which inventory valuation method is he likely to use?
a. LIFO
b. Specific identification method 
c. retail method
d. gross % method

11. The periodic inventory system:
a. automatically updates inventory at the time of each purchase or sales
b. has a physical inventory count at the end of the accounting period 
c. must know sale amounts and dates in order for records to be complete
d. is the same as the perpetual system
12. Starr company is in the computer industry and is experiencing continuously lower unit…