Test Bank, Intermediate Accounting, 14th ed.

11

CHAPTER 8
Cost of Goods Sold and Inventory:
Identification and Valuation
MULTIPLE CHOICE QUESTIONS
Theory/Definitional Questions
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29

Costs included in work in process inventory

Definition of LIFO reserve
LIFO conformity rule
Interim period LIFO liquidation
Inventory pools
Examples of inventory
Goods on consignment
Flow of product costs through inventory accounts
Inventory shrinkage--how it affects raw materials and cost of goods sold
Determination of cost of goods sold
Goods on consignment--included in consignor's inventory
Use of discounts lost account
The effect of omission of purchase on inventory and cost of goods sold
Weighted average inventory--not appropriate for perpetual system
Goods shipped FOB destination are included in sellers inventory
FIFO with falling prices--gives highest cost of goods sold
Specific identification--matches cost flow with physical flow
Goods shipped FOB shipping point are included in buyers inventory
FIFO--best approximates specific identification in manufacturing
LIFO with rising prices gives lowest reported net income
Journal entry when merchandise is returned under perpetual system
Inventory valuation under LIFO versus FIFO
Dollar-value LIFO--specific identification cannot be used for layers
Perpetual inventory system
Double-extension and link-chain methods--variations of dollar-value LIFO
Goods in transit at year-end purchased FOB shipping point
Application of double extension
How warehouse costs and discounts affect inventory values
Periodic inventory method--trade discounts not reported separately

12
30
31
32
33
34
35
36
37
38

Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

Journal entry when merchandise is defective under perpetual system

Weighted average inventory--not appropriate for perpetual system
LIFO--appropriate for periodic or perpetual
FIFO--most closely reports current cost
Effect of decreasing inventory costs under FIFO and LIFO
FIFO with rising prices--same amount for perpetual and periodic
Dollar value LIFO--basis for computations
Determining the inventory method best for predicting future earnings
Ending inventory under the dollar-value LIFO method

Computational Questions
39
Purchases made net of discount
40
Determination of net purchases with net and gross methods
41
Computation of purchase amount under gross method
42
Computation of FIFO cost of goods sold
43
Computation of cost of goods sold
44
Determination of accounts payable balance
45
Computation of FIFO periodic inventory
46
Computation of LIFO periodic inventory
47
Computation of LIFO perpetual inventory
48
Computation of FIFO perpetual inventory
49
Computation of weighted average periodic inventory
50
Computation of moving average perpetual inventory
51
Computation of number of days sales in average inventories
52
Computation of cost of goods sold
53
Computation of cost of merchandise available for sale
54
Computation of dollar-value LIFO inventory
55
Computation of dollar-value LIFO inventory
56
Computation of dollar-value LIFO inventory
57
Computation of dollar-value LIFO inventory
58
Computation of freight-in
59
Computation of ending inventory
60
Computation of cost of goods sold
61
Computation of inventory turnover
62
Computation of cost of goods available for sale
63
Computation of inventory turnover
64
Computation of inventory cost
65
Computation of value of inventory under the dollar-value LIFO method
66
Computation of value of inventory under the dollar-value LIFO method
67
Computation of value of inventory under the dollar-value LIFO method
68
Computation of value of inventory under the dollar-value LIFO method
69
Computation of ending inventory under periodic FIFO costing alternative
70
Computation of ending inventory under periodic LIFO costing alternative

Test Bank, Intermediate Accounting, 14th ed.

71
72
73
74
75
76
77
78
79
80
81
82
83
84

13

Computation of cost of unit available for sale using the average cost
method
Computation of cost of goods sold
Computation of cost of goods sold
Computation of inventory balance using the average cost method
Computation of cost of ending inventory using periodic LIFO inventory
method
Computation of year-end inventory balance
Computation of accounts payable balance
Computation of accounts payable balance
Computation of cost of goods sold
Computation of periodic FIFO cost of goods sold
Computation of periodic LIFO cost of goods sold
Computation of cost of goods sold using the average cost method
Computation of dollar-value LIFO inventory
Calculate inventory turn-over

PROBLEMS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16

Computation of ending inventory by subtracting items that should not be

included
Computation of LIFO inventory for three years
Computation of cost of goods available for sale
Correct entries under periodic inventory system
Computation of inventory under LIFO, FIFO, and moving average
Computation of inventory under dollar-value LIFO
Computation of inventory under LIFO, FIFO; give gross margin LIFO
Computation of periodic LIFO, FIFO, weighted average
Computation of dollar value LIFO inventory
Computation of ending inventory using the dollar-value LIFO method
Computation of perpetual moving average and periodic weighted average
Computation of dollar value LIFO for five successive years
Computation of price index using double-extension method
Price index with double extension, dollar-value LIFO inventory
Change from LIFO to FIFO
LIFO liquidation

14

Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

MULTIPLE CHOICE QUESTIONS

c
LO1

1. Which of the following would not be included in the cost of work in process
inventory?
a. Cost of electricity to operate factory equipment
b. Maintenance costs of factory equipment
c. Depreciation on office equipment in the sales managers office
d. Depreciation on factory equipment

d
LO6

2. The term LIFO reserve refers to

a. a cost flow assumption for valuing inventory.
b. a special fund set aside to cover LIFO liquidations.
c. inventory pools used in the dollar-value LIFO method.
d. the difference between the ending inventory amount under LIFO and the
ending inventory amount under another inventory cost flow assumption.

d
LO6

3. Which of the following statements is true?

a. A company must use the FIFO cost flow assumption for taxes as
well as for financial accounting and reporting.
b. A company may use FIFO for inventory valuation purposes on the
balance sheet provided that LIFO cost of goods sold is reported on the
income statement.
c. Application of LIFO for financial reporting purposes must strictly follow
IRS regulations relating to LIFO.
d. LIFO is the only inventory method that must be used for financial
reporting purposes if used for tax purposes.

4. If a company experiences a liquidation of a LIFO inventory layer in the

second
quarter that is expected to be restored by the end of the annual financial
reporting period, the company should
a. treat the layer as if it were liquidated and include in cost of goods sold the
expected replacement cost of the inventory sold.
b. deplete the LIFO layer as if the interim period were an annual period.
c. change to an alternative inventory cost method, such as FIFO, so that the
problem of LIFO liquidation is not encountered.
d. delay the recognition of both revenue and cost of goods sold on the
inventory involved until a final determination of the LIFO inventory can be
made at the end of the annual period.

LO6

Test Bank, Intermediate Accounting, 14th ed.

c
LO9

15

5. Which one of the following statements regarding inventory pools is not

correct?
a. A company is not required to use the same pools for tax and financial
reporting purposes.
b. The unit cost assigned to items in a new layer may be based on the
weighted average cost of acquisitions during the period.
c. The larger and more diverse the composition of a pool, the greater the
likelihood of inventory liquidation under LIFO.
d. Layers of good acquired at varying price levels can exist in a single pool.

d
LO1

6. Which of the following would not be reported as inventory?

a. Land acquired for resale by a real estate firm
b. Stocks and bonds held for resale by a brokerage firm
c. Partially completed goods held by a manufacturing company
d. Machinery acquired by a manufacturing company for use in the
production process

b
LO3

7. Goods on consignment are

a. included in the consignees 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 the above.

b
LO1

c
LO2

8. Which of the following describes the flow of product costs through the
inventory
accounts of a manufacturer?
a. Raw materials, goods in process, factory overhead, finished goods
b. Raw materials, goods in process, finished goods
c. Raw materials, direct labor, factory overhead, finished goods
d. Raw materials, direct labor, factory overhead
9. Western Manufacturing Company uses a perpetual inventory system for its
raw
materials. The inventory records reflect a raw materials balance of $378,500
at December 31. A physical inventory taken on that date revealed raw
materials of $375,750. How will the $2,750 difference affect raw materials
inventory and cost of goods sold, assuming it is attributed to normal
shrinkage?
Raw Materials
Cost of Goods Sold
a.
Increase
Decrease

16

Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

b.
c.
d.

Decrease
Decrease
No effect

No effect
Increase
Increase

d 10. Cost of goods sold is equal to

LO2
a. the cost of inventory on hand at the end of a period plus net purchases
minus
the cost of inventory on hand at the beginning of a period.
b. the cost of inventory on hand at the beginning of a period minus net
purchases plus the cost of inventory on hand at the end of a period.
c. the cost of inventory on hand at the beginning of a period plus net sales
minus the cost of inventory on hand at the end of a period.
d. the cost of inventory on hand at the beginning of a period plus net
purchases minus the cost of inventory on hand at the end of a period.
a 11. Goods on consignment should be included in the inventory of
LO3
a. the consignor but not the consignee.
b. the consignee but not the consignor.
c. both the consignor and the consignee.
d. neither the consignor nor the consignee.
d 12. The use of a discounts lost account implies that the recorded cost of a
LO4
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.
d 13. A company using a periodic inventory system neglected to record a purchase
LO3
of merchandise on account at year-end. This merchandise was omitted from
the year-end physical count. How will these errors affect inventory at yearend and cost of goods sold for the year?
Cost of Goods
Inventory
Sold
a.
No effect
Understate
b.
No effect
Overstate
c. Understate
Understate
d. Understate
No effect
c 14. Which inventory costing method would not be appropriate for a manufacturer
LO5
using a perpetual inventory system?
a. First-in, first-out
b. Last-in, first-out
c. Average cost

Test Bank, Intermediate Accounting, 14th ed.

17

d. Dollar-value LIFO

a 15. If goods shipped FOB destination are in transit at the end of the year, they
LO3
should be included in the inventory balance of the
a. seller.
b. common carrier.
c. buyer.
d. bank.
a 16. In a period of falling prices, the use of which of the following inventory cost
flow
LO7
methods would typically result in the highest cost of goods sold?
a. FIFO
b. LIFO
c. Weighted average cost
d. Specific identification
b 17. The specific identification method of inventory costing
LO5
a. eliminates all opportunity for profit manipulation.
b. matches the flow of recorded costs with the physical flow of goods.
c. can be used only with a perpetual inventory system.
d. is a violation of generally accepted accounting principles.
a 18. Merchandise shipped FOB shipping point on the last day of the year should
LO3
ordinarily be included in
a. the buyers inventory balance.
b. the sellers inventory balance.
c. neither the buyers nor sellers inventory balance.
d. both the buyers and the sellers inventory balances.
b 19. Which inventory pricing method best approximates specific identification in
most
LO7
manufacturing situations?
a. Activity-based costing
b. FIFO
c. Average cost
d. LIFO

18

Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

a 20. In a period of rising prices, the inventory cost allocation method that tends to
LO7
result in the lowest reported net income is
a. LIFO.
b. FIFO.
c. moving average.
d. weighted average.
c 21. The Allen Company makes the following entry in its accounting records:
LO2
Inventory........................................................................ 200
Cost of Goods Sold...............................................
200
This entry would be made when
a. merchandise is sold and the periodic inventory method is used.
b. merchandise is sold and the perpetual inventory method is used.
c. merchandise is returned and the perpetual inventory method is used.
d. merchandise is returned and the periodic inventory method is used.
b 22. For the past four years, ODoud Corp. has used LIFO for inventory valuation.
LO7
The inventory value at the end of year four was $85,000, but would have
been $60,500 if FIFO had been used throughout the four-year period. If
ODoud had used FIFO for the entire four years, income before taxes would
have been
a. $24,500 more over the four-year period.
b. $24,500 less over the four-year period.
c. $24,500 more in year four.
d. $24,500 less in year four.
d 23. In applying dollar-value LIFO, which of the following inventory cost flow
methods
LO10
could not be used to value incremental inventory layers?
a. Average cost
b. FIFO
c. LIFO
d. Specific identification
d 24. Which of the following is not true of the perpetual inventory method?
LO2
a. Purchases are recorded as debits to the inventory account.
b. The entry to record a sale includes a debit to Cost of Goods Sold and a
credit to Inventory.
c. After a physical inventory count, Inventory is credited for any missing
inventory.
d. Purchase returns are recorded by debiting Accounts Payable and
crediting Purchase Returns and Allowances.

Test Bank, Intermediate Accounting, 14th ed.

19

c 25. The double-extension method is a variation of which of the following

inventory
LO10
cost flow methods?
a. Moving average
b. FIFO
c. Dollar-value LIFO
d. Conventional (lower-of-cost-or-market) retail
d 26. Goods in transit at year-end purchased FOB shipping point were
appropriately
LO3
recorded in the purchases account but were incorrectly excluded from the
ending inventory. What effect will this omission have on the company's
assets, liabilities, and retained earnings at year-end?
a. No effect, no effect, overstated
b. No effect, no effect, understated
c. Understated, no effect, overstated
d. Understated, no effect, understated
a 27. When the double-extension approach to the dollar-value LIFO inventory cost
LO10
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
a 28. A company records inventory at the gross invoice price. Theoretically, how
LO4
should the following affect the costs in inventory?

a.
b.
c.
d.

Warehousing
Costs
Increase
No effect
No effect
Increase

Cash Discounts
Available
Decrease
Decrease
No effect
No effect

a 29. When using the periodic inventory method, which of the following generally

20

Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

LO4

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 purchases during the period

d 30. A firm using the perpetual inventory method returned defective merchandise
LO4
costing $2,000 to one of its suppliers. The entry to record this transaction will
include a debit to
a. Accounts Receivable.
b. Inventory.
c. Purchase Returns and Allowances.
d. Accounts Payable.
b 31. The average cost method is applicable to which of the following inventory
LO5
systems?
Periodic
Perpetual
a. Yes
Yes
b. Yes
No
c.
No
Yes
d.
No
No
c 32. The LIFO inventory cost flow method may be applied to which of the following
LO5
inventory systems?
Periodic
Perpetual
a.
No
No
b.
No
Yes
c. Yes
Yes
d. Yes
No
a 33. Which of the following inventory costing methods reports most closely the
LO5
current cost of inventory on the balance sheet?
a. FIFO
b. Specific identification
c. Weighted average
d. LIFO
b 34. Which of the following will occur when inventory costs are decreasing?

Test Bank, Intermediate Accounting, 14th ed.

LO7
FIFO.

21

a. LIFO will result in lower net income and lower ending inventory than will
b. FIFO will result in lower net income and lower ending inventory than will
LIFO.
c. LIFO will result in a lower net income, but a higher ending inventory, than
will FIFO.
d. FIFO will result in a lower net income, but a higher ending inventory, than
will LIFO.

c 35. During periods of rising prices, when the FIFO inventory cost flow method is
LO7
used, a perpetual inventory system would
a. not be permitted.
b. result in a higher ending inventory than a periodic inventory system.
c. result in the same ending inventory as a periodic inventory system.
d. result in a lower ending inventory than a periodic inventory system.
d 36. The dollar-value LIFO inventory cost flow method involves computations
based
LO10
on
Inventory Pools
A Specific Price
of Similar Items
Index for Each Year
a.
No
Yes
b.
No
No
c.
Yes
No
d.
Yes
Yes
c 37. Which of the inventory cost flow assumptions provides the best measure of
LO7
earnings, where best means most appropriate for predicting future
earnings, when prices have been declining?
a. FIFO
b. Specific identification
c. LIFO
d. Average cost
c 38. In the dollar-value LIFO method, what does the ending inventory for any
period
LO10
represent?
a. The ending inventory at current cost
b. The ending inventory at base-year dollars
c. The sum of inventory layers each costed at the current cost index in effect
the year the layer was added
d. The sum of inventory layers each costed at historical cost

22

Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

a 39. Assume that a company records purchases net of discount. If the company
LO4
bought merchandise valued at $10,000 on credit terms 3/15, net 30, the entry
to record a payment for half of the purchase within the discount period would
include a debit to
a. Accounts Payable for $4,850 and a credit to Cash for $4,850.
b. Accounts Payable for $5,000 and a credit to Cash for $5,000.
c. Accounts Payable for $4,850 and to Interest Expense for $150, and a
credit to Cash for $5,000.
d. Accounts Payable for $5,000 and to Interest Revenue for $150 and to
Cash for $5,000.
c 40. On August 1, Stephan Company recorded purchases of inventory of $80,000
LO4
and $100,000 under credit terms of 2/15, net 30. The payment due on the
$80,000 purchase was remitted on August 14. The payment due on the
$100,000 purchase was remitted on August 29. Under the net method and
the gross method, these purchases should be included at what respective net
amounts in the determination of cost of goods available for sale?
Net Method
Gross Method
a. $178,400
$176,400
b. $176,400
$176,400
c. $176,400
$178,400
d. $180,000
$176,400
b 41. Ami Retailers purchased merchandise with a list price of $100,000, subject to
LO4
a trade discount of 20 percent and credit terms of 2/10, n/30. At what amount
should Ami record the cost of this merchandise if the gross method is used?
a. $100,000
b. $80,000
c. $98,000
d. $78,400
c 42. With LIFO, cost of goods sold is $195,000, and ending inventory is $45,000.
If
LO6
FIFO ending inventory is $65,000, how much is FIFO cost of goods sold?

Test Bank, Intermediate Accounting, 14th ed.

a.
b.
c.
d.

23

$215,000
$195,000
$175,000
$65,000

b 43. Holdaway Co., a manufacturer, had inventories at the beginning and end of
its
LO4
current year as follows:
Beginning
End
Raw materials.......................................................... $11,000
$15,000
Work in process....................................................... 20,000
24,000
Finished goods........................................................ 12,500
9,000
During the year the following costs and expenses were incurred:
Raw materials purchased.........................................................
Direct labor cost.......................................................................
Indirect factory labor................................................................
Taxes and depreciation on factory building.............................
Taxes and depreciation on sales room and office...................
Sales salaries...........................................................................
Office salaries..........................................................................
Utilities (60% applicable to factory, 20% to sales room,
and 20% to office)...............................................................

$150,000
60,000
30,000
10,000
7,500
20,000
12,000
25,000

Holdaways cost of goods sold for the year is

a. $257,000.
b. $260,500.
c. $261,000.
d. $269,500.
a 44. Barlow Companys Accounts Payable balance at December 31, 2002, was
LO3
$1,800,000 before considering the following transactions:

Goods were in transit from a vendor to Barlow on December 31, 2002.

The invoice price was $100,000, and the goods were shipped FOB
shipping point on December 29, 2002. The goods were received on
January 4, 2003.
Goods shipped to Barlow FOB shipping point on December 20, 2002,
from a vendor were lost in transit. The invoice price was $50,000. On
January 5, 2003, Barlow filed a $50,000 claim against the common
carrier.

24

Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

In its December 31, 2002, balance sheet, Barlow should report Accounts
Payable of
a. $1,950,000.
b. $1,900,000.
c. $1,850,000.
d. $1,800,000.
d 45. Miller Inc. is a wholesaler of office supplies.
calculators
LO5
during August is shown below:
Date
August 1
7
12
21
22
29

Balance/
Transaction
Inventory
Purchase
Sales
Purchase
Sales
Purchase

The activity for Model III

Units
2,000
3,000
3,600
4,800
3,800
1,600

Cost
$36.00
37.20
38.00
38.60

If Miller Inc. uses a FIFO periodic inventory system, the ending inventory of
Model III calculators at August 31 is reported as
a. $150,080.
b. $150,160.
c. $152,288.
d. $152,960.

25

Test Bank, Intermediate Accounting, 14th ed.

a 46. Miller Inc. is a wholesaler of office supplies.

calculators
LO5
during August is shown below:
Date
August 1
7
12
21
22
29

Balance/
Transaction
Inventory
Purchase
Sales
Purchase
Sales
Purchase

The activity for Model III

Units
2,000
3,000
3,600
4,800
3,800
1,600

Cost
$36.00
37.20
38.00
38.60

If Miller Inc. uses a LIFO periodic inventory system, the ending inventory of
Model III calculators at August 31 is reported as
a. $146,400.
b. $150,080.
c. $150,160.
d. $152,960.
c 47. Miller Inc. is a wholesaler of office supplies.
calculators
LO5
during August is shown below:
Date
August 1
7
12
21
22
29

Balance/
Transaction
Inventory
Purchase
Sales
Purchase
Sales
Purchase

The activity for Model III

Units
2,000
3,000
3,600
4,800
3,800
1,600

Cost
$36.00
37.20
38.00
38.60

If Miller Inc. uses a LIFO cost perpetual inventory system, the ending
inventory of Model III calculators at August 31 is reported as
a. $146,400.
b. $150,080.
c. $150,160.
d. $152,960.

26

Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

d 48. Miller Inc. is a wholesaler of office supplies.

calculators
LO5
during August is shown below:
Date
August 1
7
12
21
22
29

Balance/
Transaction
Inventory
Purchase
Sales
Purchase
Sales
Purchase

The activity for Model III

Units
2,000
3,000
3,600
4,800
3,800
1,600

Cost
$36.00
37.20
38.00
38.60

If Miller Inc. uses a FIFO cost perpetual inventory system, the ending
inventory of Model III calculators at August 31 is reported as
a. $150,080.
b. $150,160.
c. $152,232.
d. $152,960.

b 49. Stephens Inc. is a wholesaler of photography equipment. The activity for the
LO5
VTC cameras during July is shown below:
Date
July 1
7
12
21
22
29

Balance/
Transaction
Inventory
Purchase
Sales
Purchase
Sales
Purchase

Units
2,000
3,000
3,600
5,000
3,800
1,600

Cost
$36.00
37.00
37.88
38.11

If Stephens Inc. uses the average cost method to account for inventory, the
ending inventory of VTC cameras at July 31 is reported as
a. $153,400.
b. $156,912.
c. $158,736.
d. $159,464.

27

Test Bank, Intermediate Accounting, 14th ed.

c 50. Stephens Inc. is a wholesaler of photography equipment. The activity for the
LO5
VTC cameras during July is shown below:
Date
July 1
7
12
21
22
29

Balance/
Transaction
Inventory
Purchase
Sales
Purchase
Sales
Purchase

Units
2,000
3,000
3,600
5,000
3,800
1,600

Cost
$36.00
37.00
37.88
38.11

If Stephens Inc. uses a moving average perpetual inventory system, the

ending inventory of the VTC cameras at July 31 is reported as
a. $153,400.
b. $156,912.
c. $158,736.
d. $159,464.

c 51. The following information is available for Lyman Company:

LO8
Cost of goods sold for 2002...............................................
Inventories at December 31, 2001.....................................
Inventories at December 31, 2002.....................................

$1,200,000
350,000
310,000

Assuming that a business year consists of 360 days, the number of days
sales in average inventories for 2002 was
a. 49.5.
b. 93.
c. 99.
d. 105.
a 52. Following are the account balances from Fulton Companys income
statement:
LO4
Inventory, January 1, 2002.................................................
$30,000
Purchases...........................................................................
40,000
Purchase Returns and Allowances.....................................
5,000
Purchase Discounts............................................................
4,000
Freight-In............................................................................
5,000
Inventory, December 31, 2002...........................................
15,000
Freight-Out..........................................................................
6,000
Given this information, the cost of goods sold during 2002 is
a. $51,000.
b. $46,000.
c. $56,000.
d. $66,000.
c 53. Following are the account balances from Jackson Companys income
statement:
LO4
Inventory, January 1, 2002.................................................
$35,000
Purchases...........................................................................
35,000
Purchase Returns and Allowances.....................................
2,000
Purchase Discounts............................................................
4,000
Freight-In............................................................................
5,000
Inventory, December 31, 2002...........................................
10,000
Freight-Out..........................................................................
6,000

Given this information, the cost of merchandise available for sale during 2002
is
a. $65,000.

b. $59,000.
c. $69,000.
d. $61,000.
b 54. Cannon Company adopted the dollar-value LIFO inventory method on
December
LO7
31, 2001. Cannons entire inventory constitutes a single pool. On December
31, 2002, the inventory was $300,000 under the dollar-value LIFO method.
Inventory data for 2002 are as follows:
December 31, 2002, inventory at year-end prices........................$390,000
Relevant price index at year-end (base = 1.00 for 2001)....................
1.20
Using dollar-value LIFO, Cannons inventory at December 31, 2002, is
a. $325,000.
b. $330,000.
c. $360,000.
d. $468,000.
c 55. Young Corporation adopted the dollar-value LIFO method of inventory
valuation
LO10
on December 31, 2001. Information concerning that inventory is presented
below:
Inventory at
Date
Current Prices
December 31, 2001
$600,000
1.00
December 31, 2002
759,000
1.15
December 31, 2003
864,000
1.20
December 31, 2004
787,500
1.25
What is the cost of the ending inventory to be reported by Young Corporation
at December 31, 2002, under dollar-value LIFO?
a. $600,000
b. $660,000
c. $669,000
d. $690,000

b 56. Young Corporation adopted the dollar-value LIFO method of inventory

valuation
LO10
on December 31, 2001. Information concerning that inventory is presented
below:
Inventory at
Date
Current Prices
December 31, 2001
$600,000
1.00
December 31, 2002
759,000
1.15
December 31, 2003
864,000
1.20
December 31, 2004
787,500
1.25
What is the cost of the ending inventory to be reported by Young Corporation
at December 31, 2003, under dollar-value LIFO?
a. $720,000
b. $741,000
c. $744,000
d. $828,000
b 57. Young Corporation adopted the dollar-value LIFO method of inventory
valuation
LO10
on December 31, 2001. Information concerning that inventory is presented
below:
Inventory at
Date
Current Prices
December 31, 2001
$600,000
1.00
December 31, 2002
759,000
1.15
December 31, 2003
864,000
1.20
December 31, 2004
787,500
1.25
What is the cost of the ending inventory to be reported by Young Corporation
at December 31, 2004, under dollar-value LIFO?
a. $630,000
b. $634,500
c. $637,500
d. $720,000

d 58. From the following information, determine the amount of freight-in.

LO4
Beginning Inventory...............................................................
$20,000
Purchases..............................................................................
41,000
Purchase Returns and Allowances.......................................
3,000
Purchase Discounts..............................................................
4,000
Freight-In...............................................................................
?
Cost of Goods Available for Sale..........................................
55,000
Ending Inventory...................................................................
?
Cost of Goods Sold...............................................................
22,000
a.
b.
c.
d.

$3,000
$4,000
$2,000
$1,000

c 59. From the following information, determine the amount of ending inventory.
LO4
Beginning Inventory...............................................................
$20,000
Purchases..............................................................................
41,000
Purchase Returns and Allowances.......................................
3,000
Purchase Discounts..............................................................
4,000
Freight-In...............................................................................
?
Cost of Goods Available for Sale..........................................
55,000
Ending Inventory...................................................................
?
Cost of Goods Sold...............................................................
22,000
a.
b.
c.
d.

$23,000
$32,000
$33,000
$22,000

c 60. The following information was obtained from the accounts of McKay
Company:
LO4
Inventory, January 1..............................................................
$ 30,000
Purchases..............................................................................
45,000
Purchase Returns and Allowances.......................................
5,000
Purchase Discounts..............................................................
4,000
Freight-In...............................................................................
5,000
Inventory, December 31........................................................
20,000
Freight-Out............................................................................
6,000

Given this information, the cost of goods sold during the year is
a. $46,000.
b. $41,000.
c. $51,000.
d. $61,000.
c 61. During the year, The Hill Company purchased $1,920,000 of inventory. The
cost
LO8
of goods sold for the year was $1,800,000 and the ending inventory at
December 31 was $360,000. What was the inventory turnover for the year?
a. 5.0
b. 5.3
c. 6.0
d. 6.4
b 62. The following information was obtained from the accounts of Cox Company:
LO4
Beginning Inventory...............................................................
$ 20,000
Purchases..............................................................................
40,000
Purchase Returns and Allowances.......................................
2,000
Purchase Discounts..............................................................
4,000
Freight-In...............................................................................
5,000
Ending Inventory...................................................................
10,000
Freight-Out............................................................................
6,000
Given this information, the cost of goods available for sale is
a. $65,000.
b. $59,000.
c. $69,000.
d. $61,000.
d 63. Selected information from the accounting records of Thayer Company is as
follows:
LO8
Net sales for 2002.................................................................... $900,000
Cost of goods sold for 2002.....................................................
600,000
Inventory at December 31, 2001..............................................
180,000
Inventory at December 31, 2002..............................................
156,000

Thayer's inventory turnover for 2002 is

a. 5.36 times.
b. 3.85 times.
c. 3.67 times.
d. 3.57 times.
c 64. The following information applied to Landon Company for 2002:
LO4
Merchandise purchased for resale..........................................
Freight-in..................................................................................
Interest on notes payable to vendors......................................
Purchase returns......................................................................

$300,000
7,500
3,000
1,500

Landons inventoriable cost for 2002 was

a. $309,000.
b. $307,500.
c. $306,000.
d. $301,500.
c 65. At the end of year 1, Clinton Company adopted the dollar -value LIFO
method,
LO10
and the end-of-year 1 inventory cost was calculated to be $20,000.
Year
2
3
4
5

Ending Inventory
at End-of-Year Prices
$38,400
$45,500
$35,000
$51,000

Price Index
(Year 1 = 1.00)
1.2
1.3
1.4
1.5

Under the dollar-value LIFO inventory method, what would be the value of
the inventory at the end of year 2?
a. $46,080
b. $38,400
c. $34,400
d. $32,000

b 66. At the end of year 1, Clinton Company adopted the dollar -value LIFO
method,
LO10
and the end-of-year 1 inventory cost was calculated to be $20,000.
Year
2
3
4
5

Ending Inventory
at End-of-Year Prices
$38,400
$45,500
$35,000
$51,000

Price Index
(Year 1 = 1.00)
1.2
1.3
1.4
1.5

Under the dollar-value LIFO method, what would be the value of the
inventory at the end of year 3?
a. $35,000
b. $38,300
c. $45,500
d. None of the above
b 67. At the end of year 1, Clinton Company adopted the dollar -value LIFO
method,
LO10
and the end-of-year 1 inventory cost was calculated to be $20,000.
Year
2
3
4
5

Ending Inventory
at End-of-Year Prices
$38,400
$45,500
$35,000
$51,000

Price Index
(Year 1 = 1.00)
1.2
1.3
1.4
1.5

Under the dollar-value LIFO method, what would be the value of the
inventory at the end of year 4?
a. $25,000
b. $26,000
c. $30,000
d. None of the above

c 68. At the end of year 1, Clinton Company adopted the dollar -value LIFO
method,
LO10
and the end-of-year 1 inventory cost was calculated to be $20,000.
Ending Inventory
Price Index
Year
at End-of-Year Prices
(Year 1 = 1.00)
2
$38,400
1.2
3
$45,500
1.3
4
$35,000
1.4
5
$51,000
1.5
Under the dollar-value LIFO method, what would be the value of the
inventory at the end of year 5?
a. $34,000
b. $37,400
c. $39,500
d. $51,000
c 69. Purchases and sales during a recent period for Coleman, Inc. were:
LO5
Purchases During the Period
Sales During the Period
1st Purchase
500 units @ $2
1st Sale
600 units @ $7
2nd Purchase 1,000 units @ $3
2nd Sale 750 units @ $8
3rd Purchase
500 units @ $4
3rd Sale
500 units @ $9
4th Purchase
500 units @ $5
4th Sale
500 units @ $10
2,500 units
2,350 units
Beginning inventory was 100 units at $1 each. Given this information, what
is the ending inventory if the periodic FIFO costing alternative is used?
a. $400
b. $500
c. $1,250
d. $3,100
a 70. Purchases and sales during a recent period for Coleman, Inc. were:
LO5
Purchases During the Period
Sales During the Period
1st Purchase
500 units @ $2
1st Sale
600 units @ $7
2nd Purchase 1,000 units @ $3
2nd Sale 750 units @ $8
3rd Purchase
500 units @ $4
3rd Sale
500 units @ $9
4th Purchase
500 units @ $5
4th Sale
500 units @ $10
2,500 units
2,350 units
Beginning inventory was 100 units at $1 each. Given this information, what
is the ending inventory if the periodic LIFO costing alternative is used?
a. $400
b. $500

c. $1,250
d. $3,100
c 71. Purchases and sales during a recent period for Coleman, Inc. were
LO5
Purchases During the Period
Sales During the Period
1st Purchase
500 units @ $2
1st Sale
600 units @ $7
2nd Purchase 1,000 units @ $3
2nd Sale 750 units @ $8
3rd Purchase
500 units @ $4
3rd Sale
500 units @ $9
4th Purchase
500 units @ $5
4th Sale
500 units @ $10
2,500 units
2,350 units
Beginning inventory was 100 units at $1 each. Given this information, what
is the cost per unit available for sale during the year when using the average
cost method (rounded to the nearest cent)?
a. $2.61
b. $3.10
c. $3.31
d. $3.53
d 72. The following information was taken from Frandsen Companys accounting
LO4
records:
Increase in raw materials inventory....................................$
Decrease in finished goods inventory................................
Raw materials purchase.....................................................
Direct-labor payroll.............................................................
Factory overhead................................................................
Freight-out..........................................................................

7,500
17,500
215,000
100,000
150,000
22,500

There was no work-in-process inventory at the beginning or end of the year.

Frandsens cost of goods sold is
a. $497,500.
b. $487,500.
c. $482,500.
d. $475,000.
a 73. The following information is available for Hudson Company:
LO4
Disbursements for purchases............................................. $290,000
Increase in trade accounts payable................................... 25,000
Decrease in merchandise inventory................................... 10,000
Cost of goods sold was
a. $325,000.
b. $305,000.

c. $275,000.
d. $255,000.
a 74. The following information is available for Carter Corporation for the month of
LO4
June:
Beginning Inventory
Purchased, June 3
Purchased, June 5
Sold, June 9
Purchased, June 15
Sold, June 19

8 units @ $20.00 = $160

5 units @ $22.00 = $110
7 units @ $24.00 = $168
9 units
8 units @ $26.00 = $208
7 units

Given this information, the ending inventory balance using the average cost
method is
a. $276.
b. $302.
c. $368.
d. $386.
d 75. Janices Sporting Goods had the following inventory records for one line of
skis
LO4
for the month of January:
Beginning Inventory......................
Sales (Jan. 1 Jan. 7).................
Purchase (Jan. 8).........................
Sales (Jan. 9 Jan. 16)...............
Purchase (Jan. 17).......................
Sales (Jan. 18 Jan. 29).............
Purchase (Jan. 30).......................

70 pairs @ $100 per pair = $7,000

50 pairs
46 pairs @ $104 per pair = $4,784
49 pairs
62 pairs @ $110 per pair = $6,820
56 pairs
18 pairs @ $112 per pair = $2,016

Assuming the periodic LIFO inventory method is used, what is the cost of
Janices ending inventory?
a. $4,124
b. $4,268
c. $4,376
d. $4,100
c 76. Gordon Companys inventory at June 30, 2002, was $75,000 based on a
LO3
physical count of goods priced at cost, and before any necessary year-end
adjustment relating to the following:
Included in the physical count were goods billed to a customer FOB
shipping point on June 30, 2002. These goods had a cost of $1,500
and were picked up by the carrier on July 10, 2002.
Goods shipped FOB destination on June 28, 2002, from a vendor to
Gordon were received on July 3, 2002. The invoice cost was $2,500.
What amount should Gordon report as inventory on its June 30, 2002,
balance sheet?
a. $73,500
b. $74,000
c. $75,000
d. $76,500
c 77. The balance in Master Companys accounts payable account at December
31,
LO3
2002, was $1,100,000 before considering the following information:
Goods shipped FOB shipping point on December 20, 2002, from a
vendor
to Master were lost in transit. The invoice cost of $20,000 was not
recorded by Master. On January 6, 2003, Master filed a $20,000 claim
against the common carrier.
On December 27, 2002, a vendor authorized Master to return, for full
credit, goods shipped and billed at $35,000 on December 2, 2002. The
returned goods were shipped by Master on December 27, 2002. A
$35,000 credit memo was received and recorded by Master on January
6, 2003.

What amount should Master report as accounts payable in its December 31,
2002, balance sheet?
a. $1,120,000
b. $1,115,000
c. $1,085,000
d. $1,065,000
b 78. The balance in Stockwell Companys accounts payable account on
December
LO3
31, 2002, was $1,225,000 before the following information was considered:

Goods shipped FOB destination on December 21, 2002, from a vendor to

Stockwell were lost in transit. The invoice cost of $45,000 was not
recorded by Stockwell. On December 28, 2002, Stockwell notified the
vendor of the lost shipment.
Goods were in transit from a vendor to Stockwell on December 31, 2002.
The invoice cost was $60,000, and the goods were shipped FOB shipping
point on December 28, 2002. Stockwell received the goods on January 6,
2003.

What amount should Stockwell report as accounts payable in its December

31, 2002, balance sheet?
a. $1,330,000
b. $1,285,000
c. $1,270,000
d. $1,225,000
a 79. The following information is available from Preston Companys 2002
accounting
LO4
records:
Purchases..................................................................................... $530,000
Purchase discounts...................................................................... 10,000
Beginning inventory...................................................................... 160,000
Ending inventory........................................................................... 215,000
Freight-out.................................................................................... 40,000
Prestons 2002 cost of goods sold is
a. $465,000.
b. $475,000.
c. $505,000.
d. $585,000.

b 80. Campbells Clothing Store sells jeans. During January 2002, its inventory
LO4
records for one brand of designer jeans were as follows:
Beginning Inventory.................................... 10 pairs @ $ 20 = $ 200
January 6 Purchase................................... 4 pairs @ 25 = 100
January 10 Sale......................................... 5 pairs
January 15 Purchase................................. 7 pairs @ 30 = 210
January 20 Sale......................................... 10 pairs
January 25 Purchase................................. 4 pairs @ 30 = 120
Using this information, periodic FIFO cost of goods sold is
a. $330.
b. $300.
c. $430.
d. $250.
d 81. Campbells Clothing Store sells jeans. During January 2002, its inventory
LO4
records for one brand of designer jeans were as follows:
Beginning Inventory.................................... 10 pairs @ $ 20 = $ 200
January 6 Purchase................................... 4 pairs @ 25 = 100
January 10 Sale......................................... 5 pairs
January 15 Purchase................................. 7 pairs @ 30 = 210
January 20 Sale......................................... 10 pairs
January 25 Purchase................................. 4 pairs @ 30 = 120
Using this information, periodic LIFO cost of goods sold is
a. $360.
b. $300.
c. $330.
d. $430.
a 82. Campbells Clothing Store sells jeans. During January 2002, its inventory
LO4
records for one brand of designer jeans were as follows:
Beginning Inventory.................................... 10 pairs @ $ 20 = $ 200
January 6 Purchase................................... 4 pairs @ 25 = 100
January 10 Sale......................................... 5 pairs
January 15 Purchase................................. 7 pairs @ 30 = 210
January 20 Sale......................................... 10 pairs
January 25 Purchase................................. 4 pairs @ 30 = 120

Using this information, the cost of goods sold using the average cost method
is
a. $378.
b. $358.
c. $265.
d. $236.
b 83. Henry Company adopted the dollar-value LIFO inventory method on January
1,
LO10
2002. In applying the LIFO method, Henry uses internal price indexes and
the multiple-pools approach. The following data were available for inventory
Pool No. 1 for the two years following the adoption of LIFO:

01/01/01
12/31/02
12/31/03

Current Inventory
At CurrentAt BaseYear Cost
Year Cost
$300,000 $300,000
378,000
360,000
422,400
384,000

Internal
Price
Index
1.00
1.05
1.10

Under the dollar-value LIFO method, the inventory at December 31, 2003,
should be
a. $384,000.
b. $389,400.
c. $392,400.
d. $422,400.
c
LO8

84.

Selected information from the 2002 and 2001 financial statements of BN

Company is presented below:
(in thousands)
As of December 31
2002
2001
Cash
$ 21
$ 35
Accounts receivable (net)
27
22
Inventory
60
98
Prepaid expenses
105
142
Cash sales
Credit sales (percent of cash sales)
Cost of goods sold (percent of total sales
Net income

750
82%
60%
30

675
85%
58%
38

BN Companys merchandise inventory turnover for 2002 is

a.
3.43.
b.
5.68.
c.
6.63.
d.
6.79.

PROBLEMS
Problem 1
The inventory account of Duke Company at December 31, 2002, included the
following items:
Inventory Amount
Merchandise out on consignment at sales price (including
markup of 35% on selling price)..............................................................
$15,000
Goods purchased, in transit (shipped FOB shipping point).......................
6,000
Goods held by Duke on consignment..............................................
4,500
Goods out on approval (sales price $6,000, cost $4,000)..........................
6,000
Based on this information, the inventory account at December 31, 2002, should be
reduced by what amount?
Solution 1
LO1
Amounts that should not be included in the inventory are:
Markup on goods out on consignment (35% of $15,000)......................
Goods held by Duke on consignment..............................................
Markup on goods out on approval...................................................
Reduction of inventory account........................................................

$ 5,250
4,500
2,000
$11,750

Problem 2
The following data relate to the first three years of operation for the Lewis
Company:
2002
2003
2004
Net income under FIFO........................ $30,000
$45,000
$16,000
Net income under LIFO........................ 12,000
32,000
12,000
Ending inventory under FIFO............... 55,000
67,000
71,000
Compute the ending inventory under LIFO for each year. (Ignore income taxes.)

Solution 2
LO5
2002
$30,000
12,000
$18,000
$55,000

Net income under FIFO........................

Net income under LIFO........................
Decrease under LIFO...........................
Ending inventory under FIFO...............
Change in year-end inventory based
on change in net income under LIFO
as compared with FIFO:
Increase in cost of sales............ $18,000
Decrease in beginning
inventory under LIFO...........
0
Decrease in ending
inventory............................... $18,000
Ending inventory under LIFO.... $37,000

2003
$45,000
32,000
$13,000
$67,000

2004
$16,000
12,000
$ 4,000
$71,000

$13,000

$ 4,000

18,000

31,000

$31,000
$36,000

$35,000
$36,000

Problem 3
The following information is available for the Fister Company for 2002:
Freight-in..................................................................................
$
Purchase returns.........................................................................
Selling expenses.........................................................................
Ending inventory.........................................................................

50,000
185,000
357,000
117,000

The cost of goods sold is equal to 400% of selling expenses. Compute the cost of
goods available for sale.
Solution 3
LO4
Cost of goods sold (400% x $357,000)............................................. $1,428,000
Add: Ending inventory................................................................
117,000
Cost of goods available for sale................................................. $1,545,000

Problem 4
At the close of its fiscal year on March 31, 2002, Gren Industries, Inc. was in the
process of relocating its plant. This resulted in some confusion relating to the
inventory cutoff, as indicated by the following:

(1)
(2)
(3)
(4)
(5)

Merchandise on hand costing $1,794 was included in the inventory although

the purchase invoice was not recorded until April 12, 2002.
Merchandise shipped on April 1, 1999, was included in inventory--the cost of
this merchandise was $2,219, and the sale was recorded as $3,138 on
March 31, 2002.
Merchandise costing $12,150 was included in the inventory although it was
shipped to a customer on March 31, 2002, FOB shipping point; the company
recorded the sale of $19,246 on that date.
Merchandise costing $1,820 was not counted.
Merchandise in transit (shipped to the company FOB destination) was
recorded as a purchase as of April 2, 2002, and its cost of $17,287 was not
included in the March 31, 2002, inventory.

Assuming that the company does not maintain a perpetual inventory system and
that the books for the fiscal year have been closed, provide the necessary
correcting entries. (Ignore income taxes.)
Solution 4
LO3
(1)
(2)
(3)
(4)
(5)

Retained Earnings.......................................................
Purchases.............................................................
Retained Earnings.......................................................
Sales.....................................................................
Retained Earnings.......................................................
Inventory................................................................
Inventory......................................................................
Retained Earnings................................................
No entry required. Transaction handled correctly.

1,794
1,794
3,138
3,138
12,150
12,150
1,820
1,820

Problem 5
The data below relate to Raw Material F, which is stocked by Dixon Inc. in its
warehousing operation:
Raw Material F
Units
Dollars
Date
Received Issued Balance
Price Received Issued Balance
Jan. 1
1,600
$16
$25,600
Jan. 11
2,000
14
$28,000
Feb. 16
960
Mar. 20
680

June 22
580
15
8,700
Aug. 18
950
Sept. 10
810
Oct. 8
1,510
17
25,670
Dec. 9
930
Dec. 21
400
18
7,200
From these data, provide answers for the following [show computations for (1)]:
(1) Assuming a perpetual inventory system is used, compute the ending inventory
under (a) FIFO and (b) LIFO.
(2) If a perpetual inventory of Raw Material F is kept on a moving average basis,
the ending inventory will be:
(a) lower than the LIFO basis.
(b) higher than the FIFO basis.
(c) lower than the FIFO basis.
(d) impossible to determine.
Solution 5
LO5
(1) (a) FIFO:

400
1,360
1,760

units @ $18 = $ 7,200

units @ $17 = 23,120
units
$30,320

(b) LIFO:

780
580
400
1,760

units @ $16 = $12,480

units @ $17 = 9,860
units @ $18 = 7,200
units
$29,540

(2) (c) Lower than the FIFO basis.

Problem 6
On December 31, 2000, The Davis Company adopted the dollar-value LIFO
inventory method. The inventory on that date using the dollar-value LIFO inventory
method was determined to be $500,000. Inventory data for following years are
listed below:
Year Ended
December 31
2000
2001
2002
2003
2004
2005

Inventory at
Respective
Year-End Prices
$500,000
572,000
603,750
756,250
702,000
612,000

Year-End
Price Index
(Base Year 2000)
1.00
1.10
1.15
1.20
1.30
1.20

Compute the inventory amounts for Davis at December 31, 2000, 2001, 2002,
2003, 2004, and 2005, using the dollar-value LIFO inventory method for each year.
Use the year-end price index as the incremental layer index.

Solution 6
LO10
Inventory at
Inventory at
End-of-Year Year-End Base Year
Date
Prices
Index
Prices
12/31/00 $500,000 1.00 = $500,000

Layers in
Base Year
Prices
$500,000

Price
Index
1.00

Dollar-Value
LIFO Cost
$ 500,000

12/31/01

$572,000

1.10 = $520,000

$500,000
20,000

1.00
1.10

$ 500,000
22,000
$ 522,000

12/31/02

$603,750

1.15 = $525,000

$500,000
20,000
5,000

1.00
1.10
1.15

$ 500,000
22,000
5,750
$ 527,750

12/31/03

$756,250

1.25 = $605,000

$500,000
20,000
5,000
80,000

1.00
1.10
1.15
1.20

$ 500,000
22,000
5,750
96,000
$ 623,750

12/31/04

$702,000

1.30 = $540,000

$500,000
20,000
5,000
15,000

1.00
1.10
1.15
1.20

$ 500,000
22,000
5,750
18,000
$ 545,750

12/31/05

$612,000

1.20 = $510,000

$500,000
10,000

1.00
1.10

$ 500,000
11,000
$ 511,000

Problem 7
Edwards Sporting Goods began operations February 1, 2002. Edwards sells
footballs to high schools and colleges throughout the country. The company uses
a periodic system. A summary of inventory records for the month of February
appears below:

Date
February 2
February 17
February 26

Inventory Records--Footballs
Terms of
Units
Gross Price
Purchase
Received
on Invoice
3/10, net 30
800
$30,000
net 30
600
22,560
2/10, net 45
550
20,490

All footballs are sold for $47.50. Edwards takes all discounts that are offered and
uses the net method for recording purchases. On February 28, 470 footballs were
on hand.
(1)
(2)
(3)
(4)

Compute the ending inventory cost under FIFO.

Compute the gross margin on sales under LIFO.
Compute the ending inventory cost under LIFO.
Give the journal entry to record the February 2 purchase.

Solution 7
LO5
Units
Cost
Beginning Inventory....................
0
0
Purchases: February 2............ 800 @ $36.375 = $29,100 ($30,000 - $900)
February 17.......... 600 @ 37.600 = 22,560
February 26.......... 550 @ 36.510 = 20,080 ($20,490 - $410)
Goods available.......................... 1,950
$71,740
Less ending inventory................. 470
Sales........................................... 1,480
(1)
(2)

Ending Inventory--FIFO
(470 @ $36.51).............................

$17,160

Sales (1,480 @ $47.50)...........................................

Cost of goods sold:
(550 @ $36.51)..................................................
(600 @ $37.60)..................................................
(330 @ $36.375)................................................
Gross margin on sales--LIFO..................................

$70,300
$20,080
22,560
12,004

54,644
$15,656

(3)
(4)

Ending inventory--LIFO
(470 @ $36.375)..........................

$17,096

Feb. 2 Purchases (Inventory)............

Accounts Payable..............

29,100
29,100

Problem 8
The Clayton Music Company was formed on December 1, 2001. The following
information is available from Claytons inventory records:
Units
Unit Cost
Balance at January 1, 2002............................................. 4,800
$14.25
Purchases:
January 17, 2002........................................................ 9,000
15.00
March 12, 2002........................................................... 7,200
16.50
June 23, 2002............................................................. 3,600
15.75
November 15, 2002.................................................... 5,400
17.25
The company uses a periodic inventory system, and a physical inventory on
November 30, 2002, shows 9,600 units on hand. Prepare schedules to compute
the ending inventory at November 30, 2002, under each of the following inventory
methods:
(1) FIFO.
(2) LIFO.
(3) Average cost.
Solution 8
LO5
(1) Computation of inventory under FIFO method
Units
November 15, 2002.........................
5,400
June 23, 2002..................................
3,600
March 12, 2002...............................
600
9,600

Unit Cost
$17.25
15.75
16.50

Total Cost
$ 93,150
56,700
9,900
$ 159,750

(2) Computation of inventory under LIFO method

Units
January 1, 2002...............................
4,800
January 17, 2002............................
4,800
9,600

Unit Cost
$14.25
15.00

Total Cost
$ 68,400
72,000
$ 140,400

(3) Computation of inventory under the average cost method

Units
Unit Cost
January 1, 2002...............................
4,800
$14.25
January 17, 2002............................
9,000
15.00
March 12, 2002...............................
7,200
16.50
June 23, 2002..................................
3,600
15.75
November 15, 2002.........................
5,400
17.25
30,000

Total Cost
$ 68,400
135,000
118,800
56,700
93,150
$ 472,050

Average Cost: $472,050/30,000 = $15.735

November 30, 2002, inventory: 9,600 units @ $15.735 = $151,056
Problem 9
The following data are from the inventory records of the Dennis Corporation, which
adopted LIFO effective January 1, 2002:
Jan. 1, 2002
Dec. 31, 2002
Inventory at base prices.............................
$320,000
Inventory at current prices.........................
$436,800
Inventory at base prices.............................
420,000
(1) Using the dollar-value LIFO procedures, compute the inventory on December
31, 2002, from the above data.
(2) Prepare a schedule showing the inventory layers included in ending inventory
at December 31, 2002.
Solution 9
LO10
(1) December 31, 2002:
Inventory at current prices..........................................................
Inventory at base prices..............................................................
January 1, 2002, inventory at base prices.......................................
Inventory increase at base prices ($420,000 - $320,000).......................
Price index applying to increase ($436,800/$420,000)..........................
Layer increase ($100,000 x 1.04)..........................................................
December 31, 2002, inventory at dollar-value LIFO
($320,000 + $104,000).......................................................................

$436,800
420,000
320,000
100,000
104%
104,000
424,000

(2) Inventory layers at December 31:

Base-year layer...........................
Current layer...............................

Base
Price
$320,000
100,000
$420,000

Price
Index
100
104

Inventory
Balance
$320,000
104,000
$424,000

Problem 10
Shown below are the inventory records for the Sundance Camera Store for 2002,
the first year in which dollar-value LIFO was used:
Inventory at base-year price
Inventory at year-end prices
External price index

January 1
$108,000
100.0

December 31
$141,900
110.0

Inventory records contained the following data for 2003 and 2004:

Inventory at year-end prices

External price index

December 31
2003
2004
$147,736
$159,505
118.0
115.0

Using the dollar-value LIFO method, calculate the ending inventory for each of the
following dates:
(1) December 31, 2002.
(2) December 31, 2003.
(3) December 31, 2004.

Solution 10
LO10
Inventory at
Inventory at
End-of-Year Year-End Base-Year
Date
Prices
Index
Prices
12/31/01 $108,000 1.00 = $108,000

Layers in
Base-Year Price
Prices
Index
$108,000 1.00

Dollar-Value
LIFO Cost
$ 108,000

(1) 12/31/02

$141,900

1.10 = $129,000

$108,000
21,000

1.00
1.10

$ 108,000
23,100
$ 131,100

(2) 12/31/03

$147,736

1.18 = $125,200

$108,000
17,200

1.00
1.10

$ 108,000
18,920
$ 126,920

(3) 12/31/04

$159,505

1.15 = $138,700

$108,000
17,200
13,500

1.00
1.10
1.15

$ 108,000
18,920
15,525
$ 142,445

Problem 11
The following information was available from the inventory records of the Brooks
Company for January 2002:
Units
Unit Cost
Total Cost

Balance at January 1, 2002...................

Purchases:
January 6, 2002...............................
January 26, 2002............................
Sales:
January 7, 2002...............................
January 31, 2002............................
Balance at January 31, 2002.................

3,000

$19.55

$ 58,650

2,250
10,200

20.60
21.50

46,350
219,300

2,700
7,200
5,550

(1) Assuming that Brooks maintains perpetual inventory records, what should be
the inventory at January 31, 2002, using the FIFO inventory method, rounded
to the nearest dollar?
(2) Assuming that Brooks maintains perpetual inventory records, what should be
the inventory at January 31, 2002, using the LIFO inventory method, rounded
to the nearest dollar?
(3) Assuming that Brooks does not maintain perpetual inventory records, what
should be the inventory at January 31, 2002, using the average cost inventory
method, rounded to the nearest dollar?
Solution 11
LO5
(1) Computation of ending inventory using perpetual FIFO method:
January 26, 2002............................

Units
5,550

Unit Cost Total Cost

$21.50
$ 119,325.00

(2) Computation of ending inventory using perpetual LIFO method:

Beginning Inventory........................
January 26, 2002............................

Units
2,550
3,000
5,550

Unit Cost
$19.55
21.50

(3) Computation of inventory under the average cost method:

Units
3,000
2,250
10,200
15,450

Unit Cost
@ $19.55 =
@ 20.60 =
@ 21.50 =

Total Cost
$ 58,650
46,350
219,300
$ 324,300

$324,300/15,450 = $ 20.99
5,550 x $20.99 = $116,495 (rounded)

Total Cost
$ 59,852.50
64,500.00
$ 114,352.50

Problem 12
The Murphy Company manufactures a single product. On December 31, 2001,
Murphy adopted the dollar-value LIFO inventory method. The inventory on that
date using the dollar-value LIFO inventory method was determined to be $325,000.
Inventory data for succeeding years are as follows:
Year Ended
December 31
2002
2003
2004
2005
2006

Inventory at
Respective
Year-End Prices
$363,000
420,000
430,000
480,000
348,000

Relevant
Price Index
(Base-Year 2001)
1.10
1.20
1.25
1.20
1.16

Compute the inventory amounts at December 31, 2002, 2003, 2004, 2005, and
2006, using the dollar-value LIFO inventory method for each year.
Solution 12
LO10
Inventory at
Inventory at
End-of-Year Year-End Base-Year
Date
Prices
Index
Prices
12/31/01 $325,000 1.00 = $325,000

Layers in
Base-Year Price
Prices
Index
$325,000 1.00

Dollar-Value
LIFO Cost
$ 325,000

12/31/02

$363,000

1.10 = $330,000

$325,000
5,000

1.00
1.10

$ 325,000
5,500
$ 330,500

12/31/03

$420,000

1.20 = $350,000

$325,000
5,000
20,000

1.00
1.10
1.20

$ 325,000
5,500
24,000
$ 354,500

12/31/04

$430,000

1.25 = $344,000

$325,000
5,000
14,000

1.00
1.10
1.20

$ 325,000
5,500
16,800
$ 347,300

12/31/05

$480,000

1.20 = $400,000

$325,000
5,000
14,000
56,000

1.00
1.10
1.20
1.20

$ 325,000
5,500
16,800
67,200
$ 414,500

12/31/06

$348,000

1.16 = $300,000

$300,000

1.00

$ 300,000

Problem 13
The following data are from the inventory records of the DDT Chemical Co. for the
years 2001 and 2002:
Inventory Quantity
(in Units)
Inventory Prices
Commodity
2001
2002
2001
2002
A
200
200
$ 5.00
$ 5.40
B
50
80
20.00
23.00
C
300
400
15.00
17.00
D
160
192
25.00
24.00
From these data, compute the price index for 2002 using the double-extension
method.
Solution 13
LO9
Commodity
A
B
C
D

At 2001 Inventory Prices

Quantity
Cost
Total
200
$ 5.00
$ 1,000
80
20.00
1,600
400
15.00
6,000
192
25.00
4,800
$13,400

2002 inventory at 2002 prices = $14,328

2002 inventory at 2001 prices $13,400

At 2002 Inventory Prices

Quantity
Cost
Total
200
$ 5.40 $ 1,080
80
23.00
1,840
400
17.00
6,800
192
24.00
4,608
$ 14,328

= 106.9 price index for 2002

56

Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

Problem 14
On January 1, 2001, Fawcett Distributors, Inc. adopted the dollar-value LIFO
inventory method for income tax and external financial reporting purposes.
However, Fawcett continued to use the FIFO inventory method for internal
accounting and management purposes. In applying the LIFO method, Fawcett
uses the double-extension method for determining price indexes and the multiplepools approach under which substantially identical inventory items are grouped
into LIFO inventory pools. The following data were available for Inventory Pool No.
1, which is comprised of products X and Y, for the two years following the adoption
of LIFO:
FIFO Basis per Records
Units

Unit Cost

Total Cost

Inventory, 1/1/01
Product X...................................
Product Y...................................

20,000
7,000

$30
25

$ 600,000
175,000
$ 775,000

Inventory, 12/31/01
Product X...................................
Product Y...................................

23,000
5,000

$35
28

$ 805,000
140,000
$ 945,000

Inventory, 12/31/02
Product X...................................
Product Y...................................

16,000
6,000

$40
32

$ 640,000
192,000
$ 832,000

(1) Prepare a schedule to compute the price indexes for 2001 and 2002 using the
double-extension method.
(2) Prepare a schedule to compute the inventory amounts at December 31, 2001
and 2002, using the dollar-value LIFO inventory method.

Solution 14
LO9, LO10
(1)
Fawcett Distributors, Inc.
Computation of Internal Price Index for Inventory Pool No. 1
Double-Extension Method
December 31, 2001
December 31, 2002
Current inventory at current year cost:
Product X......................
23,000 x $35 = $805,000 16,000 x $40 = $640,000
Product Y......................
5,000 x $28 = 140,000 6,000 x $32 = 192,000
$945,000
$832,000
Current inventory at base cost:
Product X......................
23,000 x $30 = $690,000 16,000 x $30 = $480,000
Product Y......................
5,000 x $25 = 125,000 6,000 x $25 = 150,000
$815,000
$630,000
Conversion price index:
2001: $945,000/$815,000 = 1.16
2002: $832,000/$630,000 = 1.32
(2)
Fawcett Distributors, Inc.
Computation of Inventory Amounts Under Dollar-Value LIFO Method
at December 31, 2001 and 2002
Current Inventory
at Base Cost
December 31, 2001
Base inventory...................
2001 layer..........................
December 31, 2002
Base inventory...................
2001 layer..........................
2002 layer..........................

Conversion
Price Index

Inventory at
LIFO Cost

$775,000
40,000
$815,000

1.00
1.16

$775,000
46,400
$821,400

$630,000
0
0
$630,000

1.00
1.16
1.32

$630,000
0
0
$630,000

58

Chapter 8 Cost of Goods Sold and Inventory: Identification and Valuation

Problem 15
Two reasons often advanced for the adoption of LIFO inventory costing for financial
reporting are the improved matching of current costs with current revenue during
periods of rising prices and the reduction of income tax payments. Nonetheless, the
number of companies using LIFO has not increased over the last several years. Some
companies actually have switched from LIFO to FIFO over the last several years.
Identify reasons why a company would change from LIFO to FIFO for financial
reporting purposes.
Solution 15
LO7
There are at least four reasons why a company might change from LIFO to FIFO for
financial reporting purposes.
The first reason relates to the existence of contractual arrangements, such as debt
covenants, that require that certain ratios (e.g., current ratio, debt-to-equity ratio) be
maintained at specified levels. The use of FIFO during periods of rising prices
increases the value of inventory and produces more favorable ratios.
A second reason is that some management compensation plans are based on some
form of reported income. The use of FIFO during periods of rising prices raises
reported income and thus increases management compensation.
A third reason again relates to the fact that the use of FIFO results in a higher net
income. Managers may believe that this higher reported net income will result in higher
prices for the companys stock. Empirical research suggests that the choice of
accounting methods for inventory costing is viewed by professional investors and
analysts as nothing more than a gimmick. Unless the change results in increases in
cash flows, it is likely to be disregarded by the market.
The fourth reason is that managers may be anticipating future declines or liquidations.
LIFO would result in higher taxable income than FIFO in years in which inventory costs
decline or older layers of inventory costed at lower prices are liquidated.

Problem 16
The following data are available for Castle Gate Company:
Units
Beginning inventory (base layer of LIFO inventory) 20,000
Purchases
80,000
Total available for sale
100,000
Sales (88,000 units, costed on LIFO basis) from:
Purchases
80,000
Base inventory layer
8,000
Cost of goods sold
88,000
Ending inventory

12,000

Unit
Cost
$1.00
$1.50

Total Cost
$ 20,000
120,000
$140,000

$1.50
$1.00

$120,000
8,000
$128,000

$1.00

$ 12,000

The company has experienced a temporary LIFO liquidation by not maintaining the
base year inventory of 20,000 units. The company uses a perpetual inventory system.
Prepare the entries to account for the temporary liquidation and the replacement of the
liquidated units assuming that 8,000 units will be replaced at $1.60 per unit
Solution 16
LO6
Entry to record liquidation:
Cost of Goods Sold.......................................................................132,800
(80,000 x $1.50) + (8,000 x $1.60)
Inventory
(80,000 x $1.50) + (8,000 x $1.00)........................................
128,000
Excess of Replacement Cost of LIFO Inventory
Temporarily Liquidated (8,000 x $.60)...................................
4,800
Entry to record replacement:
Inventory (8,000 x $1.00)..............................................................
Excess of Replacement Cost of LIFO Inventory
Temporarily Liquidated (8,000 x $.60)..........................................
Accounts Payable (8,000 x $1.60).........................................

8,000
4,800
12,800

CHAPTER 8 -- QUIZ A
Name _________________________

Section ________________________
T F

1. Activity-based cost (ABC) systems are designed to allocate direct labor costs
to manufacturing activities.

T F

2. Work in process inventories include only the costs of direct materials and
direct labor.

T F

3. When a perpetual inventory system is used, physical counts should be made

periodically to confirm the inventory balances on the books.

T F

4. Abnormal shortages or thefts of inventory should be reported separately as

operating expenses.

T F

5. Normal inventory adjustments for shrinkage and breakage are reported as

adjustments to cost of goods sold.

T F

6. When the terms of a sale are FOB shipping point, goods in transit at yearend should be included in the inventory of the seller.

T F

7. Title to goods shipped FOB destination remains with the seller from the
shipping point to the destination point.

T F

8. Goods held by customers on approval should be excluded from the sellers

inventory.

T F

9. Consigned goods are reported by the consignor in inventory at the sum of

their cost, handling and shipping costs, and the estimated gross profit.

T F 10. The LIFO conformity rule (IRS Regulations) does not permit companies to
report inventory values using any method other than LIFO in the financial
statements or in the attached notes.

60

CHAPTER 8 -- QUIZ B
Name _________________________
Section ________________________
T F 1. In a period of rising prices, the use of FIFO relates the current high costs of
acquiring goods with rising sales prices. As a result, FIFO tends to have a
stabilizing effect on gross profit margins.
T F 2. In dollar-value LIFO applications, when a specific layer is reduced or
eliminated, it can be restored when quantities increase in future periods.
T F 3. The gross method of accounting for purchase discounts is theoretically
preferable to the net method.
T F 4. The gross method of accounting for purchase discounts reflects the fact that
discounts not taken are in effect credit-related expenditures incurred for
failure to pay within the discount period.
T F 5. The specific identification method is a highly objective approach to matching
historical costs with revenues.
T F 6. Specific identification as an inventory method matches the flow of recorded
costs to the physical flow of goods.
T F 7. LIFO assumes a cost flow that closely parallels the usual physical flow of
goods sold.
T F 8. With FIFO, inventories are reported on the balance sheet at or near their
current value.
T F 9. Unlike other inventory cost methods, the average cost approach provides the
same unit cost for items of equal utility.
T F 10. FIFO provides income tax savings during periods of falling prices.

CHAPTER 8 -- QUIZ C

61

A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.

Name______________________
Section_____________________

Product costs
Consigned goods
LIFO reserve
Net method
Dollar-value LIFO inventory method
Factory overhead
Double extension
Trade discount
Perpetual inventory system
FIFO
LIFO

L.
M.
N.
O.
P.
Q.
R.
S.
T.
U.

FOB destination
Gross method
Work in process
LIFO conformity rule
LIFO inventory pools
Specific identification
Periodic inventory system
Raw materials
Period costs
FOB shipping point

Select the term that best fits each of the following definitions and descriptions:
____ 1. Terms under which title to merchandise transfers to the purchaser when the
goods are received.
____ 2. A method of inventory valuation that reports inventory after consideration of
any purchase discounts.
____ 3. A discount that converts a list price to the price a purchaser is actually
charged.
____ 4. A technique used with dollar-value LIFO to compute the ending inventory at
base-year prices.
____ 5. The classification of inventory into items having common characteristics. The
LIFO historical cost method is then applied to each grouping.
____ 6. All manufacturing costs except direct materials and direct labor.
____ 7. Inventory that is partially processed and requires additional work before it can
be sold.
____ 8. A cost flow assumption that normally approximates the actual physical flow of
the merchandise.
____ 9. A regulation that requires the use of LIFO for financial reporting purposes if
LIFO is used for income tax purposes.
____10. The inventory method that matches the cost flow to the physical flow of the
asset.
____11. A valuation method that reports the inventory cost before the consideration of
purchase discounts.
____12. Records that provide a continuous summary of inventory activity.
____13. Costs that are recognized as expenses during the period in which they are
incurred.
____14. The historical cost flow assumption that best matches current cost to current
revenues.
____15. Inventory that is physically located at a dealer, but the title is retained by the
shipper until the merchandise is sold.
62

CHAPTER 8 -- QUIZ SOLUTIONS

Quiz A
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

F
F
T
T
T
F
T
F
F
F

Quiz B
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

F
F
F
F
T
T
F
T
T
T

Quiz C
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.

L
D
H
G
P
F
N
J
O
Q
M
I
T
K
B

64

Valuation

Chapter 8 Cost of Goods Sold and Inventory: Identification and

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